Monday, October 09, 2006
Michelle Singletary uses improbable assumptions to "prove" she's right.
As I mentioned a few weeks ago, Michelle Singletary advised a student with $30,000 to pay down her $39,000 debt loan rather than parking it in savings.

Well, I wasn't the only one who thought she was skimming over the assumptions. So her new article attempted to refute the saving advocates' point of view.

She did some basic rate calculations for the loan interest, trimmed 28 percent off that to account for the tax deduction, and compared it to parking the funds in a savings account for one year and paying the same tax rate on the interest. And lo and behold, she found that you'd pay more in interest on the $39,000 loan than you would receive on the $30,000 deposit.

Which is fine, except her assumption was that a savings account would only earn 4 percent.

As I said, and she should know, there are any number of accounts that beat that 4 percent. Even if this student didn't go with E-Loan, there are still tons of accounts besting 5 percent.

Based on her assumptions, in fact, the deposit would really only need to earn 4.6 percent to break even. That leaves the former student in question with almost 30 accounts from which to choose.

She makes the point that we might be in a declining interest rate environment, but even that doesn't hold that much water. If the questioner went to E-Loan (and why wouldn't she?), and E-Loan began drawing back their rate by 0.1% every month starting in November, she'd STILL be earning above 4.6 percent for at least another year.

She cheated to get that answer that she wanted. And I've lost some respect for her because of it.



Blogger Kira said...

I haven't read the column, but if the $30k is all the money she has, I think it's very unwise to use all of it to pay down the debt and leave nothing for other goals. $39k in student loan debt isn't much these days. =) Even despite the interest rate calculations, it's not a good recommendation.

Blogger HC said...

That was exactly what I said when the FIRST article came out. Did she respond to that point here? No. It's one more flaw in the article.

And I totally agree with your second sentence. If I only had $39k in student loans, I'd be running like the wind, with flowers in my hair.

Post a Comment

<< Home