Nothing Wrong With Student Loans?

The prevailing logic in our culture is that student loans are a good thing, or at least a necessary evil that is required in order to get an education. In reality they sap both our individual and collective futures. We take the people with the most energy, the most enthusiasm, and the most potential and saddle them with long-term financial commitments at exactly the wrong time.

Student loans are a student loans are a multi-billion dollar industry , in some ways a shady one. With hundreds of millions of dollars going through major universities there is a significant conflict of interest, establishing a relationship that will enrich an institution at the expense of its students. The New York Times published an article detailing the tangled relationship between Citibank and several universities. While no wrongdoing was admitted on anyones part, both parties agreed to pay restitution and to abide to a new code of conduct for student loan processing. That sure sounds like wrongdoing to me!

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A Great Trend — Colleges Refusing Student Loans

I feel one of the real short-sighted decisions that we have made as a society is the decision to saddle students with debt (often a great deal of it) in order to complete their graduation. Now, I know that if you approach education with your eyes open it is entirely possible to make it happen without debt. However, it still is the case that when a student is evaluated for financial aid, it is assumed that they can and will go into debt in order to get an education.

It gave me great hope to read that Davidson College (alma matter of one of my nieces) has decided to go a different direction. MSNBC is reporting that Davidson has decided to replace student loans with grants and work-study programs. This is especially heartening, as this is a small, private, liberal arts school, where prices are often highest. The ability to graduate without debt makes this a great college value in my book!

Why I Don’t Use Credit Cards

The issue of credit cards comes up a lot when I teach FPU, and there is always someone who doesn’t see the problem with using them. Personally, I think credit cards are at best dangerous and at worst usurious. There is absolutely no upside to credit card debt, whatsoever.

Here are several reasons why I don’t use credit cards for my finances:

  • On average, people spend 12-18% more when they use credit cards vs cash.
  • Credit card companies don’t have any loyalty.
  • Perks and rewards come at a very high cost.
  • Credit Cards make it difficult to track your purchases day-to-day and easy to buy things you can’t afford. I don’t want to use any tool or service that has a vested interest in damaging my long-term future.

Here are some reasons why I don’t do business with these companies:

Dabbling with credit cards is like playing with snakes. Don’t be surprised if you get bit!

Investing Strategy — From the Mouths of Babes

Is investing easy enough for children to do? Evidently so! Paul B. Farrell, author of ‘The Lazy Person’s Guide to Investing‘ wrote about how an 8-year-old crafted a portfolio that not only outperformed the S&P 500, but also his own professionally managed pick.

How did he do it? Well, primarily by investing in low-cost, well diversified mutual funds that cover the entire market. Sound familiar to all the FPU people out there?

Nice Rules of Thumb

I Will Teach You To Be Rich has a simple and useful summary of two rules of thumb that are very useful in the personal finance world. I would highly recommend reading, understanding, and applying these lessons, as they will become invaluable when you are trying to quickly evaluate opportunities that come up in daily life.

Once you understand the rules, without a calculator, computer, or paper and pencil you will be able to:

  1. Translate an hourly wage into a yearly salary amount .
  2. Know how much time it will take for an investment to double in size.

When you are considering a career change or looking at making an investment it is crucial to understand the financial impact it will have on you.  Wouldn’t it be nice to be able to do those calculations quickly, easily, and in your head?  Take a moment and learn how.

Thriving on $12K/year

MSN Money provides some inspiration from a true story on surviving and thriving on $12,000 per year. Donna Freedman decided to go back to school to better herself and her future, and in doing so she had to make some radical lifestyle changes. She is now a full-time student with a grant that covers her tuition and books.

In order to make ends meet, Donna:

  • Works doing baby-sitting, mystery shopping, freelance writing, paid medical research, and as the manager of her apartment complex.
  • Takes a brown bag lunch every day.
  • Gives money to those less fortunate than herself.
  • Donates regularly to her church.

I found it totally inspiring to see someone who is making their future better and thriving in a difficult situation. She has totally taken responsibility for herself and is making it happen. Donna is going to sacrifice to graduate from school completely debt free, and be able to live like no one else. It isn’t going to be easy, but it isn’t going to be forever either.

The next time you are struggling with making a financial sacrifice, measure yourself against what the Donna Freedmans of the world are doing.

Million Dollar Habits

Michelle Singletary (from the Washingon Post) has some very wise advice having to do with the the true cost of smoking. She looks at the habit from a couple of different perspectives:

  • The potential cost of getting sick.
  • The daily or weekly cost of tobacco.
  • The cost of spending a few dollars a week instead of saving for retirement.

Michelle is counselling Carl, a 38 year old man with a $100/month habit. She figures (with conservative estimates) that channeling this money into a 401K would translate to $100,000 at age 65. When confronted with the numbers, her client has decided to quit smoking and instead focus on saving for his families future. Good for him! I am sure that armed with knowledge and willpower he can improve his life.

Million Dollar Habits

Carl isn’t really different from the rest of us, we all have our million dollar habits. It could be Starbucks, McDonalds, Marlboros, or even iTunes, but a few dollars spent here and there can be the difference between steak and Alpo at retirement.

Michelle gives us a great example of the power of compound interest, and how spending with a purpose can change our lives. Remember, if someone saves $100/month between ages 25 and 65 it will be worth $1,000,000. That is $3/day!

Now, can you change your life like Carl?