I want to play around with the idea of "interest-free" loans for college.
I have known people who received interest-free loans. They were always within-family transfers of money, much like the selling of property for a nominal price of $1.
In fact, I was the recipient of an interest-free loan. Mom-and-dad paid for me to go to Lansing Community College and then to the local State University. I paid them back.
I have a clear memory of dad putting his arm over my shoulder (we were standing in the basement, well out of Mom's hearing) when I was in the middle of my sophomore year of college, man-to-man, and telling me "Joe, I know there are a lot of things you enjoy doing. But I am telling you that if you do not get a job straight out of college...you are going to starve. I have six more kids right behind you and I cannot afford to keep you around as a pet."
That is when I became serious about studying and getting good grades.
I graduated a term early, again at Dad's urging. "Time value of money, son. Three months of 'real wages' amounts to something."
I paid mom-and-dad back every penny.
The problems with "Interest-free" loans and debt-jubilee
One problem with an interest-free loan is that the buying power of the nominal amount (usually in US Dollars) decreases every year. Three percent yearly inflation means that the buying power is reduced by half in about 23 years. That is hardly fair to the person asked to make the loan; to expect them to be paid back with debauched currency with no interest to compensate for diminished per-unit purchasing power. They simply will not do it.
The biggest problem with mandatory, interest-free loans is that you are applying coercion to MAKE people with "extra" assets give them to others without the receivers paying rent for the use of that asset.
If it were any other kind of asset, say a lawn mower or a motorcycle, you would probably agree that the owner of the asset should receive some compensation for losing access to the asset while it was loaned out and some kind of risk premium to compensate for any wear-and-tear it will incur while loaned-out including the extreme case where the borrower steals the asset and it cannot be recovered.
The problem with "debt-jubilee" is that loans will dry-up as you approach the jubilee-year. Why would any rational human make a loan the year before the jubilee-year when that money would simply transfer to the person it was loaned to. It would be a straight-up gift. The only thing worst than expensive merchandise (and borrowed money) is no merchandise on the shelves or no access to credit.
Looking at the wrong side of the problem
The problem is not that young adults are required to pay interest on the loans they take out. The problem is that young adults are given HORRIBLE advice about careers. Some prime examples are:
- It doesn't matter what major you choose. Corporations are just looking for a 4-year degree to check off the box
- Corporate recruiters tell universities that their graduates cannot write. That means they are screaming for Liberal Arts majors
- You are going to change your career seven or eight times. That means it does not matter what degree you get
- You are an athlete so we need to give you a dumbed-down degree (with zero salability) so you can spend time in the gym
- You can always get an MBA so your undergraduate degree doesn't matter
- Our surveys tell us that graduates Liberal Arts majors experience much higher salary growth rates than Engineering majors
- Psychology majors are STEM majors
- Follow your passion. It will all work out.
Young adults swallow that advice because they WANT to believe those messages. Academic counselors give that rotten advice because they are daffy and are afraid they will be called "dream-killers" or some other soul-crushing curse. The other reason is that they are shills for whatever college hired them.
They never ask the boring question "What are the Net Present Values of the incremental income stream generated by the degrees I am considering?"
Nearly all spreadsheet programs have a simple Net Present Value calculator built into them. "=NPV" is what you would use in Microsoft Excel. Put in the cost of "education" for the five-or-six years most students are taking to "experience" getting a four-year degree. Then put in reasonable expectations of annual income after that. Use some defensible interest rate like 6% or 8% because a dollar earned in your twenties is worth more than a dollar earned when you are in your fifties.
A junior in HIGH SCHOOL can perform the research and do the calculations.
THAT is amazing advice. I have a niece that needs to do this. Timely, and thank you.
ReplyDeleteIf you can, have her throw a "trade" into the mix. Heavy equipment or "lineman" might be good choices. Everybody wants to be your friend when you have a backhoe.
ReplyDeleteExcellent advice overall and I'll be keeping a copy. Keeping loans in the family/friends is one of the oldest forms of lending, though risky, and investment in family is another way to build generational wealth. Sorry about the wall of text again; your posts and advice are often fairly in-depth.
ReplyDeleteWhen banks are the entities knowingly debasing their own FIAT, I find it difficult to have sympathy for them receiving their own devalued ones and zeros back. More so when there are early repayment penalties because the "interest" or borrower is the product. When we still had fractional reserve banking, the banks would make the same loan to many others based on the same deposited funds, effectively creating new FIAT. These days, the collateral for a college loan is the borrower's mere promise to repay. The borrower IS the collateral and compounding interest means the borrower gets milked for most of his life for many times more than value of the loan. Loans in general are often government backed so losses are socialized while profits are privatized. Lenders make these loans effectively without risk. Loans should not be mandatory, no one has a right to the property of others, even if it's FIAT.
I can't advocate for abolishing ROI or interest, nearly everything about our economic system today runs on the allocation of capital and some form of lending in return for a profit. Even I want a return on my deferred resources and investments but not when it means abusing others with usury and debt slavery. Lending gets murky when it's based on real collateral, and more-so when it's arguably not lending anymore but the purchasing of stock or a stake in a company; these come with risk to the lender. People have debated the morality & ethics of lending and interest for thousands of years and I doubt it will be resolved anytime soon.
Spot on for most of your points & advice but not all advice applies all the time or in all places. Outside of the trades, a two year bachelor's degree is the new high school diploma in a lot of places and a red flag if you don't have one; a check-in-the-box for low-level positions. I'm not telling people to lie on their resumes, that's fraud, but employers don't waste time checking accreditation for low-level jobs and a milled diploma is fine. STEM, medical, legal, etc, NEED an accredited degree and it WILL be checked. A milled diploma is just a tool to get a better wage while working toward an accredited degree; it's no substitute.
Following one's passion MAY work if it is economically viable; but not guaranteed. I incorporated my plant nursery because I have a passion for Cactus & Etheogens; it's my third attempt at self-employment and first successful one. By extension I have developed an interest in chemistry, gene editing, & tissue culturing; I have been around the block a few times and now it's back to school. The market for chemists is small but viable in Texas and a complementary minor will help. I can realistically expect $55K-$65K/yr with a Master's degree after graduation. All of this is to support my ultimate passion: art.
Psychology is not a STEM degree but when paired with logic and programming, it is a potent and highly marketable skill set; the combination says A LOT about the kind of mind a person has. Psychologists may find work in game development and creating more realistic characters, etc. A Liberal Arts degree is worthless on its own but MAY complement an existing, worthwhile degree. Liberal arts involve art/music/writing, philosophy, communications, debate, etc. I intend to take an art class as an elective since I'm required to pick one and I'm already an artist with familiarity in the technical and theoretical aspects of 2D illustrations; some sculpting, modeling, etc; it will polish an existing, marketable, skill that I have.
If counselors shattered kids souls from time to time it might save them from years of pain. I intended to touch on gold, jubilee, etc, but I ran out of space. XD
Too many people believe the hype that a college degree is a NECESSITY in life. They also are taught to look down on a job that doesn't require a degree. There's nothing wrong with a degree.....what's stupid is going in to debt to acquire one generally. Unless you are going to be a doctor or something else with a virtually guaranteed high income debt is your enemy....especially for a degree. Because the more money they make available for loans the MORE MONEY the universities charge. It's a nasty incestuous relationship. I went to university....as did my wife. We both have an Associate in Science degree.....in a job that pays. I make over $10K a month. So did my wife before she retired. And we made that kind of money for our entire careers. Both our daughters went to college.....and graduated debt free. Because we signed them up for a state pre paid tuition program the day they were eligible. It cost me the equivalent of a car payment per month for about 7 years...and guaranteed them both access to college. The oldest didn't know what she wanted to do.....she got an AA in General studies from a local community college. And then went to work for the biggest coffee company in America. She now gets paid almost $60K a year to roast coffee beans. My youngest KNEW what she wanted. She started University as a sophmore and got two Bachelor degrees and a Masters....in 5 years. She now works as a school district employee making good money and great benefits. 20 years and she's vested for a decent retirement and can find a new career. One daughter is married....her husband has a HS diploma and makes more than she does.....fixing machinery as a maintenance engineer. He will always have work. The other daughter has a boyfriend....who is a maintenance engineer. He learned to fix C130's in the air force. And can fix anything. He too will always be able to find work at good pay. Two young men who will always be able to put food on the table and pay the utilities. Because they did NOT go into debt. And both of them own their own homes....and have for several years.
ReplyDeleteBeing successful in modern America CAN be done. But you have to be smart about it.