Laying the Foundation: Facing Student Loan Debt
As we focus on getting back to the basics of building wealth and laying the foundation for successful finances, an important topic to discuss is debt. The number one factor that interferes with our ability to build wealth is debt. Student loan debt is the second-highest debt among Americans, with 1.5 trillion dollars owed. Student loan debt has become the number 1 reason we kill our chances of building wealth. Many of us have gone to school on student loans or had to take student loans out for our children to go to school. Upon leaving school, we are faced with substantial student loan debt. This debt affects our ability to build wealth because all of our resources now become paying that student loan debt back.
It takes at least two people to have a relationship, for example, at work, whether you work for an organization, corporation, or government agency that is a relationship because there is a contract involved. Marriage takes two people and also comes with a contractual agreement. Having a business partner is another relationship that requires a contractual agreement. There’s always a contractual agreement when people come together and establish some form of relationship. You don’t want to make going to college a relationship, especially if it’s an unhealthy one.
When you take out student loans, you enter into a lender-borrower relationship. The lender is an individual, a public or private group, or a financial institution that makes funds available to a person or business with the expectation that the funds will be repaid. Repayment will include the loan amount and payment of any interest or fees. The borrower is the party that borrows the money and is responsible for repayment. In a lender-borrower relationship, the lender has control of the interest rate and the length or term of the loan repayment.
As you or your children approach higher education, you don’t want to have a relationship with that institution, but there are only two ways that you pay for the cost of education. If you want to improve your knowledge and set yourself up for a career, either the money comes directly from your income, or you borrow the money. You’re either the borrower or the lender. As you think about which path you want to take, ask yourself this question: Who do I want to make my financial decisions in the future?
If you decide to take out student loans, the lender has control. With any higher education, whether it’s a trade school, community college, or a 4-year institution, there’s a price tag on that knowledge. Develop a plan for how you will achieve that knowledge. In my household, we have a code of conduct, standards, and expectations for our family. One of those standards was that our children would get a higher education, but they would not take out student loans to do so. My kids have understood what was expected of them since they were freshmen in high school. Our agreement was that the responsibility of the cost of education would be split half between my wife and I and the other half would be on them to take care of. By setting this code of conduct, we allowed time for them to decide what they wanted to do and come up with a plan for how they would achieve that goal.
There is a leak in the wealth you could be building because you have failed to plan ahead. The years leading up to college fly by, and suddenly we find ourselves with no time to prepare for that financial obligation. Lenders know that most people don’t have a plan for how they will pay for college and take advantage of that, ultimately controlling the situation.
Navient is a private education loan management company. Recently the student loan provider reached a settlement for unethical student loan practices agreeing to cancel $1.7 billion in private student loan debts for 66,000 borrowers in 39 states and pay $95 million in restitution. They were accused of increasing the loan amounts, crushing borrowers with debts they were highly unlikely to repay due to low graduation rates and low-income jobs upon graduation.
People view higher education as an opportunity to build a better life for themselves and their families; however, student loan debt is causing families to start off behind and increases the number of challenges they face on their journey of building wealth. Money that could be spent investing in property or stocks goes to paying off debt for 5 to 10 years after graduation, if not longer.
As you think about going into higher education, have a code of conduct set and develop a strategic financial plan. Do your research on tuition rates, room and board, and meal plans. Don’t make decisions based on emotions. It’s easy to get caught up in the idea of dream schools and other details that take away from the importance of why you’re getting a higher education in the first place, to establish a better future. So, make decisions that will set you up to have the best financial success. Look for opportunities to cut costs, and if you do have to take out student loans, be intentional with how you pay off that debt.
