Consumer Debt: Being Debtfree - Student Loans - Means of Better Life or Golden Handcuffs??( Part Four)

Is there a cost to education? Or is it necessary to get it at any cost? Should the rising university fees stop any one from getting the all important education?? Are student loans a good way of supporting your time at the university? Will the education and the raised living standard “higher salary” counter the cost of education or will student loan eventually be the golden handcuffs that all of us will sport for a long .. long time to come??

I am currently doing some research on Emerging markets and as such have been reading lots of financial news from India and China. While browsing through the financial newspapers, what caught my attention was one of the insignificant financial news, which I thought had profound social implications. The newpaper reported that a bollywood flick ‘Three Idiots’ (http://www.imdb.com/title/tt1187043/ ) was one of the highest grossing foreign films in China! Now although this piece of news finance was not the most eye popping financial news I read that day it certainly is the most socially significant problem in the emerging markets and the story seems to have attracted just as many eyeballs on the other side of the Himalayas. The story of ‘Three Idiots is about students in a engineering school how against all odds are trying to get the education. They come from different backgrounds some rich, some poor battle against all odds and go on to achieve their goals in life. It seems to have hit a nerve in the emerging markets and from what I have seen the story is not that dissimilar in the West either!

In recent years, the UK and Europe in general has seen a lot of student demonstrations against the governments for cutting the aid to higher education which resulted in higher education fees ( this by the way was a direct effect of the sovereign debt crisis, but this blog is about consumer debt / types of personal debts so I wont discuss it any further in this blog ). The student bodies were complaining that the fees were unsustainable and that average student will be have £50000 debt by the time they are done with their university. To make matters worse the government was trying to explain its ‘repayment plan’ ( or the lack of !! ). It said the student will have to pay the loan back only when he / starts earning over £21000 in a year and any balance after 20 years will be written off!!! Now, I don’t know about what my good readers think about this scheme but if there ever was a Ponzi scheme, this is one!!! This is a blueprint for defaults in 20 years time. What the government is saying in no uncertain terms is that students should take loans for studying and in the event of them not getting a job ( which is a very high possibility given that students are being enrolled on courses which have no market value, just so that universities can lay hands on more government aid via the students!! ) they don’t have to pay it back or even if they do get it back the repayment is 11% of their income above £21k i.e. unless a student earns well over £30k from day 1, the repayment will never even cover the interest on the loan let alone the principal!!! And ladies and gentlemen hold your breath, cause if you thought that this has the subprime crisis written all over it, think again, cause atleast in the case of sub-prime crisis, there was a property against which loan was given, hence atleast part of the repayment could be ensured by selling the property, in this case there is no collateral! So if a student doesn’t get a job, then he not only gets jobseekers allowances but also gets his loan money waived off!!! Now many would argues that no one would want that, but to me this is actively encouraging the youth to not work cause if they work their earnings will not be that much higher ( after loan repayment and taxes ) compared to their allowances! From the information I have, governments across Europe and the US are following policies that are not that different from the ones in UK! All this means more pain for the tax payers (yes any one who earns more than £7450 per year ) in coming 20 years!!!

So as usual, by this time, I assume the reader must be thinking, that although most things that he read make some sense, whats the alternative?? Not studying?? Surely that’s worse?? By this time the regular readers of this blog must have guessed that just like in parts 1, 2 and 3 of this series, I will present an alternative. Don’t get me wrong, I am not suggesting that people should not study! Infact I would actively encourage people to study! Liking a subject and then getting as much knowledge as worldly possible can be very rewarding and as I had written in one of my previous blogs ‘Pleasure’ (http://socyberty.com/philosophy/pleasure-the-essence-of-good-life/ ), it can be very satisfying. The question is not if you should study, but how you should study! A dear friend of mine and an inspiration in many ways has lived a debt free life got educated and is one of the happiest man on earth! I am going to tell his story in this blog which is in many ways an alternative to traditional sources of study.

My friend got out of school at the age of 18. He was a decent student and had finished in the top ¼ of his class. During his previous summer holidays, he had worked as a sandwich maker at Subway. Although it wasn’t his favourite job, he decided to go back to do it after finishing school as by this time he had become mates with the stores manager. As he spent more time in the store, he realised that there was lot more to business then just making and selling sandwiches! And the whole business aspect of the franchise fascinated him, and 6 months into his job he decided that business management is his area of interest and that he would pursue it. BBA is normally a three year full time course but a very reputed university does the same course part time in 5 years. He got enrolled in that course. The curriculum was not any different than the full time course, just that there were less modules per semester. My friend worked 4 days full time and attended 9 hours of lectures 1 day every week. He usually had 2 exams and one mini project to be handed in every semester. He finished his course in 5 years and secured a higher second class. However, what I thought was most impressive was that at the age of 23, he had no education loan or any other kind of debt and owned a car and most other luxury items that we can think of! Oh and 5 years into Subway, he was now a manager of the store earning an impressive £23500! per year ( in 2005! ). Infact he had used Subways supply chain management that he had learnt on job as an example of process improvement for manufacturing industries as his final year project! Talk about on job training! When I look at his example, and compare it with the more traditional route of full time bachelors degree, I can clearly see that he at 23 was much better placed than many others that I know. He had a healthy bank balance, a much better understanding of his personal finances, had never suffered lack of money ( as he was always on 4/5th of full time income all through ). Not to mention that he was never out of job and as a result had even managed to progress in what is usually considered as a dead beat job. His degree and years of experience as store manager at Subway helped him to move on to bigger things. He now manages a high street retail store and earns 2-3 times his Subway managers salary. All through living a debt free life! He still doesn’t own a house, but given his income I think he will be able to buy one in less than 10 years!

The point I am trying to stress here is knowledge is important and necessary, but debt isn’t! I think the standard way of getting educated is making people less and less creative. The shackles of debt as soon as they leave university prevent free thought and creativity and happiness that follows get replaced by this instant urge to repay the debt, or to make up for the lost time. Infact I would go so far as to argue that opening up the mind to various new thoughts and ideas which is the very purpose of fruitful education gets well and truly lost in the modern way of acquiring education via a debt ( student loan ). I think my friend is just one example of living debt free ( without student loans ). I can think of many more examples where car mechanics ( mechanical engineers ), waiters ( hospitality ), cooks, office assistants, literature and drama etc can be learnt on job while studying part time. The extra years spent in acquiring will be offset by the years of experience gained ( which based on my personal experiences always counts more in the real world! ). What do my good readers think about this?

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Consumer Debt: Being Debtfree - Renting vs. Owning( Mortgaging )?? Part Three

Consumer Debt: Being Debtfree - Renting vs. Owning( Mortgaging )?? Part Three

Is being debt free a pipe dream? Can it be done? Can a house be bought debt free? More importantly, is it necessary to buy a house? Is renting bad? Does it make more or less financial sense to rent??

In my previous blog, I wrote about the story of my friends and how they looked completely different on the day that they made the last payment on their mortgage. I am sure theirs wasn’t an isolated story and that this scenario has been witnessed by almost everyone in our daily lives ( our parents? ). When I started writing about the consumer debt and how it can be avoided or should be avoided, I got a very positive response from the readers. Most of my readers agreed that debt for consumer items is uncalled for and is best avoided. However, there was always an exception made to this rule for items that are deemed expensive i.e. generally cost more than 3-4 months salary. Car and house were the most common examples cited. In part 2 of this series ( ..) I had written about how if debt is avoided a car can be bought in less time than required to clear off the debt and also if things were to go bad how you will not lose you sleep over it. The problem with debt ( car loan ) is that if things do take a bad turn, no matter how many payments you have made your car will be repossessed and payments will be taken by selling it. The problem with this is that a new car is subject to roughly 20% depreciation every year. So the value of car drops more quickly then what you have paid off in the 1st, 2nd or 3rd year of your loan repayments ( typical 5 year car loan). This is called ‘negative equity’. Simply put, even when the car is sold, you still owe money to the bank! Imagine this scenario: you have lost your job, now lost your car and just to add insult to injury, you still owe money to the bank for a car that you no longer own! One of my family member is a car salesman and he would tell us how his firm had to repossess cars and then send bailiffs in order to secure the full payment, it was a common theme in car loan market. On the other hand ‘negative equity’ was an unheard phenomenon in the real estate market. Things have changed and how!!!

Most middle class people dabble in the stock market. They may or may not be good at it but still everyone likes to put some money ( may be negligible ) in some shares, if for nothing else than, to have another talking point at the pub! However, not many people dabble with the options and futures market. When asked, the common reason cited is that ‘leverage’ is a beast! Most options and future contracts can be owned by fronting around 10-20% ( called margin ) of the total cost of the asset i.e. a futures contract of £100 can be bought by putting up £20 ( sometimes even less – depending on your broker ). If the cost of the contract goes up by 10% i.e. £10 and you sell it, you make a 50% profit on your original £20 investment! On the other hand if the cost falls by £10 you make a 50% loss! This in short is leverage, it can make or break fortunes and hence common people tend to avoid these risky investment vehicles. And yet almost everyone buys a house ( and a holiday home! ) by fronting only 10% deposit on a £165000 ( avg. UK house price ). It means if the house price goes up by 10%, you stand to make 100% on your original investment ( £16500 ) however what everyone conveniently forgot ( until 2007 ) was that leverage is a b*tch! And works both ways i.e. 10% ( don’t even want to imagine 25% ) drop wipes out the original equity! A further drop can quickly be equal to or more than a years salary!!! If things go bad, you will not only lose your house, but still owe enough money to the bank that the debts will only be written off with your death!! Can anyone recall ‘Merchant of Venice’ and the demand of pound of flesh?? This demand of a pound of flesh or rather the its absence could be easily seen on my friends face when they paid off their mortgage ( although I have to say being close to 60 is not the ideal time to be debt free! Well actually there is no ideal time to be in debt! )

So then I hear you say, what’s the alternative?? Most of us don’t have the required £165000 required to buy the house. Does that mean we should never own one?? Is that not careless?? Also, isn’t renting throwing the money? If you have the mortgage, at the end of it, you atleast own a house!? These are all legitimate questions, some of which are typically used as sales tactics by real estate agents. Now I am going to provide you with an alternate scenario. This scenario will rival the standard way of ‘buying’. A 25 something couple buys a avg. UK home £165000 by paying 10% deposit £16500 and pays towards the mortgage. Rate of interest 4%. I used an app call mortgage calculator to find out what they have to pay per month. It is £785 approx. The home insurance, maintenance and property tax ( £1800 approx. per annum ) is another £100 per month i.e. they are liable to pay 16500 + ( 785+150 )*25*12= £297000!! Also the first 16500 down payment does not yield any interest ( 4% ) and that loss alone over a period of 25 years is more than £20000 which should be added to the eventual cost paid ( 297000 + 20000 ) taking the house price to £317000!!! I can go on and on, but I think my readers get the picture that when a house is bought at more than 180% of its cost price, it costs you precious time of your life ( lost in the extra repayments ).

Now look at the alternate scenario, you have £16500 instead of buying the house ( £165000 ) you decide to rent it at £500 a month ( again this is personal experience! I have done it for the past 5 yrs in one of the most sought after locations in midlands!) This saves you ( 285+150 ) £435 every month compared to your mortgage i.e. £5220 a year. Now all you need is some excel sheets and if you work it out, at 4% interest rate your initial £16500 and £5220 that you would add to it in 25 years, you will not only have lived in the same house but will also have £250000 as bank balance! Also, you will never have to worry about the house prices going up or down and in the worst case scenario, if one or both lose their jobs, they will have a bank balance to support them through their worst times!! I think it can be done. Most Germans rent. Only the really rich ( and most people who do not buy houses at 25 can be rich by 40!! ) buy houses.

I think there are lessons to be learnt. Living debt free in not a pipe dream. It is not privy of the very rich. Financial freedom truly is the best freedom! It can and will change your life.

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