student loans

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The Best Investment You Can Make

Posted on by David

People are always looking for that next big investment. Whether it’s the next tech company, cryptocurrency, or real estate, people are always looking for something that will bring home big returns. In the 90’s it was Beanie Babies, then it was Pokémon cards, now it’s Funko Pops. But I’m here to tell you the best way to consistently get returns–at around 20%! Here is the best investment you can make:

Pay off your dang credit card

There it is. That’s all there is to it. It may not be glamorous, but paying off your credit card is the best investment you can make right now. It’s better than Amazon, Apple, Bitcoin, real estate, or government bonds. Why is that? The median interest rate on a credit card right now is 19.96% (source), and that’s historically low. In 2019 the median interest rate was 21.3%, and the average maximum APR was 24.98%. Meaning if you had a $1000 credit card balance, every year you were paying $250 in interest.

As of 2021 Americans owed over $807 billion in credit card debt that comes out to $6,270/family (source). $6,270 on a credit card with a 19.96% interest rate comes out to $1,251.49/year in interest. That’s over $100/month just in interest!

How does this happen?

Most credit cards only require you to make a minimum payment each month. This minimum payment is usually around $30 or 1% of your balance, whichever is greater. In our example of the average family, if they only pay $30/month towards their credit card, they’re actually going $70 more into debt every month. Even if they never use their card again! This is how credit card companies make money. They let you ignore your balance and only charge you a small fee, then charge you interest on that balance.

Bank of America, for example, charges a minimum payment of $35 or 1% whichever is greater. If you have a past due balance on your credit card of $4000, the minimum would be 1% of that or $40. If the interest rate on that card is 20% (the national median) then the APR equates to 1.67%/month. The interest on $4000 would be $66.67/month. $66.67 in interest minus your $40 payment equals $26.67 added to your balance. You paid $40 towards your credit card and instead of going down, your balance went up by $26.67!

Don't pay money to owe more money.
Sonic Sez “that’s no good”

Paying credit card debt is better than playing the stock market

So you can see how making the minimum payments on a credit card is a terrible idea. By keeping a balance on your card you are losing 20% annually. This is the same as making a negative 20% return on investment. So if you have $4000 in credit card debt but also have $4000 in the stock market making a 10% annual return (pretty good for the stock market). Then you are actually making a net 10% loss.


10% + -20% = -10%

In this case it would actually be a better investment (much better) to take all of that money out of the stock market and put it towards eliminating your credit card debt. If having a credit balance is a negative 20% return then any money put towards paying that balance would be like making a 20% annual return on that investment.

A 20% annual return is unheard of in the work of investing. Anything that consistently returns 20% would be the most popular investment ever. Let’s see how other popular investments compare. Between 1985 and 2020 these following assets have returned:

Large cap stocks (S&P 500)9.6%
Real Estate8.5%
United States Bonds 4.1%
Gold3.2%
Source: visualcapitalist.com

Even if you consider Bitcoin’s meteoric rise to nearly $50,000, in the last 6 months it has lost 24.26%. Bitcoin has made some people super rich, but its volatility is so great that no fund manager would choose it over something that consistently returns 20% per year. Remember even during stock market crashes credit card rates stay above 10%. Even at the worst point in the 2008 financial crisis, the average interest rate on credit cards was 12%. Even at its lowest point in the last 30 years, paying off a credit card was a better investment than the average return of the S&P 500.

Credit card debt is an emergency

In a recent survey Bankrate found that that 54% of Americans say that have more emergency savings than credit card debt. 54% of Americans could pay off their credit card debt and make a 20% return on that investment. Even if you don’t pay off the balance in full, everything put towards paying of that balance is the same as making a 20% return on your investment.

More than half of Americans said that increasing their emergency savings was a higher priority than paying down credit card debt. Newsflash: credit card debt is an emergency! Many Americans hold revolving credit card debt while also contributing to a 401(k). Now I’m not one to recommend ignoring your 401(k), but remember if your 401(k) is making a 10% return (above average) then you are making a net loss of 10% by contributing to your 401(k) rather than paying down credit card debt.

Paying off credit card debt can feel like climbing a down escalator, but if your committed, you can accomplish it.
If you’re trying to reach the top you have to be committed.

Unless you can make an investment that returns greater than 20%, your best option is always to pay down credit card debt. Why make a 7% return when you can make a 20% return?

Conclusion

All of this assumes you are going to stay out of credit card debt after paying off your balance. It doesn’t do you any good to divert money from your 401(k) contribution to pay off your credit card just to then max out your card. Then you’re back where you started and you missed out on gains in your 401(k). This requires a changed lifestyle.

Like anything else in life, having a plan is the first step. If you are in credit card debt, make a plan to pay it off as soon as possible. Be committed to that plan even if it means living on less or pausing other investments, because paying down your credit card balance is the best investment you can make.

This advice also applies to other high-interest debt. Most student loans have low interest rates, but some private loans can have up to 13% APR. Paying only the minimum of debt will just leave you further in the hole. Make a plan to tackle high interest debt and commit to that plan.

What do you guys think? Is there a better investment out there that I didn’t think of? What are some good reasons to keep a credit card balance? Let us know in the comments below!

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How to Solve the Student Loan Problem

Posted on by David

Last week we discussed the smart way to do college. The college system isn’t perfect, so it’s up to students to pursue college in an intelligent way: decide on a good career first and then pick a major that will equip you to excel in that career. Then after those decisions are out of the way, choose a college that is well-equipped to teach you that major. But none of this actually solve the root issue. Here’s my proposal for how to solve the student loan problem.

My proposed solution: Just make student loans illegal

It may sound dumb, but I've got a rationale.
Wait, what?

No seriously. It’s illegal to give predatory loans for mortgages or cars, so why is it legal to prey on college students? According to debt.org, Predatory lending can be “any practice that convinces a borrower to accept…a loan that a borrower doesn’t need, doesn’t want or can’t afford.” Based on our imaginary conversation with the loan officer in part 1, it’s hard to deny that the student borrower can’t afford a student loan.

Imagine you’re about to graduate high school and you go to the bank and ask for a $100,000 loan.

Loan Officer: What do you have for collateral?

17 year old: I’ve got an Xbox and that’s about it.

Loan Officer: OK, let me see your bank statement.

17 year old: I’ve got a thousand dollars in my checking account

Loan Officer: Um, do you have two months of pay stubs?

17 year old: Yep, I’ve been working part-time at McDonalds for the past year making about $600/month

Loan Officer: HAHAHAHA good joke. REJECTED.

If we make student loans as difficult to obtain as mortgages, then only those people who are credible will be able to obtain them. It won’t completely eliminate defaulting on student loans but it should decrease it significantly.

I can hear you complaining about it already:

But that would make it harder for poorer families to send their kids to college!

Yes, yes it would. It should be harder for poorer people to buy expensive things. I know that’s not a particularly empathetic position, but that’s just how life is. It’s harder for poorer people to buy houses, cars, and luxury trips to Europe. The reason college is so expensive is because everyone can pay for it whether they can afford it or not. Predatory student loans deceive poorer families into believing they can afford a small private liberal arts college when they can’t.

Now I’m not saying that poor people don’t deserve to go to college. But I am saying that lying to people and telling them that they can have everything they want, all they have to do is take on $50,000 in debt, is not kind. Saddling poor people with student loans that can last multiple decades is not helping them. It’s a hindrance. According to the National Consumer Law Center, over 2 million federal student-loan borrowers have been repaying their debt for at least 20 years.

But college is a means to raise yourself above your current economic condition!

Yes, it is–or at least it’s supposed to be. The problem is that having recurring student loan payments makes it really hard to rise above you current economic condition. According to EducationData.org, 30% of black college graduates with student loans default in the first 12 years of repayment. For 1/3 of black graduates a college degree didn’t even make them enough money to pay their college debt!

College is only useful if it teaches you marketable skills. Otherwise it could bankrupt you for life!

Interest on student loans is a killer
It’s crazy how long it takes to pay off student loans when you pay the minimum payments.

Eliminating student loans will make college cheaper

EducationData.org reports that 30% of college students obtain student loans. So if we outlawed student loans, then college enrollment would drop by 30%. This would put a strain on colleges, pressuring them to lower tuition if they want to attract more students. Remember that at the end of the day colleges are just businesses looking to make money. They’ll follow the laws of economics and set prices at the optimum level to attract buyers (students). The reason tuition keeps outpacing inflation every year is because people keep paying for it (with student loans).

We have seen how the availability of loans increases prices. Until recently car loans were usually 3-5 years in length but within recent years 7 and 8-year car loans have become the norm. This increase in loan availability has causes the automobile market to outpace inflation. Put plainly, the reason cars are so expensive now is because car loans are more easily available. An 84-month car loan will have lower monthly payments than a 60-month loan so consumers then opt for the more expensive car.

The same thing has happened to the housing market. Housing has skyrocketed past inflation because of the relative ease of getting a mortgage. I know we discussed how difficult it was to get a mortgage in part 1 of this series (and it is), but compared to any other type of loan a mortgage is really easy to get. 30-year mortgages were virtually unheard of before the 1950’s. Now nearly every mortgage is a 30-year mortgage. Because of the ease of getting a 30-year mortgage, home buyers often end up buying much more house than they need.

In 1950 the average new house was 983 sqft. (source) as opposed to 2020 where the average new house had 2,333 sqft. People are able to “afford” more house because a 30-year loan has lower monthly payments than a 15 or 20-year loan. But are they really able to afford it? With a 30-year mortgage you will end up paying more interest than the initial value of the house. According to nerdWallet “37.6% of households headed by people age 65 to 74 had a mortgage on their primary residence in 2019.” If you still don’t own your house by the time you’re 70, could you really afford it?

Student loans just allow you pay for that increasing unaffordability for the rest of your life.

Allowing huge loans causes prices to go up, because consumers think they can now magically afford it. But all that does is saddle them with crippling debt. This is the same as college! Student loans don’t make college more affordable, they make it less affordable. Student loans just allow you pay for that increasing unaffordability for the rest of your life.

Eliminating student loans will make college degrees more valuable

Eliminateing student loans would also have the effect of making college degrees more valuable. If fewer people were able to obtain a college degree then it becomes more valuable. In 1950 only 6% of Americans had college degrees, as of 2020 37.5% of Americans have college degrees. You have people going to college who don’t care because “a college degree is required to get ahead”.

The reason that’s true now is not necessarily because a degree helps you get ahead. It’s because not having a degree gets you left behind. College nowadays is like high school was in the 1800’s. Only so many children went to high school so a high school diploma was valuable. Then by the 1900’s when high school became mandated, a high school diploma became less valuable.

The more people who receive a college degree, the less valuable it becomes. That’s why you now need advanced degrees in many fields. If we make college out of reach for a good portion of the population that will increase the value of a college degree. This will also give employers a much-needed kick in the pants to show them that maybe a 4-year degree shouldn’t be required for most jobs. Maybe a B.A. in English doesn’t make you more qualified to be an administrative assistant than anyone else.

Many employers require 4-year degrees for roles that don’t need a 4-year degree. They are still super important for technical positions, but hiring a kid with a bachelor’s degree in psychology over someone with an associate’s degree and 20 years of technical experience for a supervisor position needs to stop. And maybe making college degrees rarer will show employers that they’re often not really necessary.

The Incredibles is always on point.
It’s just basic economics.

A Less Extreme Solution

So I know outlawing student loans entirely is an extreme solution that will probably hurt people, but I think it’s a good starting point for conversation. Maybe don’t outlaw them altogether, but what if we did require the kind of rigor for student loans that we do for mortgages? What if we required a sort of collateral for student loans? High school seniors may not have something valuable enough to ensure a $50,000 loan, but what if we put the student’s decided major down as a way to ensure the loan?

The loan shark (I mean servicer) can check the student’s major against the median salary for recent graduates with that same major and offer a loan accordingly. Students that go into engineering or some field that traditionally pays a lot will be able to qualify for a larger loan amount because the loan servicer has a greater assurance that they will be able to repay the loan. A student who picks a major that traditionally pays less will qualify for a lesser amount because they are more of risk to the loan provider.

Another idea would be to not offer student loans to students. Offer them to the student’s parents who have a job. car loans require a job, mortgages require a job, shouldn’t student loans require a job as well? And this kind of loan already exists; it’s called a parent PLUS Loan. Maybe these should the main type of student loan rather than some fringe option.

Conclusion

Anyway those are some ideas I’ve had to try and tackle our ever-increasing student loan problem. And it is a problem. Student loan debt in the United States totals $1.73 trillion and grows 6 times faster than the nation’s economy. I believe the main culprits behind the student loan problem are the predatory lending practices of the loan servicers and the fact that the federal government guarantees all student loans.

And this isn’t to say that college is stupid and all student debt is bad. I know many people who got student loans to go to college and when they graduated they worked really hard to pay them off. If you pursue college with a solid plan and a clear goal it can be a great tool. The problem is that predatory student lending has made it possible for everyone to go to college whether they can afford it or not. And if someone can’t afford college letting them take on a lifetime of debt won’t help their situation.

What do you think? Is my proposal to outlaw student loans crazy? How would you solve the student loan debt problem? Let us know in the comments below!

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The Smart way to do College

Posted on by David

In last week’s post we talked about how college is stupid, in that we go about college all the wrong way. As of 2019 41% of recent college graduates work jobs that don’t require a degree (source). College is sold to us at every opportunity, but for the wrong reasons and at entirely the wrong price. The silver lining is that if there’s a wrong way to do college, there must be a right way also. Let’s talk about the smart way to do college.

Pick your Degree before you pick your School

Boiled down to my most salient piece of advice, if you want to do college smart you should pick your degree before you pick your school. If the most important criteria when picking a college are academics, job placement, how it looks on a resume, and cost, then your major should be decided before even looking at colleges.

I know many people change their major while in school, but most of those are people who didn’t have a plan going into college. Usually these are people who just signed up for college and decided on a major without giving it much thought.

There should be lots of thought put into a decision that costs this much money, but sadly that’s often not the case. Deciding where to go to college before deciding on a field of study is like taking an expensive trip overseas without deciding what you want to do there: not a great plan.

Not a great plan

Pick your school based on your chosen major

I know of several people who went to small liberal arts colleges and then discovered these colleges didn’t offer engineering degrees. They ended up going into math or physics because they couldn’t do engineering. Take a guess how useful a B.A. in physics is from a small liberal arts college. Hint: not that useful. Most of these students ended up transferring, or going on to grad school so they could get a more useful degree. And that’s after paying a 300% markup for tuition because they went to a private liberal arts school.

So decide on a field of study and then find the best school to pursue that field of study. The best school doesn’t have to be Harvard, but find the best school for your desired field of study for the right price, in the right location. For me that best choice was the University of Nebraska. It was a cheap public university with a great engineering school. It was 20 minutes away from family, and my church had subsidized student housing.

What if I end up changing my major?

Many people do change their major, but if you’ve actually decided on a field of study, you’ll probably stick to at least that relative field. Many people drop out of electrical engineering, but they often switch to some other type of engineering so most of their classes will transfer. I seriously considered switching majors to Laser Physics. It’s not engineering but nearly all of my credits would transfer.

What if I don’t know what I want to study?

Then don’t go to college. College is a really expensive way to try to find out what you want to do for a career. Find something that you can do that will make ends meet in the meantime, and take some time to figure out what you actually want to do.

Not all majors are Created Equal

I think it goes without saying, but some degrees are useful and some degrees are useless. Liberal arts degrees are useless. Useful majors give you marketable skills, which I’m defining as a skill that you can take with you to a different career or that employers are looking for. The problem with college is that most degrees don’t teach you skills. They may teach a lot of facts but it’s hard to get a job where all you do is know facts. Most companies want you to be able to perform some sort of task that bring in revenue.

Heck even underwater basket weaving teaches a more marketable skill than most liberal arts. But lest you think I’m just an apologist for the hard sciences, I don’t think Biology gives you any marketable skills either. There’s a reason most people who get a bachelor’s degree in science end up going to grad school. Most bachelor’s degrees don’t give you marketable skills.

As a holder of a masters in electrical engineering, these scene is more real than it has any right to be.
I’ve never watched a more relatable scene.

Smart Majors

Why are ten of the top ten highest paid degrees engineering? Because engineering is a marketable skill. Problem solving, computer programming, design, soldering, laboratory work… these are all skills that you can learn in college that employers are interested in. Other non-engineering degrees like teaching, foreign language, or business, also teach marketable skills. As the world gets smaller and more intertwined, being able to speak a foreign language is immeasurably helpful to companies and interpreters are highly sought after.

Business is often called “the universal major of all” because everything is a business, but that makes it marketable. Specialized business degrees like marketing, economics, accounting, and management are always desirable to hiring managers. (My one caveat here is that if you get a business degree just because it sounds like it might be marketable but don’t have a plan on how to use it, that is not a useful degree.)

Not-So-Smart Majors

Art history, on the other hand, doesn’t teach any marketable skills. I’m not saying you can’t get a job with an art history degree or even that you can’t get a job in that field, but it’s not marketable to anyone else. Philosophy or religious studies is another example. Personally I find them to be fascinating subjects, but no one so far has offered me money to philosophize. It’s not a marketable skill.

The same goes for English, or sociology, or psychology. I’m not saying they’re useless degrees, but there is a reason only 27% of college graduates end up getting a job in the same field as their major (source). And 41% of recent college graduates end up in jobs that don’t even require a degree (source) or they go on to get their PHD. The majority of majors are interchangeable because very few of them actually teach you marketable skills.

Even with an English degree, John Mulaney is doing pretty well for himself.
I never understood why college students reveled in not doing their homework. College is too expensive to just ignore.

Trade Schools

What’s a good way to learn skills? Trade schools, community colleges, and apprenticeships offer cheap avenues to learn marketable skills. Apprenticeships and trade schools are becoming passé, but community college is growing faster than ever. People often look down on a 2-year degree as less valuable than a 4-year degree, but an associates in welding will make you way more money than a bachelor’s in psychology ever will.

If you are interested in working with computers but don’t want the stress of getting a computer science degree, you get an associates in information technology or database management for a whole lot less money. Also those jobs are pretty plentiful and well paid. And if you find you really like programming you can then transfer to a university and finish up a 4-year degree.

Again, I’m not anti-college or pro-trade schools or anything, I’m just saying that you should pick a career path before going to college, and you should major in something that makes your marketable for that career path. They say “get a job doing something you love and you’ll never work a day in your life.” That’s lovely. If you find a company that will pay me to go hiking through the mountains, please let me know. But for the rest of us, employers pay employees to do things because they wouldn’t do them for free. If you want to succeed in life, you need to:

  1. find a career that is in demand
  2. Pick a major that will train you to be effective at that career
  3. Pick a college that is well-equipped to teach you that major
  4. Work hard to make yourself stand out to employers

Conclusion

While college isn’t the right idea for everyone, there is a smart way to do college. If you decide on a good career first and then pick a major that will equip you to excel in that career, you’re off to a good start. Last post we discussed the wrong reasons to choose a specific college. Today we learned that the smart way to choose a college is to find a good school for your chosen major. In our next post I’ll give my solution to the college problem.

What do you think? Am I being too harsh on liberal arts? What did you study in college? Let us know in the comments below.