There’s a word for people who work for others against their will. While few people look at it that way, when you take out a loan, you pledge future earnings to obtain money today. That means you are selling part of your life for money today. Whether or not you end up toiling your life for the benefit of your lenders depends entirely on how you use that money.
In some circumstances debt is an important way to get ahead. If you borrow to buy a home that’s within your means, you are exchanging the money you would otherwise pay for rent for the ownership of an asset that will house you. If you are wise, your home will eventually be free of debt providing low cost shelter for your later years.
Borrowing to buy an automobile is often a less attractive evil since cars tend to wear out just as they are paid off, if not before. In addition there is the temptation to buy a more expensive car than you need. Living with a car payment is a good way to get caught on the hamster wheel of debt slavery. With a car payment as a permanent part of your life, you are only a few credit cards purchases from getting into serious trouble.
What about that college loan?
Perhaps the most confusing of all debt is educational loans, especially college loans. On one hand a college degree promises higher earnings and a career that will not wear out your body after 40 years. On the other hand, the costs of college are zooming through the stratosphere. Depending on your view of economics, the federal government is either helping students get an education by guaranteeing loans, or making college less affordable by flooding the educational market with money that would otherwise not be there.
Whatever the macro view, when you consider taking a loan for educational purposes be sure you have a reasonable chance of repaying the money comfortably. What is the probability of a job at the end of your course work? What will your loan payments be? How long will it take to repay the money? What is a reasonable earnings expectation when you start your career? Will your payments be manageable?
Educational loans take many forms. Some take a surprisingly long time to pay off. It’s not unusual for people with these kinds of loans to pay for ten years or more and find they’ve only paid a few thousand dollars of tens of thousands they borrowed.
If you are considering borrowing, spend a little time understanding the mechanics of loan amortization. What is the compounding period of the loan you’re looking at? Is it a fixed rate or are there adjustments in the future that you’d rather not think about? Is there a penalty for paying it off early (a “prepayment penalty”)?
One of the great holes in American education is money management. No one teaches school kids how to budget their money. No one explains how debt can be a route either to success or to a dismal future. It is one of the most important areas of our lives, and we are essentially on our own to sink or swim.
Here is an article about student loans. Among other things you’ll see that there is about a trillion dollars in outstanding student loan debt and 10% is overdue. $100 Billion is a lot of overdue dollars!
But don’t worry, Uncle Sam developed several programs to help. Notice that they tend to have something in common. You can work in a career that Uncle wants you to work in, or where someone else wants you to work, or of course, you can dedicate 10% or 15% of your income (read: life) for the next 20 or 25 years.
Beware of what borrowing can do to you. Before you sign those papers make sure it is doing something for you!