You’ve probably seen the news about Austin billionaire, Robert F. Smith, offering to payoff the college debts of the Morehouse College class of 2019. I greatly admire the successful founder and CEO of Vista Equity Partners for his gesture to wipe out up to $40 million in student loans with his own money.
As I read the story, a note about one of the recipients, a 22-year-old finance major, reminded me of a Mark Twain quote, “Good decisions come from experience. Experience comes from making bad decisions.”
The recent graduate said he had calculated that it would have taken him 25 years at half of his starting monthly salary to pay back his $200,000 in student loans if it wasn’t for Mr. Smith’s generosity.
I’m sure that the young man’s experience at Morehouse was a positive one, but $200,000 in debt for an undergraduate degree from the 143rd ranked national liberal arts college in the country seems a tad excessive. Considering that Morehouse’s average tuition plus room and board is “only” $41,012, I’m going to go out on a limb and guess that it probably took more than one bad decision to run up a $200,000 tab.
Hopefully, others can learn from his experience.
With graduation season in full swing, the class of 2019 will soon have the opportunity to make many decisions independent from the experienced eyes of Mom and Dad. It may be helpful to share with them a Tom Bodett observation, “In school, you're taught a lesson and then given a test. In life, you're given a test that teaches you a lesson.”
One of the advantages to having been a student, parent, and advisor is that I have learned my share of lessons from life’s pop quizzes. Here are seven that I believe may be particularly helpful to those heading off to school next Fall, as well as an answer key for those that like to study.
You will spend more than you budget. It happens to everyone at some point, you run out of money before the next paycheck. Leaving home for many will be the first time you are faced with managing a personal budget. Learning to manage being flush at the beginning of the month is a life skill. Budgeting can be as much of an art as it is a science, but realistic expectations and discipline can go a long way to mastering the skill.
A loan is an obligation. Schools call student loans financial aid, don’t fall for it. The average undergraduate walks out of college with over $30,000 in student loans, which is what they are called when you graduate. Imagine how many more homes could be sold if the housing industry re-branded mortgages as aid or assistance. Completing your education can lead to higher lifetime earnings but mortgaging your future to pay for the present should be your last alternative, after actual aid (scholarship and grants) and part-time work alternatives have been exhausted.
“Taxes” are stupid. Late penalties, bounced check fees, ATM fees, traffic violations, parking tickets, etc., are levies on laziness, inattention, or just plain stupidity. Don’t be stupid, if you were bright enough to get into college, you are smart enough to avoid these “taxes”.
Textbooks are a racket. The average student spends over $1200 each year on books. How many versions of a new textbook are necessary for a college calculus class? It’s been the same basic material since Sir Isaac Newton invented the mathematical discipline in the 1600’s. A reasonable person would think with the proliferation of information in digital formats that the cost of this material would have plummeted, but the statistics (a 1700’s discovery) say otherwise.
Cars are expensive. Parking, gasoline, insurance, depreciation, and door dings all add up to make automobiles an expensive luxury for a college student. Thinking about joining a fraternity? As a pledge, you will put a lot of miles behind the wheel while running errands and being a designated driver. Driving a car in a college town also increases the chances that you will incur “stupid taxes”, get involved in an accident, or worse.
Internships are well paid! There was a time when internships were largely unpaid or compensated at low levels. However, labor laws and competition for attracting the top talent have made them a great way to get experience while earning some real money in the process. Even better, a successful internship may allow you to get your foot in the door for future job opportunities.
You are on your own. A billionaire probably isn’t going to pay off your student debt. Even if the other 539 billionaires that live in the US decided to make a similar gesture at a commencement this year, that would only cover about 10% of the colleges in the country. Oh, and if you’re counting on an inheritance from your parents, you should know that they are likely to spend it on their own retirement and health care expenses. Uncle Sam probably won’t offer much help either, with Social Security going broke in 2035.
While cheating at school is heavily frowned upon, a few of the following notes scribbled on the back of your hand may be just what a new grad needs to pass some of the tests you will soon face.
Budget for the unexpected. Track expenses and categorize them as either mandatory (rent, utilities, etc) or discretionary (eating out, fancy coffee, etc). Budget for all the mandatory outlays, a reasonable amount of discretionary, and then add another 10% make room for the unanticipated expenses or occasional splurges. If you don’t wind up needing it, you will be on your way to building a nice emergency fund.
Stick to your major. A year of college can cost up to $70,000. Undergraduates typically take and pay for an extra semester (15 credit hours), primarily due to changing majors. The sooner you select a major, the sooner you can complete the requirements. But rushing your decision can cost you if you aren't happy with your selection. Talk to an advisor to help form a four-year class plan. Once you've created the plan, meet with your advisor at least once a semester to discuss your progress.
Get ONE credit card. Having a high credit score can help you get lower interest loans, purchase lower cost insurance, be easily approved as a renter, or even help you get a job. The catch is that it can take years to develop a high credit score. However, this lesson comes with the caveat that you must pay the full balance each month. With finance charges as high as 20%, not paying your balance is a slippery slope to financial ruin.
Shop around. Start by looking in the campus library to see if you can borrow the book for free. Online rentals may also be an option, or perhaps you will find someone selling a used one on eBay. If you know some students in your class, you may be able to save money by splitting the cost of the book and hacking it by scanning it to PDF files for sharing.
Ride your bike. Riding your own bike is cheap, although a good lock may also be a worthwhile expenditure. You’ll also be doing your part to save the planet. (Oh yeah, I forgot the lesson about how we are all going to die from global warming.) A bus pass is probably also a good idea for those rainy days. For those times you need a car, consider a carpool or ride sharing service.
Start looking for internships ASAP. Most internships are done in the summer following Junior year, and the competition for the most attractive opportunities is fierce. Give yourself a leg up by seeking jobs at companies in your field of study as early as possible. Reach out to smaller companies or startups during your Freshman or Sophomore years. Hiring managers may be happy to hire a lower paid resource than they would have to pay for in the open market. The experience you gain will make you a more attractive candidate for higher paying internships and jobs after graduation later.
Pay Yourself First. When you get your first job, signup to automatically invest as much as you can. This can be a direct deposit to savings, an IRA, employer retirement plan, or combination of all of the above. The idea is if you never become accustomed to having that money to spend, it will never feel like a sacrifice. A dollar invested when you’re twenty-five years old will grow to over $45 by age sixty-five if you can average a 10% return, which is roughly what large US stocks have done long term.
Of course, you could always invite Michael Dell to speak at your graduation and hope for the best. If you are still searching for answers, get in touch.