One of the things many responsible parents are doing today is saving for college, usually in a 529 plan. Not saving for college and expecting a student loan bailout in the future is bad planning. The same goes for not saving for retirement and hoping the government will take care of you once you can no longer work.
Do you really want to take that chance? I don't think so. In fact, I have a guide for how to become a millionaire by 20 just to pay for college tuition!
Given college tuition is rising by roughly 6% annually a year, by the year 2033, the cost for one year's worth of public or private school tuition may approach $54,070 and $121,078, respectively.
Add on expenses for room, board, travel and miscellaneous stuff and the annual cost of college could easily be 50% – 100% higher.
Meanwhile, according to the National Center for Education Statistics, just 41% of first-time full-time college students earn a bachelor’s degree in four years, and only 59% earn a bachelor’s in six years.
Need to Save A Lot For College Today
Therefore, it is only logical that all of todays' new and future parents should try to save about $1 million for each child's college education. If a family has a “trophy kid,” then the family should save $4 million and so forth if college is the desired path. Going into debt to buy a depreciating asset like a car or a college degree is fiscally unsound.
No parent should expect their child to be brilliant and get scholarships. Nor should any parent expect their child to be sensible and attend a public institution to save on costs. High expectations lead to disappointment.
No matter how many articles I write about the depreciation of a college degree, not enough people will listen because the desire for status is too strong. We also all believe that we are more talented and smarter than we really are.
Parents can hope for sensibility, but should still plan to spend the big bucks.
However, to save for our children's college education often means that we are unable to save as much for our own retirements. This, in turn, may cause financial anxiety and unhappiness within the household.
Perhaps the Cancel Student Debt movement is a solution. Probably not.
Cancel Student Debt To The Rescue
Senator Bernie Sanders has proposed canceling all $1.6 trillion of student loan debt currently held by roughly 45 million Americans.
Bernie's proposal is a one-up of Senator Elizabeth Warren's proposal to cancel $640 billion of student loan debt by forgiving up to $50,000 in student debt for those earning under $100,000. Warren's plan would directly benefit about 42 million people.
During a presidential election, it is understandable that candidates need to come up with enticing proposals to gain votes. The more freebies you can promise at a minority's expense, the more votes you will get. Power is a mesmerizing elixir all politicians crave.
I'm personally waiting for the Cancel All Mortgage Debt proposal to one-up Senator Sanders. Not only would homeowners save a ton, demand for real estate would surge, thereby creating even more equity for millions. As a property owner, I've got my fingers crossed.
Canceling Student Debt Helps Wealthier Americans
What's interesting about canceling all student loan debt is that the benefits will go mostly to more well-off Americans. After all, only about 30% of Americans have a Bachelor's degree. Even fewer have a Master's or Doctorate degree.
Senator Sander's plan would help eliminate student loan debt for some of America's highest-earning professionals e.g. doctors, lawyers, bankers, consultants, etc. But at least his plan does not discriminate between student loan holders.
People against canceling student debt also make the point that nobody forced parents or students to take on so much debt. After all, there are plenty of more affordable education options.
Just because AOC could afford to pay $55,000 a year in tuition in today's dollars to attend Boston University doesn't mean we all can. Most of us don't have the financial means and will probably have to attend a state school or community college for two years instead.
I Knew We Weren't Rich
When I was looking at attending college, I chose William & Mary, a public school, because the tuition was only $2,800 a year. Only the rich kids who couldn't get into a top 25 school went to a school like The University of Richmond in Virginia, a good school, where tuition was about $25,000 at the time and $54,690 today.
I was fine with the rich kids who went to the University of Richmond instead of going to a state school like most of us. That's just life. We've got the same scenario playing out in practically every state, e.g., Portland University ($47,500) vs. Portland State ($8,500), University of San Francisco ($49,740) vs. SF State ($7,264), etc.
We just need to make the most of our situation. Hating on the rich is not productive because their privilege does not preclude you from creating your own wealth.
I knew my parents weren't rich given they drove an 8-year old Toyota Camry, I went to a public high school, and we lived in a cozy townhouse. Therefore, it was only logical I should attend a more affordable college. Even if I didn't get a decent paying job after graduation, I knew that with a minimum wage job I could still pay my parents back.
We Can't Always Get What We Want
In high school I really wanted to rumble to class in a 1990 Mustang 5.0 GT. The sound of a 5.0 engine was one of the sweetest ever. My rich classmate was getting a Supra and was willing to sell me his Mustang for $13,000. But I only made $4/hour working at McDonald's. So instead, I had to impress the girls with my bike and sparkling personality.
I firmly believe that other parents or college graduates who are my age (42) or younger understood the cost/benefit analysis of attending college as well. By 16, the concept of only buying what I could afford was very clear because I had to work craptastic jobs for things that I wanted. Further, the internet and all its free information about the dangers of overpaying for college have been readily available for decades now.
Everything is rational. I do not believe the vast majority of Americans who are bright enough to attend college do not understand the risks of spending hundreds of thousands of dollars for an education.
To cancel all student debt would only be rewarding irrational behavior. By rewarding irrational behavior, we may be dooming such folks to a lifetime of hardship.
The Importance Of Personal Responsibility
As honorable citizens, we know that everything is earned and nothing is given.
There's something incredibly satisfying about taking out a loan and paying it back in full. Fulfilling your obligation is the best way to cancel your debt.
My wife, a fellow William & Mary alum, graduated with $10,800 in undergraduate debt. She came from a poor family where neither parent went to college. Therefore, she logically attended a state school to save on costs.
Her first job paid her $24,000 a year in expensive San Francisco. Nevertheless, she stayed super frugal and diligently paid off her student loans in five years. When she sent in her last payment we went out to dinner to celebrate. Then it was back to saving and investing aggressively in order to one day get out of the rat race, which she did at 34.
I graduated business school with about $25,000 in student debt because my employer decided to only pay for 70% of the tuition instead of 100% once the global financial crisis hit. I wasn't about to complain after seeing colleagues get blown out left and right. But boy did it feel great to get that monkey off my back through some lockdown savings.
Not Getting Free Money Helped
There is no way we would have achieved financial freedom when we did if everything had been handed to us. Instead, we'd probably still be working and complaining about why everybody else has it better than we do while also being unwilling to do any extra work.
Getting into the mindset of earning what you deserve is incredibly powerful to building greater wealth and happiness. Adopting an entitlement mentality can really ruin your wealth.
The satisfaction of achieving a goal through years of struggle is one of the best things ever. The struggle makes you appreciate more of everything you have.
We shouldn't let politicians pandering for votes legislate away a person's ability to feel satisfaction through their own initiatives. Instead, let's use the $640 billion – $1.6 trillion in new taxes to be raised by these proposals on helping the homeless, underemployed veterans, foster children, and kids with disabilities instead of the top 30%.
Honor Your Debt Obligations
The average person who worked for their success will feel much better than the average person who gets everything handed to them. If you don't believe me, just ask any adult child over 30 still living at home with their parents. Chances are high these folks were given a little too much and lacked the motivation to succeed on their own.
Once the expectations for a handout are ingrained, there's no turning back. We'll end up raising a new generation of entitled Americans who will not fully appreciate the value money. Our economy will unravel because trust will be broken and productivity will decline.
Positive Of Cancelling Student Debt
There is always a silver lining. If the #CancelStudentDebt movement succeeds, then it is rational for all parents to stop contributing to their children's 529 college savings plan and live it up. Perhaps the extra amount of spending will help boost the economy.
What a relief for parents to no longer have to create child millionaires to pay for their children's million dollar educations. I hope folks realize how absurd our education system has become.
We can only hope that society wises up to the fact that paying record amounts of tuition for an antiquated degree will no longer be necessary in the future. But I wouldn't bet on it.
Save aggressively. Work hard. And be responsible. If a bailout comes, you'd be irrational not to accept. But if a bailout never comes, you won't care because you never expected one in the first place.
Loading ...Related Post:
How To Stop Worrying About Your Children's Future In This Brutally Competitive World
Subscribe To Financial Samurai
Listen and subscribe to The Financial Samurai podcast on Apple or Spotify. I interview experts in their respective fields and discuss some of the most interesting topics on this site. Please share, rate, and review!
For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.
As a millennial woman who has paid off all of my $40,000 debt with pure grit, working in a blue collar job, after getting an art degree, I am astounded at the people who are trying to escape responsibility for their own choices. It never even occurred to me to try and cry “no fair” to get out of it, and I am prouder and stronger for it. I was the first in my family to go to college, and grew up below the poverty line. College did give me opportunities and education I wouldn’t have gotten otherwise.
I truly see a culture of entitlement: people who drive nicer cars than me, go on expensive foreign vacations that they post on Instagram, and then complain that others should have to pay for the six years that they lived for free while in school (spending that money not just on school, but on shopping sprees, sushi, and beer). These are my friends I’m talking about, A LOT of them. No, we should not pay for them.
I have been paying on my federal graduate student loan for 18 years–and I haven’t made a dent. I have worked constantly since age 18 (I am now 53) and I picked careers where there is no future and no chance to build wealth. My first career choice didn’t work out, so I went back to school for something which, I learned only later, pays people for crap. If I had known, I wouldn’t have gone for my master’s and I wouldn’t have this grad school debt.
I deserve to have my student loan debt forgiven. I’m sick of just surviving, while other people build nest eggs and feel financially at peace. If it was forgiven, I could more quickly pay down other debt. I owe very little in cc debt; I made the mistake of taking out two unsecured personal bank loans. I pay more than the minimum, but if I could knock that out I could put more toward retirement.
I’ve always played by the rules and done what I (naively) thought I was supposed to do (I even went to a commuter school for undergrad, to save my parents money, so I missed out on the parties and the girls. I was too much of a nerd to realize I was missing out or that it was really important to go away to school–even just for the socialization and becoming emotionally independent of your parents). A lot of good it did me. I couldn’t be more bitter if I tried.
At least you can feel good knowing that you are responsible American citizen who is doing it the right way. Although I must say, missing out on four years of college and all those parties is a shame. That was an amazing time.
I’m totally for this student debt forgiveness plan. This will take money from the boomers and give it to younger generations. True it has issues such as benefiting the rich etc etc and will have some insane knock on effects such as making college even more expensive. However it will be a form.of wealth transfer from the worst generation of all time that squandered away every advantage they had and will be perhaps the last beneficiary of social security benefits.
Additionally it will make college meaningless which is a good social benefit also.
I agree. What this article doesn’t pay attention to is that as young adults coming from an unsupportive family many of us listened to financial advisors from colleges making it seem like we’d be able to pay the loans off and then entered a contractor economy (thanks microsoft) where our bachelor degrees didn’t earn us much and left us frequently out of work due to contractor requirements, mergers, companies going bankrupt etc. I have always worked more than one job yet thanks to the instability of the market for my skillset and having only one income I owe MORE in student loan debt than when I graduated due to interest. Education should be FREE as it is in other first world countries. Or for god’s sakes affordable. At the very least there should be no interest and the loans should be subject to bankruptcy like people who rack up credit card debt for going on shopping sprees. Why do they get a get out of debt free card when we are punished for getting an education and not having family support or financial guidance or choosing the right major and predicting it’s market value? It’s not just Millenials either. Senior citizens are getting social security garnished for student loan debt. It’s all of us not just the young that are hobbled by this.
If the money is going to be spent, I would prefer a plan that incentivized payback, like dollar-for-dollar gov’t matching that scales down with income or loan amount.
I went to school with a guy who used his student loans to buy a motorcycle (and other non-school related toys). To think that that debt could be forgiven turns my stomach.
I work with doctors, all of them take vacations to Hawaii and shit on their student loans. When I was in college I went camping. Seriously, these medical students take vacations, live in downtown loft apartments and dont have a job for 8 years then they complain they have to pay back that money.
The whole point of the student debt cancellation is that Twitter & Social media wasn’t really big during the big bailouts of Wall Street and banks. This is a way to recapture that feeling and anger, but with the power of twitter & social media. The Tea Party types at the time were pissed off – they wanted no bailouts whatsoever. Now the progressives are saying why could we afford to bail out Big Banks and claim not to be able to bail out the middle class.
Instead of this ridiculous student loan cancellation proposal, both party’s should focus on grade school instead. Like making public school lunch universally free, regardless of income (almost half of children already get free or reduced lunches already anyway). Even if it becomes a disaster with children learning to be wasteful with food, well at least we’ll bring the country a little closer together since a lot of Trump supporters in the Republican Party would also be presumably for it since they fit the geographic and income profile of those with children on free and reduced lunches. Oh wait, there can’t be bipartisanship in this day and age because there’s no political value to it.
Hey Sam, I graduated W&M in 2018 with no student debt thanks to the school’s extremely generous financial aid package. I essentially got a full ride from federal state and school grants combined since my parents made very little money – we’re immigrants. For me, a college education was a great privilege that I could not take lightly so I worked my butt off. By the time my little brother started attending college, my parents had been working so hard to save enough money for his education and even buying a house. I’m very proud of them and appreciate everything they had done. However, I notice that my little brother thinks of college as an obligation, not a privilege. He’s going to school to please my parents and his indifferent attitude really irks me at times so I agree with you completely when you said handing someone everything will demoralize their work ethic and motivation. I tried to get my lil brother to work a summer job so he knows how hard it is to earn money and appreciate what our parents are doing for him, but both him and my parents do not really like that idea. I wish there’s something I can do to change his mindset.
Congrats on graduating! How did you find my site? I wasn’t reading PF blogs when I was a new college grad! What are you doing now? I love W&M. Need to go back to Paul’s Deli and The Cheese Shop and eat Death By Chocolate! :)
Very interesting insight on your little brother’s attitude. In my neighborhood, I’ve noticed 100% of adult children are men, not women. Check out this post and the comments. Would love to hear your thoughts too.
https://www.financialsamurai.com/real-estate-is-a-hedge-against-many-bad-things-in-life/
Thank you!! Last time I visited, Paul’s still has the best cheese fries and I’d kill for a chicken salad on rye from the Cheese Shop any day. Also, I was in the Bay Area (Livermore specifically) last summer for an internship and currently resides in NYC for my first full time job. I’m a research assistant at Columbia University’s hospital, hoping to get my foot into data science and have been thinking about pursuing a masters degree in this field. My degree was in Physics, but looking back I should have double-majored in CompSci as well. Regardless, post-grad life has been crazy and amazing. All of this could have only happened thanks to WM.
Your blog is the first and only PF one I followed so far. I usually follow tech or machine learning blogs, but I came across your article about the average Asian household income being higher than other races after Googling how Asians fare financially since there are a lot who are doctors/engineers due to parental or cultural pressures. At one point in the article, you mentioned W&M and attending high school in VA and that got my attention. I didn’t know anything about personal finance at the time and realized this area is something I need to know since I was about to start my first job. Basically has been reading your articles ever since.
That’s an interesting observation regarding some men. Maybe my little bro will eventually grow out of his immaturity and I’ll try to help him in as much as I can. For sure he can inherit my parents’ property worst comes to worst, but I truly believe that lifestyle won’t truly make him happy but he’d stay indifferent, maybe even entitled. He won’t be miserable, but I don’t think he will ever be nearly as happy as another theoretical person who earned and saved for the property of the same value by themselves. I just firmly believe that one gotta work for something in order to enjoy it.
I think the article is fairly reasonable with the exception of the one paragraph below. Education is definitely expensive, but it’s hard to foresee $1 million within 15-20 years, and I have no idea why it’d be necessary to quadruple it for a so-called “trophy kid”. Given that education costs are already nearing a breaking point, it’s hard to fathom they’ll continue to grow at 2-3 times the rate of inflation. Additionally, few students actually pay a college’s sticker price.
“Therefore, it is only logical that all of todays’ new and future parents should try to save about $1 million for each child’s college education. If a family has a “trophy kid,” then the family should save $4 million and so forth if college is the desired path.”
A trophy kid is the 4th kid. So if all the kids are still alive, you have to pay for all four, not just one.
Interesting. I had never heard the term used to refer to a specific number child before. Who knew? If you have 4 kids and save a million for each child’s education, I’d say that’s definitely overkill, but I suppose it’s a much better problem to have than having saved too little.
https://www.financialsamurai.com/trophy-husbands-trophy-wives-and-now-trophy-kids-oh-my/
I blame the institutions more than the students. At my old university, they put up so many new buildings in the 20 years since I was there, I hardly recognize the place. Add to that the ratio of non teaching administrators to students and I see where a lot of the money is going. Universities are turning into country clubs instead of bastions of higher education. They need to find ways of cutting costs. That is the only real solution.
Something that does not seem to happen in industries that do not get subsidies (either directly or indirectly)
It’s been 20 odd years since I signed my first promissory notes for undergraduate school but please don’t plead the ignorance card. There is an entrance interview educating you on what you are signing when taking the loans and an exit interview educating you on the sum of your debts and the options for payback. While we are all young and stupid in the 18-21ish year spectrum the student loan program is doing 110% more borrower education than any other type of loan in the system.
Capping the total loan amount allowed for a individual student borrower would be a nanny state solution However it at least would present a challenge to schools to address the unchecked tuition increases.
Switching away from loans to an income sharing agreement model like Purdue or Lambda school has done could be a path toward the future. https://www.cnbc.com/2019/02/08/purdue-university-introduces-first-income-sharing-agreement-for-students-.html
Great post! I think about this quite often, as an MBA grad with a heavy load burden (of my own making). It puts me in a tricky position, because my goal is to be debt-free as soon as possible, but paying it off also risks not receiving this potential benefit.
The issue with student loan forgiveness, in my view, is two-fold:
(1) in effect, it harms those who successfully pay off their loans on their own. Why do those who pay off their loans in a timely manner lose out on this stipend?
(2) it doesn’t get at the root cause: rampant tuition increases year over year.
I do like the idea of a much lower interest rate (2-3%, which is more consistent with inflation) on student loans. More importantly, I’m also in favor of a cap on tuition increases per year, which is tricky legislatively but something needs to be done to keep costs in check.
If the cost of education continues to rise at a rate of 6% a year, eventually its going to eat away the entirety of an individual’s income (and that’s not including the cost of healthcare or housing which have been increasing at equally unsustainable rates). I don’t believe income growth, even for top graduates, is ever going to surpass that rate – imagine the massive amount of inflation that would cause. You could probably even make the opposite argument that nominally people’s incomes are decreasing.
While I agree with the general notion that absolving all debts is a bad thing for confidence in the financial system, something has to be done about our current system. There’s no consumer economy when consumers have no money to consume. My father went to a public T14 Law School in the early 80s for less than $7,000; the same education today would cost well over $150,000. I highly doubt the tuition at W&M is the same today as it was when you attended, adjusted for inflation. Is the economy better off for having a highly educated populace with spending power? Investment in human capital is a significant factor in economic growth and if we disincentivize that type of behavior eventually we’re going to crush our own economy.
There are myriad ways to fix this issue aside from the jubilee. A few spitballs: We could allow students to actually declare bankruptcy on their loans – but that would mean we actually lived in a free market. We could disincentivize the packaging of student loans into ABSs – but that would dry up liquidity in the student loan market and cause failing programs to fail. God forbid we tighten interest rates!
I think personal responsibility is important, especially from the perspective of those looking for financial independence but as a societal issue this is way more complicated than that. At least now the problem is in the political dialogue.
ps. love your site
I do not agree with forgiving student debt, but there is a point where people have been financially crippled long enough for their over borrowing mistakes.
I would support allowing loans to be discharged in bankruptcy after fifteen years, with the lender then being able to go after the school for the lesser of the loan balance or the number of years (up to four) of tuition and fees at the current rate. The schools would then have a vested interest in their students’ success and the faster they raise tuition, the more they are potentially liable for. Capping the years of fees recoverable at four would limit the school’s exposure from students who major hop or don’t have their act together.
Other:
Student loan debt should be forgivable through some sort of bankruptcy. Not sure what the unintended consequences would be, but right now people are allowed to borrow way too much because the lenders (including the gov) know that it can’t be forgiven.
First off. Forget any form of student debt forgiveness unless it is paid for by the schools that helped kids apply for these monstrosities. Then outlaw student loans. Seriously. Getting an education with student loans is like furnishing your house with “rent-to-own.”
Not to worry, prices would drop hugely if the money was no longer there to be skimmed by the schools. They are the biggest part of why they have gotten so high.
Next, not to worry. With AI and the internet and several other trends, both in technology and in society, I think we are about to see a revolution in online education. It will probably manifest in a lot of the bigger name schools offering online degrees for a tiny fraction of the in-residence cost. Which, in turn, is probably going to shutter a lot of smaller colleges that have little to offer besides a sheepskin, and so can’t help produce Sam’s trophy kids.
In the interim, although, in reality, I doubt it would be long enough to get things rolling, add four years to public high school (use a different building if you can). Attendance is not only voluntary, but you have to competitively demonstrate the capability and the motivation to stay for those years. Call it college because it would provide a bare bones college education, no frills, no frat parties, no pottery classes. Vocational school, same way.
A society has to balance the rights of the individual against the needs of society. This is why, even while claiming to be capitalists (and, fortunately, we are, mostly) we have things like public roads, public parks, public law enforcement, and several other things that aren’t privatized and on a pay-as-you-go basis. We could probably do without quite a few of some of the less essential ones, but educating members of society is probably one of the more essential ones.
It would seem to make more sense that the colleges fill out their own students if they can provide the results the students are looking for. Not sure why the bailout is born by other people.
Right. I agreed. No public bailout. That ship has sailed. But, going forward, these student loan programs should be outlawed, same way that these payday check cashing companies and car title loan shops should be.
Student loan programs are insidious and unscrupulous and little different from people trying to sell bad financial instruments to gullible old people (and most college age kids aren’t any better).
At the very least, the government, at any level, should not be involved in providing or collecting on them.
I went through college with the help of ROTC, but it was clearly spelled out that they would give me a job when I graduated, what the salary and conditions of employment would be, and how long it would take before my debt was discharged (four years). Of course, it meant I couldn’t go to an Ivy (none of them had ROTC back then), even though they were actively recruiting me, but they weren’t offering scholarships and no way was I taking out loans for such a thing.
A bit different from guilting (don’t you owe it to your future to get the best education you can manage?) a kid into getting loans to buy an overpriced degree (because the schools know they can get these loans) that may or may not help them get a good job and that they may never be able to pay off, and can’t even get out of through bankruptcy.
I am a college grad with 60K-ish in loans. It is alot, but it is not impossible I think. I believe that Ms. Warren’s plan is the most reasonable of the forgiveness options. What I do believe this brings to light is an entirely other discussion. Why did the US spend so much money bailing out business and banks that were going bankrupt but now they refuse to consider the same course of action for students are, I believe, victims of what is a financially predatory system of education?
I think it would be sufficient to cancel all interest on student loans, or reduce the interest to 1%. All interest already paid above that should be re-applied as payments on the principle. If I pay ahead on my loans it does not go to the principle, but to the interest. To be frank, that is bullsh*t as well. To refuse to see that the system is broken and that many people have been taken advantage of is blindness in my opinion, whether you personally agree to full forgiveness of loans or not.
Because if the government didn’t bailout the banks, the economy would have crumbled further and millions more jobs would have been lost.
The gov’t ended up making money on its bailout money. Lots of it.
Your attitude of deserving to get bailed out from your $60K loans is terrible and entitled.
If you didn’t want to pay back $60K, why did you take it out in the first place?
> The gov’t ended up making money on its bailout money. Lots of it.
Huh, I didn’t know that.
I was against the bailouts, and probably still would be even knowing this tidbit, but it makes me feel a little bit better knowing this.
Also, I didn’t take your word for it – I was about to ask for a search but I did a Google search on your exact words (https://www.google.com/search?q=gov’t+ended+up+making+money+on+its+bailout+money) and came across this article:
Quote from said article:
> In total, $623 billion in taxpayer money was dispersed via bailouts and roughly $698 billion has come back via dividend revenue, interest, fees and asset sales. …the bailouts ultimately earned taxpayers more than $75 billion in profit
Do you support Warren’s plan because it’s the one most beneficial to you personally? Like, hey, you borrowed 60k, so let’s forgive the majority of that but not the majority of the loans of people crazy enough to borrow 200k? It’s perfectly rational if that’s why, but please be aware of your own possible biases.
Also, if you obtained a degree that significantly increased your future earnings potential, why should other members of society be on the hook for that cost – particularly among those who opted to a) not go to college or b) go to a cheaper college? Presumably you can make the money back over time and then some.
The comments are a litany of “I want, I want, I want … politicians to make someone else work for me”.
“I want politicians to take money from the companies we all aspire to invest in and give to me for a free education”
“I want the politicians to take money from some taxpayer and give it to my teacher so I can get a free education”
“I want the government to dilute everybody else’s earnings to give me a stipend so I can go to college for free, or do nothing for that matter”
“Oh, I didn’t know that finding a job with the useless degree I chose would be so hard. Some politician please take money from someone else and support me now”
“I want people who lent me money for college to charge me only inflation interest (thereby getting zero reward for their delayed gratification of not using their money) so I can go to college for less“,
“I want politicians to take money from other people and create ‘free’ colleges.”
“I’m interested in studying stuff there’s no demand for so I want be able to sell my skills after I graduate (find a job) so I want someone else to pay so I can pursue my (useless) educational aspirations”
I want, I want. I want”.
Nothing breaks down societal ethics faster than viewing the ballot box as an ATM.
Folks, every penny that the government gives you is taken from someone else. Some anonymous else somewhere in the country. All the funds that you get from government is money that someone else earned according to meritocracy but was then trimmed to give it to you.
I have rarely seen American corporations (well maybe in 10% if cases) that are exposed to both domestic and international competition give out money to someone who does not deserve it. Such corporations are inefficient and are quickly taken over by competitors who make more meritocratic choices. So what are you going to do about the 10% non meritocracy? Punish the remaining 90% to create a more “fair” world where they pay for your education? Will that really make things better? Or will it create a vicious cycle of resentment and redistribution revenge through politics?
Angela, I think the number for “non-meritocracy” is much higher than 10%, unfortunately.
One author wrote: “If you get something for nothing, someone got nothing for something.”
“Folks, every penny that the government gives you is taken from someone else.”, actually it’s a bit worse… government borrows a ton of money and this debt will be passed down to our children, grandchildren, great-grandchildren, et al.
Switch to Land Value Rent for funding all government activity — eliminate the dead-weight loss from the economy: all boats rise.
How about being responsible parents who save enough for our children’s college, so that our offspring don’t have to take out loans?
If we can save x20-x30 earnings in order to FIRE then we can certainly do that.
Wouldn’t this be more ethical than immediately seeking redistribution solutions (taking someone else’s efforts in life) through the political process?
Corporations should take a more active role helping students subsidize their tuition expenses. There is a huge talent war coming with the Smart Machine Age and simple agreements could go a long way here.
Example: We pay 70% of your tuition; you work for us each summer and 2 years post graduation.
The government could find a myriad of ways to incentivize this behavior.
There’s something along these lines I heard in a somewhat recent Planet Money (NPR podcast) episode:
Someone pays 100% of your tuition, and that someone gets a percentage of your paycheck after you graduate for a certain amount of time.
This prevents loan payments from ever being more than you can afford (i.e. more than what you make) but could also be a big payout for the investors.
Someone buys you a house, car, food, education, healthcare, raises your children, according to your need
and
then gets his/her money back according to your ability.
Sounds familiar.
Reading Financial Sumarai enables me to see that America is not the land of milk and honey we make of it. In Nigeria, we don’t have student loans. A few state governments pay stipends but you bear the bulk of your fees. Thankfully, it is not an obscene amount and many students are able to pay these with the help of their extended family members.
Different strokes
Thanks for this incredible post. I am an immigrant and I married a US citizen with a debt of $40.000 4 years ago. Our AGI income roughly reached $24.000. I started to do things my dad taught me when I was a kid. Every single penny counts and always asks everything to your lenders. And I encouraged my husband to ask to his lender about interest rate for his Education and car´s loans. Wells fargo was his car´s lender with a 10% Interest rate when I checked the status of how much money he was paying towards his principal it was only $8 out of $180 monthly payment. And, for his Student Loans (9) he was paying $160month and only $12 were recruiting for his principal. Since then, we started to read more about finances and paying loans asap. I found out my husband is part of USAA through his beloved veteran grandfather and the interest rate for car´s loan was 5.2% almost half from the one wells fargo was charging him. Next day, he transferred his car´s loan to USAA and we paid the amount of $10.000 in debt in 3 years with a monthly payment of $256 and a final payment of $4000. In regards to Navient, I calculated interest rate and see if putting all student´s loan in one account would be beneficial or leaving them separately. I read that if you place all your loans in only one debt it is not beneficial if some of them have an interest rate of 4.4% and others have 6%. Once you joined them, the system will recruit in the highest interest (6%) and I did not want to hit our finances with that. So, we asked for the program named “INCOME DRIVEN PLAN” which has good benefits in you also add AUTO PAY for every month. We pay $550 per month ($300 for the loan with highest interest rate and $250 for the loan with high amount of debt) and since we are in auto-pay there is another 0.3% of decrease in interest per month. I do not encourage to take the “Forbearance” option it will place you in a crash financial crisis, because this recruit high monthly interest even if you are paying $0 per month. If you do not have enough saving per months but still want to pay your loan, there is another way named DEFERMENT. You can pay your loans and the Gov subsidized some of the interest and you can still contribute towards payments. Always start to pay your loans with the high interest during this period, and you will see the saved money in interest. My husband has already paid 2 out of 9 student loans in one year. I feel an extremely happy wife helping my Us citizen husband. I thought when I married him I would be a financial issue for him specially with the paperwork for migration services, but he said I am his “financial diamond saver”. During all of this, I brought him the idea to open our online business through a 3rd company, and it has been profitable and allow us to keep paying his debts. We purchased a new home last year, and opened investment accounts for Roth Iras, ESA in Ameritrade, Money Market and Growth plan with Fidelity. But, all of these have happened because we wanted to save. We do not use our A/C very often, our lights are only “on” if we needed, we only take the chance for a family trip once every 6 months, we use our miles from our credit card company to cover travel expenses, we ALWAYS pay in full amount our credit card monthly statements, only one account in netflix for $7 per month, clean our own cars with rationale amount of water (I hate to spend water if it is not needed), we go to groceries stores with organic food on sale ( ALDIS), we go to a restaurant once per month, only buy clothes if we really need them for our jobs (once per year), we do not like fancy stuff for cleaning dishes (Dollar tree has great options for dishwasher or house supplies), we use dishwasher once or twice per week ( we wash dishes by hand with rationale amount of water). We do not have fancy card, but we have a decent new home. And the best thing, we just turned 30 years old. Americans have great opportunities for making huge investments in this country. I wish I had these opportunities in my poor country, but I had the greatest economist in my life “MY LOVELY DAD, RAFAEL” Good luck!
Thanks for this incredible post. I am an immigrant and I married a US citizen who a debt of $40.000 4 years ago. Our AGI income roughly reached $24.000. I started to do things my dad taught me when I was a kid. Every single penny counts and always asks everything to your lended. And I encouraged my husband to ask to his lender about interest rate for this Education Loan and his car´s loan. Wells fargo was his car´s lender with a 10% Interest rate when I checked the status of how much money he was paying to his principal it was only $8 out of $180 monthly payment. And, for his Student Loan he was paying $160month and only $12 were recruiting for his principal. Since then, we started to read more about finances and paying loans asap. I found out my husband is part of USAA through his beloved veteran grandfather and the interest rate for car´s loan was 5.2% almost half from the one wells fargo was charging him. Next day, he transferred his car´s loan to USAA and we paid the amount of $10.000 in debt in 3 years with a monthly payment of $256. In regards to Navient, I calculated interest rate and see if putting all student´s loan in one account would be beneficial or leaving them separately. I read that if you place all your loans in only one debt it is not beneficial if some of them have an interest rate of 4.4% and others have 6%. Once you joined them, the system will recruit in the highest interest (6%) and I did not want to hit our finances with that. So, we asked for the program named “INCOME DRIVEN PLAN” which has good benefits in you also add AUTO PAY for every month. We pay $550 per month ($300 for the loan with highest interest rate and $250 for the loan with high amount of debt) and since we are in auto-pay there is another 0.3% of decrease in interest per month. I do not encourage to take the Forbearance option it will place you in a crash financial crisis, because this recruit high monthly interest even if you are paying $0 per month. If you do not have enough saving per months but still want to pay your loan, there is another way named DEFERMENT. You can pay your loan and the Gov subsidized some of the interest and you can still contribute payments. Always start to pay your loans with the high interest during this period, and you will see the save money in interest. My husband has already paid 2 out of 9 student loans in one year. I feel an extremely happy wife helping my Us citizen husband. I thought when I married him I would be a financial issue for him specially with the paperwork for migration services, but he said I am his “financial damon saver”. During all of this, I brought him the idea to open our online bussiness through a 3rd company, and it has been profitable and allow us to keep paying his debts. We purchased a new home last year, and open investment account for Roth Iras, ESA in Ameritrade, Money Market and Growth plan with Fidelity. But, all of these have happened because we wanted to save. We do not use our A/C very often, our lights are only “on” if we needed, we only take the chance for a family trip once every 6 months, we use our miles from our credit card company to cover travel expenses, we ALWAYS pay in full amount our credit card monthly statements, only one account in netflix for $7 per month, clean our own cars with rationale amount of water (I hate to spend water if it is not needed), we go to groceries stores with organic food on sale ( ALDIS), we go to a restaurant once per month, only buy clothes if we really need them for our jobs (once per year), we do not like fancy stuff for cleaning dishes (Dollar tree has great options for dishwasher or house supplies), we use dishwasher once or twice per week ( we wash dishes by hand with rationale amount of water). We do not have fancy card, but we have a decent new home. And the best thing, we just turned 30 years old. Americans have great opportunities for making huge investments in this country. I wish I had these opportunities in my poor country, but I had the greatest economist in my life “MY DAD, RAFAEL” Good luck!
Great post – good job Rafael!
Your dad raised a wise daughter!
Sadly, politicians cannot cancel student debt! Thos is why you are told 10 times before you agree…the ONLY way to eliminate student debt is to pay it off or die. Canceling student debt would ruin the great economy we are currently experiencing Now! Not gonna happen.. and is why going to an Ivy league college is no guarantee of success! Open your eyes!!
Yang2020 solution for Freedom dividend of $1000 for every adult citizen. This is a long-term solution that will help students, people who don’t choose college, and every race and class. It makes no sense to focus on a bandaid one off solution like canceling debt – it mirrors the bank bailouts which only benefits one class of persons. The student debts problem originates with Universities who don’t have the right incentives – that is the problem to solve.
The freedom dividend is brilliant because it gets what we talk about here on Financial Samurai and FIRE, about being able to take risks and do what you love. Getting unstuck for students, homeless, people trying to put food on the table. Very interesting to hear about how this can curb crime, since a ex-cons coming back into the world will have security to lean on, and an incentive not to do bad things and go to jail first place.
With AI around the corner, I think this’ll open up a new kind of economy that can help us transition into the future with new professions, gig economy, creative and humanitarian work.
The issue with Yang’s 1000 a month plan is it eliminates Medicare, SNAP, etc, and all of those cover costs a great deal more than a 1000 a month. For instance, you have a family with a working parent, say a teacher with student loans, and they have a child with diabetes. Childcare is difficult to find, affordable and good childcare even harder, insulin prices have skyrocketed while the product hasn’t changed measurably, and so what do you recommend then?
Should we prepare for more jobs being taken over by tech, definitely, but the rest of his plan isn’t humane or functional. We need to fix money in politics, create more affordable childcare solutions and healthcare solutions before this idea is feasible.
Stop capitalizing interest. Credit back all interest to orig loan. Let rhem pay that down. That’s what the forgiveness would be. Lots of these default loans are because they can’t get jobs. Then bad credit!!so didn’t it make sense to get economy back on feet with good credit so they can. Spend$ !! Just cause unemoyment stats are down doesnt mean not struggling pay chk to paychk??!!
Nice post! I have to say that I agree with pretty much everything laid out in this article. What boggles my mind is that they say the average student debt for new graduates is around $30,000. Most sources say that this is the reason millennials are behind finically and are getting married later, not buying a home until later and just generally behind. But hey, most people have no problem going out and buying a $30,000 car (financed of course.)
Hmmm, something is up here. In reality, if you’re motivated and have a somewhat decent job, $30,000 is not a huge amount of money. I think if most people put their minds to it, they would be able to pay off their loans fairly quickly. Instead they focus their energies complaining about how behind they are and how much debt they have hoping for bailouts like this.
When the bailouts come, are they really a changed person?
A college graduate will easily make $2,000,000 over his/her lifetime. Well, just subtract 30,000, -1.5%, and honor your debt. Is it really worth it to break down societal trust and personal responsibility to foist that cost on other people through the political process? This is exactly the slippery slope to erosion of societal ethics. And it unleashes a vicious cycle. Then the auto-mechanic who never went to college but had to pay taxes for your college will take his revenge at the polls by foisting on you some of his expenses through the political process. Eventually everything becomes politics running through the inefficient government meat grinder. People start spending more time in politics redistributing the wealth rather than creating it. This is a perilous path for the nation in a competitive world.
Pushing the lever a little bit towards personal responsibility, even if a little inconvenient to repay a 30k loan at first, rather than giving priority to a mentality of “I’m a victim, the world owes me, politicians will deliver my revenge”, would go a long way towards increasing overall happiness and prosperity. Come to think of it this is how America climbed to the top of the world’s prosperity charts. Alas we’re about to throw away the baby with the bath water.
The “freebies” pandered by politicians for 2020 will drastically reduce the number of people who are able to achieve FIRE. I mean reduce by at least an order of magnitude.
The annual accumulating federal deficit is already above one trillion per year, and compounding, before all the new “freebies” promised by politicians in 2020 are even added to the spending, and before the eventual inevitable recession that is sooner or later coming is factored in. Two percent annual wealth taxes on those owning more than 50M are a true pittance compared to the annual deficit. This wealth tax would raise just 0.05 trillion per year under the most optimistic estimates (Washington Post, a left leaning newspaper).
The electorate will likely vote for these “freebie” proposals like mice are attracted to the peanut butter in an electric trap. They will vote thinking that the new taxes will only affect those owning more than 50M. What they will eventually get a few years down the line is VAT sales taxes in the 20+% range on everything they purchase — as they inevitably do in Europe. You would have to extend tax hikes well into the middle class to pay for all these freebies, just like in Europe, where the highest marginal tax rates are already applied to those making just 2-3 times average national income. That is, somewhere in the $60-100k annual income range you are already in the 45-55% top income tax range. And… on top of that Europeans get an additional VAT tax of 21-25% on everything they buy, hitting disproportionately the middle class and bottom income earners. That is the ONLY way to fund the welfare state of “free” college, “free” healthcare etc., just as they do in Europe. Indeed American tourists don’t realize that eating pizza in Florence.
When we talk about saving an additional 20-30% of income being the pivotal difference between FIRE and “working for the man” all your life, you realize what these taxes will do to the FI movement. And that is only the asset accumulation part of FIRE. Then, during actual retirement you will have to reduce your safe withdrawal rate to just 1-2% because the wealth tax will be trimming the other 2% (*). Good luck then accumulating enough wealth (under 45-55% European income tax rates+ 20% VAT on everything you purchase) to FIRE on a 1-2% safe withdrawal rate. Good luck indeed!
It is easy for us who have already FIREd to pander “free” healthcare as we get older and “free” college for our kids, so that we can foist the expense on the suckers that are still working. But people who aspire to one day FIRE will see their aspirations de-facto shattered— just like in Europe where FIRE is virtually unattainable.
———
(*) if you think that wealth taxes will remain only for those owning 50M or more, look at places where wealth taxes are actually implemented. In France, Spain and Portugal wealth taxes kick in at a net worth of $800,000 to 1M. A house in San Francisco is enough to get you over that — before you’ve even accumulated your first FIRE penny. Politicians promise but reality evolves otherwise. When the US first imposed an income tax in 1913: “It also established a one percent tax on income above $3,000 per year; the tax affected approximately three percent of the population (source Wikipedia)”. Did I hear the politician say “a very small tax starting at just 1% will affect only the despicable top 3%”?. How did that work out? Ask the Frenchman on a $1500 monthly salary paying an additional 20% VAT on everything he buys. That is the eventual paradise of “freebies” dispensed at the ballot box.
Hmm, maybe! But if everything becomes free, then isn’t that the end goal to FIRE? Free healthcare, free education, universal income, etc. Not a bad lifestyle.
FS, I am assuming your rely is 100% sarcasm. I sure hope so anyway.
I’m as right-wing as they come, and here are my thoughts. While I don’t have many answers, I do think that certain things should be considered:
1. Allow student loans to be discharged in bankruptcy under certain conditions. I believe that was taken away because high earners with high debt went bankrupt to get out of debt fast. It would have been better to revise the law rather than toss it out completely. What conditions? I don’t know – we could spend the next year or two as a society arguing about it.
2. Introduce some level of accountability on to the schools. They did this with for-profit schools, so why not the traditional ‘not for profit’ schools. How to achieve this is open to debate.
3. Insist that non-academic staff (bloat) be cut. Not sure how to accomplish this, but even when I was in school in the 80s, I was appalled at what I saw. I worked PT in student affairs (Vice Chancellor’s Office) and I can only imagine it has gotten worse. Universities are like municipalities. Threaten their budget, and they threaten to cut vital services (police, fire, EMTs, etc). Schools will have to cut course offerings and decrease the academic staff. What a bunch of BS.
4. Instead of using tax payer money as the bail-out, why not tax the endowments of the larger universities? Why should they take my money when they can tax the schools? This way, the money set aside for education actually goes towards education. Isn’t that fair?
+1 for proposing 1 & 3. Makes much sense. Didn’t understand 2. And didn’t really think 4 was an option, but hey, worth a try. I worked as a TA while in school and OMG, the amount of waste going around was just plain silly.
#2 – for profit schools got slammed for the claims of fraud from students: https://www.newsweek.com/profit-college-student-debt-fraud-settlement-1279059
The schools promised/insinuated jobs were available, and people were duped. I don’t see why there isn’t a similar criticism levied at major universities.. https://diverseeducation.com/article/104845/
I am really tired of these articles that base the primary reason for not canceling student debt based on the fact that a person made poor financial choices during school. Like you, I worked and sacrificed my way through my undergraduate and graduate education. In fact, for three out of the four years of my undergraduate education, I worked 70 hours per week. I graduated with zero college debt. I cannot say the same for professional school.
I think these discussions regarding canceling debt that the Democrats are raising are important because there is a fundamental flaw with our education system. A lot of these articles try to simplify the problem saying that Democrats are just putting a Band-Aid on the situation, but they are getting people talking about the problem. We have an education system that is mired in administrative costs, too many overpaid administrative positions, and too much money spent on extra curricular activities for students. These cost are transferred to the students regardless of whether they took advantage of them. We also live in a society where the cost of living versus salary versus the cost of a college education have changed much since the 1970s, 1980s, and 1990s. Millennials get a bad rap regarding this. Again, it is a necessary conversation and something needs to be done about it. The people that assume that those with debt don’t work hard and didn’t sacrifice are just being ignorant and heartless. Fixing the situation will require canceling some of the debt terms and putting more responsibility on schools. I think you are being facetious if you think Elizabeth Warren and Bernie Sanders do not understand this. Sink your average voter understands this. Assuming people won’t save for a college education if all are part of student dead is canceled is just stupid.
I agree with you that we American should all get freebies. Life is tough enough in America, we have a right to an easier life subsidized by those who got lucky.
The Europeans and Canadians are happy due to socialism. Why can’t we follow the same path like you said?
Keep up the good fight my comrade.
If the $1.4 trillion of student loan debt is canceled this year, I am pretty sure that there is going to be an even greater amount of people taking out student loans in the future under the expectation that it will be canceled again. This is just rational economic action.
The cycle of spending money on things we cannot afford will never end if we cancel student debt.
But most importantly, it is one of the best feelings two fulfill your obligations. Let’s not take away this great feeling of triumph from those with debt.
If you read more into Sanders’ actual plan instead of the clickbait headline, he explains exactly how we can rectify the broken education system so that is not presumed. Sure, if we canceled the debt, and didn’t fix the problems that led to it that doesn’t do any good. The problem is most Americans especially those who are the first time college students in their family don’t have the information or help to set themselves up for success and avoid student loans. I did, and due to extenuating circumstances still had to get some, not 30k, but still.
See, they don’t pay student teachers a dime, and you are also required to sign that you won’t work while student teaching since technically you work full-time hours, and have full-time courseload already that semester. What do you tell teachers then? This is one of the reasons we have a teacher shortage nationwide. As far as public loan forgiveness plan, it currently hasn’t been functioning properly, and a lot of people who counted on it, turn in their proper documents, are now being told they aren’t even eligible when they checked first.
Let’s recognize please that we need a solution, and telling people that they need to pick themselves up by their bootstraps which is a physical impossibility by the way is not an answer.
Let’s require colleges have financial pre-req classes before anyone can enroll. Let’s make colleges show exactly how many students from each department actually go into jobs that pay more than minimum wage, and whether in their field or not. Let’s cut the admin bloat, and utilize tech better. Let’s do an exchange of community service contracts similar to ROTC in order to go to public university for free. Let’s have that community service contracts be in industries desperately short educated labor such as teaching, green energy, transportation infrastructure, etc. Let’s use this as a means to help resolve multiple long term problems we are facing, and if canceling student loan debt is attached to an actual functioning public service loan forgiveness program, awesome.
We cannot pretend that student loan debt is not having a long term and devastating impact on our nation’s economy, population growth, industry, and more. Whether or not people agree with cancellation of loan debt, it needs to be addressed, and at least Warren and Sanders are actually facing it head on versus burying their heads in the sand like most.
Don’t think writing about the topic ignores the topic. Isn’t it the exact opposition?
Can you share more about your story? What are the specific things you are doing to help resolve this situation?
If you have written an article about this topic I’d love to read it as well.
The never ending supply of loans that are backed by the full faith of the USA + bad choices + the large overhead of colleges = the situation we are in. Cancelling debt doesn’t fix any of this.
You may be right. But who will reigni in the universities that inflat costs greater than inflation? My school added a freaking trading room touch each people how to become traders. It was paid by a financial industry is guy who made a boatload of money as a trader. Is that what a college education is about? They get no money for me for donations I can tell you that much.
Why wasn’t it possible to continue your undergraduate success in professional school? Presumably once in professional school you were already a college graduate, presumably capable of earning even more by working. And if that were somehow not possible why did you continue? Wasn’t college enough for you? Why do I have to pay for your professional school? Because Bernie Sanders and Elizabeth Warren will force me to take some funds that would otherwise go into my children’s 529 college fund and give it to you instead?
The Australian approach of income contingent loans is a good idea in this context I think. You only pay back the loan if you earn more than a threshold income. Currently in Aus, it is something like AUD 55k a year (USD 39k per year). It would be even better if this was linked to the income the universities receive which isn’t the case in Australia currently. For example, the government could reduce the funding the state universities get in proportion to the income contingent loans which aren’t being repaid.
OTOH it seems a bit extreme in the US that you can’t even cancel student debt if you declare bankruptcy.
If they did income based loan repayment only some people would pay. There are a lot of people with uncles and relatives that will pay them under the table for certain professional jobs. Aka you would have no income or just “enough” to not red flag the irs.
A lot of scammers out there this would benefit.
Sam, saying hello from the Philippines. We learned about you and your blog from a business insider article (I make $200,000 a year in passive income after retiring at 34, and it works because I followed 5 steps). Your family’s financial story is truly inspiring.
We started our financial journey last year. Finally! We’ll go through your entries to find the ones applicable to our local setting. Excited
Since going to college is a choice, I believe people who choose to go to college do have a responsibility to repay their student loan debt. After all, the amount of student loan one incures is directly proportional to the income they will make anyways.
It’s just a matter of sacrificing other luxuries for a short while such as traveling, purchasing a fancy car or any other type of indulgence which are only luxuries and not a necessity. I felt it was important to pay off my student loans first before I changed my lifestyle.
Not always true. An art degree (BFA) at my uni (top 100 state school) is 160k for 4 years for out of state students and 85k for in state. I don’t know that the average artist makes enough to afford that if they had to take out the max amount.
Well perhaps that means that there is not enough demand in the world for “artists” who cannot sell their stuff ie people don’t want that kind of art. Perhaps that means there should be fewer such artists. The world does not owe people a living just because they like doing/studying something.
There’s a feel good myth that we all can do/pursue what we want and somehow there will be enough demand in the world for our trade. Who will dig the graves? Who will clean the sewers? Who will work at the meat factory?
“I like doing something there’s no demand for and a politician will trim someone else’s money (productivity) and support me. Great! I’ll vote for him! “
Great societal ethics.
I actually left Europe to come and study in a graduate school in America. Not a famous school, but one where a non-exceptional student could get into, and one where the expense/reward ratio made long term sense. What? Why would anyone leave that European paradise of “free” college to come and study in America?
Because while college in Europe is generally free (well, you still pay a small part) room and board is generally not. In contrast, dog eat dog capitalist America offered me a job while I was studying. The proceeds of that job were enough to pay for tuition room and board. This is actually typical in American graduate schools and very very rare in Europe. I came to the US with two thousand dollars in my pocket and the day I graduated I had $23,000 in the bank. My parents in Europe did not have to fork out a penny. This would have been virtually impossible had I stayed in Europe.
Also, college is not “free” in Europe. In America the typical student may graduate with loans, which if they chose their degree based on some real demand and value, and if then once they graduate have a reasonable financial plan, they can repay the debt in a few years once they start working. In Europe, once you start working, the state pares all your future earnings to pay for these “free” services. This is especially true if you become a successful person, earning say $100k per year where in Europe you face marginal tax rates over 50% plus various additional deductions to pay for all the “free” stuff. In many ways this European paring of wages often happens way upstream, before you even see it in any financial statement or paycheck. Which brings me to a related point…
Folks, salaries in Europe are a lot lower than in the US to start out with. A graduate with a masters degree in engineering from a good school will be earning around $40k in Holland as a first salary, less in Spain. An $3000 per month first salary for a college graduate in Europe is considered stellar. The reason is, again, that behind the scenes European states garnish upwards of 50% of GDP to pay for all the “free” stuff. That is why achieving financial independence in Europe is hard, really extraordinary, unless you are born into old money in the first place. I know the grass is always greener in the other side, but simply visiting as a tourist does not really allow you to examine the grass. It is easy to go to Barcellona for a few weeks, on your American salary, sit at a tapas bar and say what a wonderful life. That life is different behind the scenes, once you have to work and bootstrap yourself in that environment. Starting out in Europe, forget ever achieving FIRE unless you are already born into old money. The macro fact that the European continent is growing at 1-2% rates when the world as a whole grows two to four times faster should be an encapsulation of the deterministic decline trajectory that such policies bring. All these policies flatten the effort-reward curve, as the more exceptional more competent and more diligent have their work incentives reduced (taxed or regulated) to support a lower productivity life for the mediocre. Again, the slow growth rate of that continent across the Atlantic encapsulates its arithmetically inevitable deterministic decline.
Yes, I also did a PHD in the US, where funding for PhDs was much better than in Britain. However, in some European countries – Sweden and Switzerland for example – PhD students can get get higher “salaries” than in the US or Australia.
Wonderful comment and thank you for sharing. Makes a lot of sense.
What about this point: there is no need to pursue FIRE in Europe because life is already so good.
You mean Europeans prefer to keep working rather than FIRE because their working lives are so wonderful?
Absolutely not. Once again things look different once you get in the trenches.
To the typical European (I was born there, grew up and worked in Italy France and Belgium for a few years and most of my relatives are still there) work is much more of a drudge compared to corporate America. The “I can’t wait till 4pm until I can get out of the office”, “I can’t wait until my next vacation and already dread return to work” mentality is much more pronounced in Europe. Work psychology in Europe is much closer to what you find at the DMV or Post Office in America. By contrast corporate America offers a much more enthusiastic work environment, with a much more rewarding effort-reward curve, and much higher salaries (which higher salaries are a result of that steeper effort-reward curve and the higher international competitiveness it inevitably fosters).
The fact that so many Americans are idolizing Europe without ever having actually lived and worked there is quite worrisome. As I said, you only have to look at Europe’s structural permanent anemic intercontinental growth rate of 1-2% to get a summary of what it’s happening and where they’re headed. As an investor I’m sure you understand that there is no future on a growth rate of 1% when you are on a planet that is growing along a 4% trendline. Decline drags everything down with it. Including self-righteous higher morals. History is full of once patronizing self righteous higher morals that end up in misery, marginalization, decline and extinction.
The arithmetic is simple. At a 1% annual growth rate annual per capita income in France will grow from $45k to $60k in 35 years. In the same 35 years average world per capita income growing at 4% will go from $15k today to $60k. Same as France. Today’s Frenchman will be a middle income world citizen by 2054, just 35 years from now — Where the average Mexican is today. Do you really want your children on a French trajectory? That seems to be the banana peel Americans are about to step on. And mind you, that French trajectory is not a happy path until world average catches up to them in 35 years. They are already feeling the malaise of decline.
Regarding student loan forgiveness – it seems the problem is massively complex, but it appears states are starting to trend in a good direction with free community college dependent on certain conditions being met. I like that you wrote a bit about how it will help those that don’t necessarily need the help in addition to what the politicians purport to be the primary impetus behind their positions. I wonder what future tuition will be covered – medical school, law school, etc.? Is that fair? Are people that made the wise financial decision to stay in-state going to be punished with taxes by the willfully financially ignorant that didn’t do the math beforehand? With the 59% number above, there are people in the 41% not graduating with hundreds of thousands in student debt that are likely never to pay it back. Who is to blame and will you and I be forced to cover? How far will the chain reaction of forgiving student loans reach?
I paid off my wife’s student loan after we got married and that was one of the proudest thing I did in my life. However, I have zero student loan because I did my undergrad in Taiwan, and my tuition was $800 per semester. My 4 year college (a private college but heavily subsidized by public money) costs less than $20K USD (in 2019 money). US colleges are becoming Veblen goods for global students and just like Rolex and LV bags, they command exorbitant prices. If forgiving student loans sounds bad, maybe we should revisit why colleges are so expensive.
+1 to looking at why college is so expensive. If we use tax payers dollars to pay for college and forgive loans, won’t this give universities a reason to not work on reducing costs. With colleges spending millions of dollars on Athletics, hiring over qualified professors for general education course, and building new and over priced housing, it might make sense to determine the root cause to the sky rocketing cost instead of pumping more money into the system.
It frustrates me that tuition has skyrocketed since I attended school even though one would think that vastly expanded technologies and the increase in online educational would help lower costs. I also don’t think a massive student debt forgiveness policy will solve the problems with higher education in the US. I agree it’s important to maintain the value and message that debt obligations should be honored and paid.
We could stop paying football coaches seven figures (while atheletes get zero) for a start. Might rein in tuition a bit?
Many athletic programs pay from themselves AND put $ into the school. I know leftists that may hate this reality; but college athleitics is classic supply and demand economics. Sorry to tell you this but alums like when their alma mater performs well on the athletic stage and are more than willing to pay for that privilege.
Good coaches are rare so they can get rewarded well. They are “worth it.” Schools make more $ from their services than they cost. You and I better offer the same scenario in our jobs or we should be fired or paid less.
While I tend to agree with the incentivizing poor behavior comments I think there is a much bigger concern in the room. That is why is education costs spiraling out of control. I’d theorize it’s the availability of cheap loans with a high acceptance rate in the first place. The price of education becomes elastic because of those loans and all the schools turn into club med to compete. So much fat that could be cut at the college level that has nothing to do with education. Throwing more free government money at it doesn’t solve it and likely makes it worse.
I am pretty left, but I agree that these loans should not be payed off. I do think the interest on them should be lowered to around inflation, or potentially zero. Doesn’t make much sense that the government is profiting off educating its citizens.
The other issue that you mention is that you “believe the vast majority of Americans who are bright enough to attend college do not understand the risks of spending hundreds of thousands of dollars for an education.” I disagree there. Maybe this is on average true for those pursuing business, finance, or even STEM degrees, however I know many people who had no idea how difficult it would be to find a decent paying job and to ultimately pay off their loans. And these are smart people, just not financially minded folks.
Ultimately though, I agree we shouldn’t incentive irrational (or for lack of a better term, ignorant) behavior.
It is not the government profiting from education. It is taxpayers giving you a loan at market rates. A (mind you risky) loan at inflation rate is essentially a partial giveaway. That is why there is no such thing in the free market.
If debt is forgiven then the debt holders will lose out. Who will provide future loans at a reasonable rate? If I were lending money to students and I knew going into it there was a chance they would not pay me back I would Price that risk in at a much higher rate or not provide loans at all. The idea is beyond crazy.
But here’s the thing shadow bankers originate loans and dump them off to sallie mae and/or stupid pensions/mutual funds that are starved for yield and oblivious to risk.
That connection between creditor and debtor really has not been there since securitization of this crap took off.
A point most seem to miss is that these loans are not from Granny’s savings at the local credit union. Much of this 1.6T is counterfeit credit from shadow banking.
This 1.6T help the economies of college towns tread water the last decade. Add in the subprime auto and housing bubble 2.0 along with CRE bubble, healthcare racquet bubble, and the incestuous corporate credit/buyback bubble and it’s no wonder financial assets have levitated the last ten years.
But this cannot go on forever. There will be blood to pay.
Fellow W&M alum here. Fortunately, I did not have much debt when I graduated from the College in ’09. Unfortunately, I did take on a good bit of federally-guaranteed loans to attend law school because that seemed like the right choice at a time when the job market was imploding.
I do not want student debts, including my own, to be cancelled. I would, however, appreciate some relief on the interest. (I have about a dozen loans, the vast majority of which have a 6.8% interest rate.) It’s quite frustrating that Congress set the interest rate for student loans at nearly 7% during a low-interest period.
So, I would propose an optional open ended income-based repayment option — meaning no forgiveness after 20 or 30 years — that reduces the interest rate to zero, or at least an amount more closely pegged to the inflation rate, as long as the borrower makes timely payments.
Agree – also I refinanced (with SOFI – no link, I’m not some high flying financial blogger) and got those law school loans paid off. But a 6.8 percent loan to a 3.75 mortgages is rough.
You have highlighted one of the important issues about student loans. The government is paying about 2% for money and there should not be such a high markup to the students. Why not keep it at a few basis points above the actual cost of money?
A but off topic but – personally I would take the black Chevy (behind the Mustang) over the Mustang any day. But that’s just me.
After listening to the cabal of D’s wanting to be Prez. the last two evenings, I am concerned about America’s continued value fo freedom to make life choices and self motivation.
When K. Harris shouted out that Americans want to know how WE are going to put food on thier table, I wanted to shout back at her: “THAT”S NOT YOUR ROLE!!!”
Student loan forgiveness is not a worthy use of taxpayer money. That money can be used for much more ‘woke’ distribution, such as Race Reparations or Free Healthcare for Illegal Immigrants.
The wealth tax that might be used to pay for student loan cancellation is the thing that should strike fear in the retire early community. If the safe withdrawal rate now is only 3 or 4% then think of what a one or two percent wealth tax would mean. It could mean that a safe withdrawal rate drops to 1% or maybe less because the government is withdrawing 2% with a net worth based tax. Think about what that would mean to a high cost of living early retiree who needs $250,000 to live on comfortably in early retirement. He would need as much as $25 Million to hit his FIRE target! Yikes! Even a low cost of living early retiree that only spends $40,000 a year would need $4 Million. Terrifying if you think about it.
Let’s be honest: the wealth tax idea is going nowhere, if only because of the difficulties that would follow from trying to determine the value of illiquid assets and then taxing them.
But even if it was politically viable, it would have little to no impact on the FIRE community. Sen. Warren’s proposal would only have kicked in for those with a household net worth of $50 million or more.
Wealth taxes exist and are currently active in many European countries. The countries a majority of Americans seem to aspire to these days. As far as 50M being the threshold that is the initial, let’s say, appetizer. When the income tax was first imposed in 1913 it only affected the ultra rich. Where are we now? When VAT was introduced in Europe it was only around 5%. Now it is around 25%.
Dave,
Do you really think the corrupt, now illegal (in terms of consitutional limits) federal Gov’t. would not continually push to take more $ from whoever they deem “rich” Get real man- these people are dangerous.
Fret not, The Fed will monetize all Sallie Mae debt.
The wealth tax will come in the form of financial asset deflation in real terms and strong encouragement to rotate ERISA assets into US Treasuries with negative real yields.
Just wanna point out that Elizabeth Warren’s wealth tax proposal (the most popular of them all, if there even are competing proposals) calls for a 2% tax on those with $50 million or more in assets and 3% on those with $1 billion or more. And I was just reading that this has widespread support amongst the actual millionaires who would be paying this.
Frankly, if this proposal actually causes a retiree to be unable to meet their expenses, then this retiree has a serious spending issue. I know that not every penny of this hypothetical person’s $50,000,000 net worth will be in liquid index funds, but even still. The people who would be subject to this tax are the people who would have the least problems paying it.
The two main issues with the proposal are the logistics of constantly re-valuing illiquid assets each year, and the fact that it is likely unconstitutional (the 16th Amendment grants Congress the power to tax income. It says nothing about wealth).
Sincerely,
ARB–Angry Retail Banker
The people that this tax would disincentivize are/have been/will be the most competent in our society.
Eh, that she very up for debate. You’ve also got inheritors, people who cheat the system, and lottery winners in there. Not every super wealthy person is Jeff Bezos, Bill. Gates, or someone else who went on to revolutionize whatever industry they were in.
Plus, most of the scientists, engineers, and others who’ve helped created our modern society via health care, infrastructure, or technology probably don’t have $50 million net worths. Unless you’re alleging that these people aren’t competent enough, it’s very tough to link someone’s competency, productivity, or value to their net worth. Not that there’s NO correlation or an inverse correlation, obviously, but the Randian idea of money being a quantification of human value is a gross oversimplification.
Personally, I’m on the fence regarding a wealth tax. I’ve heard much worse proposals that would increase my taxes but are “okay” because they affect the super rich more. I’d just like to see more of our tax dollars come back to us in value. I’m not an expert on Europe, but part of the reason they seem happier than us are because their tax dollars come back to them in spades via social services such a state universal health care. They pay a lot, but at least they apparently get what they pay for, as far as I can tell. What do WE get, other than a needlessly huge and over used military, concentration camp s for underage asylum seekers, and a government that’s only open 11 months out of the year?
Sincerely,
ARB–Angry Retail Banker
Inheritors represent people who did not fully enjoy the fruits of their labor and decided to pass the unused part to their children. Do you have a problem with that as a voter? That is not a good start to healthy societal ethics.
As far as glorifying Europe, I suggest you first live, work, and try to bootstrap yourself there (see my story in the other comment). It is not what it it seems. For example there is a lot more meritocracy in the US than Europe. Your proposals will erode that meritocracy by imposing redistributive burdens on all competent people just because you believe that some of them did not earn their wealth. Again, not a great start to healthy societal ethics.
I feel like you’re reading the versions of my comments you wish to read, not my actual comments.
I’ve no problem with people inheriting money, both large amounts and small. But your claim was that the wealthiest of society represented the most competent of society, directly linking competence to net worth. I gave examples where that is not the case. Perhaps in-universe in Atlas Shrugged this is the case, but not in real life.
Regarding Europe, what exactly are my proposals again? I pretty well remember saying I was on the fence regarding the wealth tax (I’m fairly ambivalent about it since it affects roughly no one and about 2/3 of millionaires apparently support it according to a few polls). I guess that translates to I want to plunge two continents into full on Socialist states in my quest for vengeance against wealth inheritors. Also, you did that thing again where you directly correlate competency to net worth.
And regarding the US work environment being a meritocracy: um, sure, why not? I will grant that you actually said that the US had MORE of a meritocracy than Europe, not that is IS a meritocracy. I’ve no idea, personally, and will have to take your word on it.
But polls and studies have shown that Europeans are happier than Americans. What am I supposed to say? Those Europeans are lying?
You mention societal ethics a few times, but societal ethics are very subjective. Do we value personal responsibility, taking care of our most vulnerable, or some balance between the two? How do we define each of the terms, and how do we define society and government’s role (or lack of a role) in each? All very important and difficult questions that, frankly, neither of us have answers to.
Sincerely,
ARB–Angry Retail Banker
Excellent quantitative observation on the FIRE withdrawal rate.
Also immagine how much harder it will be to save to achieve FIRE if the government trims another 20% of your salary — as it already does in Europe, and that is why there is virtually no FIRE in Europe, unless you are already born into old money.
“The more freebies you can promise at a minority’s expense, the more votes you will get.”
Boy, that’s for sure. Unfortunately, the “minority” doing all the paying is the lot of us diligent, hardworking earners and savers who take personal responsibility for our financial lives. Also unfortunately, we appear to be far outnumbered (with the deficit growing every year) by the slack-jawed masses who are more than happy to pig out at the public trough, utterly oblivious to the damage they’re doing to themselves and the nation. The pandering to this group is irresponsible and horrifying to anyone who believes in personal responsibility and self-respect.
“To cancel all student debt would only be rewarding irrational behavior. By rewarding irrational behavior, we may be dooming such folks to a lifetime of hardship.”
This is already happening. There is a huge and growing proportion of the population that has never known anything but dependency on welfare. The increasing trend on the political left to provide more and more forms of “assistance” only feeds this tendency toward outsourcing responsibility for one’s life to the government. The left wishes to protect people from suffering any consequences for their poor choices/life decisions, which, of course, serves to encourage an endless string of poor choices and failed lives. This cannot end well.
“Once the expectations for a handout are ingrained, there’s no turning back. We’ll end up raising a new generation of entitled Americans who will not fully appreciate the value money. Our economy will unravel because trust will be broken and productivity will decline.”
Yep, that pretty much sums it up. What’s scary is that there already is “no turning back”— over 20% of the population currently receives some form of welfare. 20%!!! Certainly some of those are folks with disabilities, or folks on unemployment currently seeking work (although in this economy, that can’t be many). But I fear an awful lot are just permanent welfare denizens who’ve been raised “in the life”. They know nothing different. For such people, there really is no turning back.
Truly scary.
Agree with much of your commentary, except that government largess comes from the left. It comes from the left and the right. The right engages in corporate welfare – $1.5T F35 fighter anyone – and plies government tax breaks on the wealthiest. The result is the same same, be it Lockheed Martin for the F35 fighter or someone seeing student loans paid for, it’s dependency on government and spending money the US does not have.
John Stossel wrote a great article called “Confessions of a Corporate Welfare Queen” where he details one simple method people use to suckle the government teat despite seven figure incomes. Highly recommend.
So the solution is …. make an even larger proportion of the economy dependent on government…
People should take responsibility for their debt and pay it off. Why do I have to bail you out?
I just read about a dentist who owes over a million $ in student loan. Sure, that sounds like a lot, but dentists make a ton of money. Just hunker down and pay it off like a responsible human being. If you can’t deal with it, you shouldn’t have taken the loan out in the first place.
No bailout unless they pay back somehow.
The dentist should work to serve uninsured people for 20 hours/week for life or something like that. See if dentists will take that deal. That’s worth a lot more than a million $.
Dental care is ridiculously expensive in the US.
But did GS take responsibility for bad bets with AIG?
This is what pisses people off. The little schmuck has to honor debts but Hampton crowd doesn’t. They get a do over.
So the solution is … even more government bailouts to take revenge on past government bailouts…
Does that make things better?
Government made a massive profit. A win for all it seems.
My firm didn’t get a bailout. Employees just got hammered instead and we were paid in mortgage backed securities.
If the firm got a bailout, the share price would have performed much better ironically.
I grew up with a drill happy dentist, and now no matter how well I take care of my teeth it’s a lifetime of decaying fillings being replaced with crowns that will break down and require root canals. No fluoride treatment, no showing a 6 year old how to brush better, just expensive filling after expensive fillings.
I just can’t believe saddling someone with up to $1M in debt and then saying “ok, go do right by your patients. But just FYI, check out how much more you make doing a root canal over a cleaning” is a particularly good way to get good medical outcomes.
Agreed. Regardless of how you feel about student debt cancellation, the extremely high cost of medical tuition is at least part of the reason why we have such high medical costs in this country.
Sincerely,
ARB–Angry Retail Banker
The student loan crisis is but a fractal of the systemic sovereign debt crisis fast approaching as 200T in unfunded liabilities move from off balance sheet to on.
But that’s ok. Preserve your wealth in bonds. LOL.
Nice analogy!!
I would only support a bail out if it gets to the root of the problem, but bailouts are almost always a band aid that provide temporary relief with no lasting solutions.
So say Bernie or Warren’s plan passes legislation. Millions of student loans are forgiven. Then what? What will happen in four years when the cycle repeats? Forgive student loans again?
Say the people with “crippling debt” gets relief through the bail out and they’re now able to stimulate the economy by consuming more. Great, short-term economic boost. Then what? What will happen once their money is tied to something like a car for 60 months?
Say the bail out passes. How does it impact those who are fiscally responsible? Will they continue to be responsible? Will policy makers really want to disincentive responsible actions?
IMO the “problem” with student loan isn’t the cost of the tuition. It’s definitely expensive and rising rapidly, but there are always sensible options out there. For example, there are plenty of State schools with decent programs that are a fraction of the cost compared to more prestigious renowned schools. There are also trade schools.
The true problem, I think, is the sense of entitlement. People’s mindset or mentality. OK that sounds harsh but hear me out. If you have a job and a student loan and you want it to be forgiven, it’s human nature to want something free so I get it. However after the initial thought sprawls out, the BASELINE thought process should be “I have my job because I went to college.” You graduated by studying, sacrificing, and working hard, but needed to take on some loans to make it possible. In other words, you borrowed against yourself because you bet on yourself. You bet that it would pay off. And it probably did. The next thought process should be “let me repay back the debt that I willingly took on, because it’s the right thing to do, even though I would LOVE for it to be forgiven.”
Instead, the proponents of the #forgivestudentloan seem very entitled. It’s almost always them blaming external circumstances for placing them in burdensome positions. The starting point of their thought process is that nothing is their fault because they’re a victim of their own choice.
For a little background on me, back in the early 2000s, I applied to five colleges and got accepted to three. Two of them were private one was public. I remember creating a table and comparing the three options – tuition costs, room and board, time it would take to commute, what I would need to earn for the ROI to be worth it, etc., and I eventually decided to go to a State school and “only” had $18k in student loans when I graduated. But the public school was not as good as the other two, so it sucks when my insecurity kicks in when people talk about going to prestigious schools – but it’s a very small price to pay.
I’m also saving diligently for my two kids 529 plans which isn’t stimulating the economy, but I want to explain to my kids that it takes a lot of sacrifice to be responsible. Whether or not they get it isn’t ultimately up to me, but I could only hope for the best.
I want to support policies or plans that supports people who are responsible. We should incentivize fiscally responsible behavior and help people that are truly in need. Most people, as this article, and many other studies point out, don’t need a student loan bail out.
What Jeff said, in spades: “I want to support policies or plans that support people who are responsible. We should incentivize fiscally responsible behavior and help people that are truly in need.”
I’m hoping there will be more incentives given for Americans who can stay fit. Taking preventative health measures is such a no brainer. I don’t know why we don’t do it.
If the government said I could get a 30% discount to get under a 15% body fat percentage, I would do it within the year. Getting the double benefit of saving money and feeling better would be a win. I think millions of others would feel the same.
Completely agree, Sam! Having been an endurance sport/fitness junky my entire life, I’m really reaping the benefits now in middle age. I look around at my peer group and count my blessings! And as you note, aside from the personal benefit of keeping oneself fit and healthy, the benefit to the nation as a whole would be tremendous if there were an effective national promotion of fitness.
It people can get a tax credit for being in the range of an ideal BMI, while regularly getting preventive maintenance, the net benefit would be tremendous. Medical costs would theoretically decrease and all of our health insurance premium would drop.
We would have to give up some sort of privacy to reveal sensitive medical records, but I’m sure there’s a way a physician can certify the results that you can attach to your tax form.
Also imagine if the tax credits were tiered by initial weight? For example, you would qualify for $7,500 going from morbidly obese to normal range, a $3,500 tax credit if you went from obese to normal weight, $1,500 if you went from overweight to healthy weight, etc.
$ always tends to drive people’s motivation. Why not subsidize or reward positive behavior that’ll have a positive impact on us all? I seriously don’t see the downside.
In my opinion, the biggest problem with student loan debt is being not dischargeable in bankruptcy. Hence, public and private institutions eagerly extend this kind of debt w/o doing proper due diligence. Readily available credit leads to the people taking debt for the degrees that can’t pay back. And ultimately it results in surge pricing — Aka the subprime mortgage crisis.
Making student debt dischargeable will make banks think twice. Student loan, the same as mortgage doesn’t increase the affordability of asset but rather over-inflates it.
This would be helping the irresponsible. Plenty of good parents save and pay cash for their kids college. Paying off other’s debts would basically be saying a big F U to the parents that already paid cash. Also what will this say to a scholarship earning student? Pretty ridiculous when you look at it from those angles. College is super expensive at a lot of school but not all. School choice is very important like you said. Your mortgage debt repayment plan is funny and really puts this whole joke of an issue into context. I’m living the debt free lifestyle and don’t want to pay anymore taxes. Someone else takes out debt and somehow now it’s my problem I have to deal with? No thanks…
It is unfair to those who saved and live frugally to have paid off their student loans and then find out that they would have been forgiven if they just lived it up instead.
It’s the same pie and the money has to come from somewhere so either taxes go up and then those same people who paid off their student loans already now get penalized and foot the bill to those who didn’t or other programs get cut.
It’s very easy to spend someone else’s money. It does not teach anything about financial management on an individual scale
I paid mine off in about a year and a half, but something needs to be done. The Purdue University president has the right idea and hasn’t raised tuition in 8 years.
He basically believes higher ed should be solely focused on education and not having multi-million dollar rec centers, high-end landscaping, etc…Colleges shouldn’t run like a business, students aren’t customers.
“It’s the interest that’s a real killer.” That’s what a friend told me who’s struggling to pay down her student loans. You make some progress only to be pushed further back by accumulated interest.
I’m for fulfilling obligations but perhaps principal-only loans could be a thing; especially for those pursuing professional degrees (teachers, engineers, physicians, lawyers, etc.) since their impact and responsibilities after school will be a bit more immediate.
I really like this idea! Lower to no interest for public service degrees. Maybe some sort of stipulation for keeping the interest low or even lowering more depending on the job/location you end up applying the education in. Might be a good way for smaller communities to attract talent.
I know they have loan forgiveness in smaller and poorer communities for medical and teaching now, but it is after years (and lots of paperwork), this would be an immediate lowering of monthly payments or an avenue to payoff faster.
Encouraging public school teaching is not good. We need to be encouraging privatization of schooling and utilizing all the free internet on the web. Kids can learn more now over the internet than they can from a teacher which costs our taxpayers a ton of money via property taxes and state income taxes
Yeah we should start hydrating crops with Gatorade.
Idiocracy here we come!
First to Comment! Yes I believe college is going to become less attractive for my children, Actual learning and skills will be more important than credentials. Just like in IT now. No one cares as long as you can do the job.
You are right that these proposals are headline grabbing; they don’t address many underlying problems. The first thing I would much rather see is to allow student loan debt to be dischargable in bankruptcy. While this would increase the interest rates charged, those could still be subsidized. But I think that provides some relief to extreme situations, while still holding accountable the parties who got in the mess. (both the individual who blundered into the situation, as well as the predatory lender who heaped loans on them) I would also welcome simplification of the student loan forgiveness program, for those professions which are important, but lower paying.
What most readers here don’t realize is that once all these Europe-like welfare state freebies are implemented, financial independence will become virtually impossible.
Sure there are some Europeans in the FIRE movement but the movement is primarily an American phenomenon. Anyone wonder why? Europeans (admittedly better educated than Americans on average) have not figured it out? Hardly that. It is that in Europe once your salary has been garnished (directly and indirectly, sometimes before you even see your gross income figure) and once you have paid the twenty five percent VAT tax on everything you buy — so that all these freebies can been paid for — you hardly have any money left to save and invest for FIRE — certainly not the 25x wages you need to have invested before you consider FIRE.
Millennials who aspire to FIRE on a liberal political platform are simply naive. For those of us who have already FIRED it may be a wash (wealth taxes but no
tuition for our children) but for younger people, our children, and future generations it will be worse under liberal euro-like policy, much worse, as they will have to live in slow growth European-like societies. The worst part of slow growth is something even beginner investors should readily know: The growth deficit compounds exponentially. In current growth trajectory average world per capita income reaches the slow growth Europeans in just thirty years. Is this really what you want to emulate? Be part of a middle income country in a few decades? You can kiss any FIRE dreams goodbye in such an environment. But the redistribution Santa Claus is just around the corner — and s/he is irresistible.
The flip side: subsidized higher education so an individual could graduate debt free working part time was a thing through some of our most productive years as a nation. Was the 70’s really that much of a socialist nightmare?
There’s other possibilities for why FIRE is more popular in America: We have a fraction of the vacation time as Europeans. Our healthcare system ties many to jobs they don’t like. We report significantly higher work related stress than other countries. In every country there’s people who save more diligently then others (and a VAT compounds the difference when you save more). People become wealthy and retire early everywhere. That it’s a social movement here may say more about our relationship to work then about other nation’s ability to save.
I do wish more of this conversation could move towards the middle grounds. Retroactively forgiving debt doesn’t address the cost issues and is a naturally polarizing topic. Forcing lenders to have skin in the game, controlling public school administrative spending, returning per student subsidization to prior levels: higher education was never this burdensome and certainly doesn’t have to be. On the flip side, we’ve done just fine as a nation with higher top tax rates, with more affordable healthcare and education. And happiness in Europe is comparable to America. To my eyes the evidence points to there being fairly wide latitude in how a developed economy is structured with different trade-offs but broadly comparable quality of life, not that we’re a capitalist nightmare or Northern Europe is some sort of impoverished USSR.
Happiness is actually higher in Europe. European countries consistently dominate in the Happiest Countries In The World polls.
No need for FIRE to be a movement in Europe because way more people are FIRE.
Nordic countries are happier, but Southern Europe is less happy, so I figured I’d call it a wash.
Socialism seems like such an extremely old-school and cookie cutter method for helping people out. Technological advances have already largely supplanted many socialist programs. Enabling socialist programs is probably, at this point, very shortsighted if it comes at the expense of disallowing technological advancement to take place. Another factor is government involvement often obfuscates the true cost of a product. Do Anti-trust laws not extend to government entities?
To a FIRE person many government programs are basically an obstacle. Paying for social security is like throwing compound interest away. Unemployment insurance? Try indeed.com first. Etc etc.
How do you measure happiness?
Social security is definitely an obstacle and a clear redistribution of income. I vote for it to be canceled.
I’d take those surveys with a grain of salt. Look at the questions they ask. They often reflect cultural temperament more than anything else. South Americans often score high in these surveys because they come across as jolly people.
If indeed Europe is happier then why not move there? Especially if one is already FIREd. So mobile!
Are working people in Europe happier than American FIREDds?
If your country’s growth rate is half the world average, then you do not stay a developed economy for long. Simple compounding arithmetic. Had the US had a mere 1% lower growth rate in the last hundred years, we would be at the level of Mexico today. These things have huge long term consequences. A roughly -3% growth deficit compared to world average (eg. Europe) compounds you into a middle income country much faster. Two three decades at most and world average has caught up with you. You’ve become a middle income country. Like Argentina today.
In a way, isn’t America’s end goal to be Europe? Where people are happier, there’s more economic equality, and less financial stress due to rising healthcare and educational costs?
I’ve tried to understand the other side through these posts:
I’ve Seen The Future Of America And It Looks So Bright
Socialism As A Means To A Brighter Future
America’s Best Life Hack: Taking Advantage Of Canada
I have been systematically shifting my investments out of the USA, primarily into emerging markets since spring.
The comments I read about how becoming a slow growth euro-like nation is a somehow desirable outcome, confirm that my strategy is likely correct. A massive amount of Americans have this misconception and when there is misconception in markets there’s opportunity for arbitrage.
Stocks in the US trade at a roughly 30 CAPE ratio. Continued returns on such high ratios require unfettered capitalism at best — something we seem poised to ditch in a little over a year. And even the current administration is a very low bar when it comes to unfettered capitalism. It merely represents a slight postponement of the much worse long term economic outcome that the other side represents.
Of course, many will say: “You are concerned about the dilution of capitalism in the US and are thus investing in places like communist China?” The issue here is that China and most of the rest of the world trade at CAPE ratios of 15 or lower, half the US. In other words, Communism and non-free markets have already been priced into those markets. Similarly the European welfare state and its slow expected growth has been priced into that continent’s valuations, with average CAPE ratios also around 15.
So let’s all put our money where our mouth is and let’s see how it turns out in the longer term (a decade or two from now). Those who aspire to Europe will keep their securities in the US at CAPE ratios north of 30, vote for one of the Democratic candidates, and hope for a brighter future. Having been born, lived and worked in Europe, I disagree. But I could be wrong. We’ll see.
The EPA has existed for 50 years now. Over 100 years of progressive income tax (including much higher top rates). 400 years of tax payer funded free public schooling. 50 years of medicare/medicaid. Sherman act was 1890. 100 years of federal regulation of food quality. 200 years of significant national labor unions.
I can certainly point to burdensome regulations I’d like removed, but to say “only unfettered capitalism” can maintain a world leading economy is a big leap to make from the data. The US has exceptionally low corruption, exceptionally good natural resources, had some of the highest rates of tertiary education in the world (but that’s changing), has done a strong job of matching capital to entrepreneurs.
If the US declines in competition, my biggest suspicions are the declining birthrate (see Japan) which isn’t helped by saddling the young with large debts, the fact that during these past productive decades we were the world leader in technological achievement and had significantly higher post-secondary education rates than Europe, but are now starting to lag them (again, see continued reduction in public investment in higher education).
Like you say, I could be wrong. We’ll see. But looking at history I think the story is more complicated then just whoever has the least commercial regulation and the fewest social nets win.
Indeed, there’s no way we can sustain CAPE ratios of 30 with the current watered down capitalist system, much less with the Euro-Walfare state a majority of American voters seem to suicidally aspire to.
BTW, even if we did maintain CAPE ratios of 30, without reverting to the mean (and that is the US mean not the lower European mean) that would still correlate with low returns.
I’m really wondering if I’m getting replies mostly from dissenters or if indeed that is what Americans think. If the latter then I’m getting signals to accelerate my investment shift out of the USA. I started the shift in the spring when the already watered down capitalism we have was polling lower than socialist aspirations. But perhaps I should accelerate. I’m curiously awaiting more comments.
Sam, since you wrote that post in 2012, average per capita income in the world has grown 32% while in Europe it has grown just 7%. Does this look like a promising trajectory?
My husband was accepted to Cornell and my good friend was accepted to Yale. Both would have to take on a lot of student debt to attend. Both got full rides at 2nd / 3rd tier schools.
My husband chose to attend Cornell. My friend chose to not attend Yale. He graduated with $170k in debt, and she graduated debt-free.
My husband and I joyfully pay his student loans each month. We now only have a balance of $47k and should pay the rest within 3 years. We’ve made sacrifices but are so happy that he went to Cornell.
My friend is doing quite well, as well. It has all worked out for my husband and her.
I would hate for my husband and me to be penalized for being so diligent in paying off his school debt. Equally, I would hate for my friend, who really wanted to go to Yale but didn’t want the financial burden, to be penalized for taking her more responsible option. If they forgive student debt, we will both feel like fools: us for being so diligent with repayment and always making it our first priority and her for not going to her first choice school when the debt would have been forgiven in the end.
I don’t know what messaging this could possibly send to us or the future generation.
You go to Yale, not for the education, but the networking. Once you drop below the tier 1 elite schools like Harvard, Yale, Princeton, Stanford, MIT, CalTech, etc and into the tier 2 ivies then it’s generally not worth the cost delta vs the tier 3 schools.
One indicator of a uni’s “network value” is how much incubator funding exists at that school…
Exactly. Future is screwed