Simplicity Seeker

A University education can be a very expensive endeavor. The growing debt levels of recent graduates attest to this fact. According to a recent study, two-thirds of 2011 grads have student loans to repay, averaging $26,600. That’s a pretty staggering amount, especially when you consider prospective job opportunities available to them when they graduate.

Just because a university education is expensive doesn’t mean you have to accumulate a mountain of debt.

I did 4 years of undergrad, took a year off to teach ESL in South Korea, then did a 1 year master’s. Not only did I not borrow a dime, but I was at least $30,000 richer by the time I graduated with a B.A and an M.A in philosophy than when I started out ($20,000 of which was from teaching ESL – which is something I recommend for anyone who doesn’t know what to do with their degree and likes to travel).

Here are some tricks and tips to avoid the education debt-trap:

1)      Only attend university after carefully considering other options. I’m not trying to discourage anyone from attending university who has the drive and the passion to pursuit a particular subject area, but too many students are going to university with no idea why or with no clue what they will do once they get their degree. I was one of them, and I am one of the fortunate ones who ended up with a secure job that pays reasonably well. I know many others who were not so lucky and are still trying to ‘make it’ in a job market that is over saturated with recent graduates with arts and social science degrees and little practical experience doing anything. Many high school guidance counselors trumpet the virtues of a university education and encourage students to apply, because it will improve their likelihood of employment and give them a higher income. Fact is, it is quite possible to make more money learning a trade (plumbing, electrical, carpentry, etc.) or another practical skill that doesn’t require a university education. While a university education does tend to offer a higher lifelong earning potential, what is often ignored in the equation is the four years in school where earnings are essentially zero (or worse negative), and the debt that students then struggle with upon graduation.

2)      Save up before you go. I recommend having at least a year’s worth of tuition and living expenses saved up before going off to university. The exact amount you should have depends upon how much tuition and expected living costs will be. I had about $10,000, half of which went to tuition and book. If you don’t have any savings after high school, work for a year. There is no reason to rush to go off to university right away, especially at the cost of your future financial well-being. One less year of accumulating date can make a huge difference.

3)      Work, work, work. University is a fun time, what with the drinking, and meeting lost of new people, and parties, and studying, and drinking…It can be a tad overwhelming, but make time to work. Even 15-20 hours a week during the school year makes a big difference, and then there are summers to save up the big bucks. You should be able to make at least $12,000/year even as a student. If you attend a university with reasonable tuition fees, it can be enough to live off of.

4)      Live with your parents. This isn’t possible for everyone, but if you can, do it! This can be a major money-saver. I was fortunate enough to live at home for the first 2 years of my undergraduate degree before moving out and living with roommates and it helped me out enormously.

5)      If you can’t live with your parents, live with roommates. Sharing accommodations can generally save you a few hundred bucks a month. Totally worth it, not to mention that you learn important life skills by living with others, such as compromise and patience. My experiences living with roommates were generally very positive and I estimate that I saved at least $7200 over 3 years by living with roommates rather than getting my own place.

6)      Scholarships. These usually require good grades, but look for them and see what you can get. My wife avoided taking on loads of debt by have a renewable scholarship that essentially paid her tuition. It helps s a lot.

7)      Don’t be a spendthrift. You can’t afford it. I know, you want to go out with your friends, buy booze, and whatever else teenagers buy these days. University is not a time for spending oodles of cash. It’s a time for roughing it a little. It’s actually a great time to learn about frugality and living on less. Learn to cook dried beans, veg. and rice dishes and take your leftovers to school. Eat tuna sandwiches. Go to house parties instead of the bar. Spend less!

8)      Only attend the most expensive universities if it greatly increases the likelihood of getting a superior job upon graduation. Here in Canada, this isn’t as much of a problem as in the US, since the vast majority of universities charge tuition that is less than $6000/year for domestic students. There are exceptions to be sure, disciplines such as Law, Medicine, or MBA are typically more expensive, but so are the salaries of typical jobs of recent graduates in those disciplines. I’m not saying higher than average tuition costs are never justified, but you should proceed with caution whenever forking over any of your hard-earned dough, and make sure you get adequate value in return. This is especially true in the US; because of there is often a massive difference in tuition costs between many state colleges and the higher-end, more prestigious universities.

As a rule, debt should be avoided like the plague. Putting something on credit essentially means you will end getting the same thing for more money. The only advantage being that you get it sooner. Patience is a virtue, and in this case it allows you to save money, because you don’t end up paying interest for something that you could save up for and buy outright. However, there are times when taking on debt can make sense.

In essence, taking on debt makes sense for three categories of purchases: 1) purchases that will provide you with an ability to earn more in the future, such as education or training, 2) purchases of assets that appreciate in value, such as real estate, 3) purchases of assets that will (or are likely to) generate a return on investment that is higher than interest owed, such as starting a business (also real estate, if you buy with the purpose of renting out your property).

Education and training:

Education can be an expensive endeavor and the decision to further your education shouldn’t be taken lightly, especially if it means taking on debt. Debt should be avoided whenever possible, so if it’s possible to receive the same education without taking on massive amounts of debt, that’s obviously better (see how to get a debt-free education), but there may be instances where debt can’t be altogether avoided in order to further your education.

Although education can be a worthwhile investment, it is important to carefully consider the likelihood of potential return vs. the upfront costs. Therefore, it is important to consider what sort of salary increase you are likely to get as a result of you schooling. Go in with realistic expectation. Starting salaries for many jobs right out of university don’t pay nearly as well as most people think (read: if you get a degree in the arts or social sciences, don’t expect to make more than $30,000/year right out of university. You might make more than that, but don’t count on it). Not only that, but it can often take a bit of time for recent graduates to find employment, so factor in at least a 6 month window to find employment in your field (you should work wherever you can in the mean time). If you find a job in your field right away, great, start paying off your debt right away!

Next, calculate how much debt you are likely accumulate over the course or your studies, as well as how high the interest payments will be once you are done.

Finally, calculate how long it will take to pay off your debt. Again, be realistic. Of course, this will be a projection, but that’s why it’s important to be realistic in your expected salary and to build in that 6 month window. As a general rule, I wouldn’t advise taking on debt of this kind, unless you can reasonably expect to pay it off within 2 years of graduation. If you think it will take you longer than that, delay going to school so you can save up more money.

If you do decide to go through with it, make a repayment plan before you even take on the debt. By doing this, you are more likely to stick to your debt repayment plan and get rid of your debt in a timely fashion.

One final tip: any extra money you make in this time should be set aside for debt repayment, so that you can get rid of it as quickly as possible.

Real estate:

Buying a house is often seen as an investment. There is a sense in which it is, but in general, this is the wrong way to conceive of your primary residence (an investment property is another story). Your primary residence is a place to live, not an investment, unless you’re at all moments ready and willing to sell.

Buying has certain advantages over renting (see my post on the advantages of buying vs. renting for more details). The main advantage of buying is that it can sometimes save you money.

How can buying save you money? Simple, if the total yearly costs of running your home (mortgage payments + property taxes + repairs and maintenance) are less than the cost of renting, then it’s definitely win to buy, because you are living for less, and a portion of your mortgage payment is building up equity in your home. Home equity may not have immediate cash value, if you’re unwilling to sell, but it’s still an asset that can be sold if the need ever arises. Not only that, but eventually the mortgage will be paid off thus greatly reducing living costs compared to renting anything equivalent.

Unfortunately, the cost of buying is rarely so overwhelmingly superior to renting. In many cities, the cost of buying vs. renting is pretty similar with only minor advantages to buying in many instances.

Real estate, unlike automobiles, tends to appreciate in value. Thus, taking on debt in the form of a mortgage in order to buy a house and/property can make sense (emphasis on the can). It’s important not to overestimate real estate appreciation. As a rule, the cost of housing tends to track inflation. When real estate growth outpaces inflation for an extended period of time, properties become overvalued which creates a real estate bubble. While a real estate bubble may last for a certain amount of time, it eventually pops and prices adjust.

The sub-prime mortgage crisis that rocked the United States is a perfect example of a real estate bubble bursting. 2008 is often identified as the year the bubble burst. While it is true that 2008 was the year the decline was most acute, the problem started much earlier than that. Real estate prices had been on the decline since 2006, after decades of almost uninterrupted and completely unsustainable growth. If I were a betting man, I would bet on a price readjustment (if not necessarily a complete meltdown) in certain Canadian cities, in particular Vancouver in Toronto, where prices are overinflated.

Starting a business:

Much like purchasing education or real estate, it is best to avoid debt whenever possible, and minimize debt when avoiding it is impossible. That being said, it can make sense to take on small amounts of debt to start a business, but only in cases where your expected return on investment and the probability of that return is equal or greater than what can be achieved through traditional investment vehicles (stocks, bonds, etc.). Starting a business always involves risk, but risk increases exponentially when your business is reliant upon taking on debt. By minimized or avoiding debt altogether when starting your business you also minimize risk.

Consumer debt should always be avoided. Even 0% financing with no payment for 1 year or other such offers should generally be avoided, unless you have the discipline to put aside the money and pay it off in full before any interest accrues.  If you have consumer debt, pay it off as quickly as possible and never let it happen.