← THE TRUTH ABOUT YOUR FUTURE with Ric Edelman
THE TRUTH ABOUT YOUR FUTURE with Ric Edelman
Episode #3: Make This Mistake, and College Will Lead to Your Teen's Ruin
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Special 4-Episode Podcast Series on College
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This is where technology, innovation and personal finance come together. This is the Truth about your Future with Rick Edelman. Welcome to the TRUTH ABOUT YOUR Future. I'm Rick Edelman. This is part three of our special podcast series on college, all to celebrate the debut of my new book, the Truth About College, coming out on December 4th. The Truth About College is my 14th book. It's being published by John Wiley and Sons, and you can pre order it right now at your favorite bookseller. And if you do, you'll get a couple of exclusive benefits. Just click the link in the show notes to get the details. I'll tell you more about them later on in this podcast. Why am I focusing on college? Because it's the most profound decision that teenagers make, and it's the default decision in this country for all teenagers that they should go to college. It's the default recommendation by high school guidance counselors. It's encouraged by parents. It's assumed by most high school students that they ought to be going to College. In fact, six out of 10 high school seniors do go on to college immediately out of high school. And like I told you in our first episode a couple of weeks ago, college is indeed the path to affluence. Almost every household in the country that earns $200,000 or more is headed by someone with a college degree. That's why I'm doing this special podcast series for you. In today's podcast, I'm going to tell you how to make the most important college choices you'll face. And let's start with this statistic. The New York Federal Reserve says that five years after graduating, people with a degree in engineering earn an average of $73,000, while those who get a degree in psychology earn earn just $40,000. Now, I'm sure those numbers don't surprise you, but here's something I bet you never thought about. Even though there's a huge difference in the incomes that people earn with their different degrees, the cost of those degrees at any given college or university is the same. If the psych major only earns half of what the engineering major is going to earn, why is the psych major paying the same for the degree? Especially when you consider that the school pays a lot more to train the engineering student, they need equipment and computers and labs. Psych majors? They just need a classroom with desks and maybe a whiteboard. And why is it that both degrees, amazingly both require exactly 120 credits to graduate? Could that really be a coincidence? Or is higher ed instead just saying, hey, we're going to average everything out. So everyone attends for the same amount of time and everyone pays the same amount. And if that's true, then doesn't that mean that the psych majors are subsidizing the engineering majors? And if that's true, then this whole thing is totally backwards because the psych majors end up earning so much less than the engineering majors. My point is this. I'm not trying to highlight the problems with higher ed. What I'm doing is saying to you that you need to realize that because of how higher ed works, you need to realize that some college degrees simply offer a lower ROI than other college degrees. An roi, A return on investment. And you need to make sure that your team gets a good roi. Yeah, return on investment, that's what matters. And that investment you're going to make is massive. Four years of their life. Maybe six if you ignore my strategy for going to college, plus maybe $300,000. This is a huge investment and we must make sure that the teen gets an economic return worthy of it. This might be the most important point in the entire podcast series I'm giving you. And I say that because a lot of people think that the income you earn after graduation doesn't really matter. They argue that college should be mostly about personal enrichment, that you should follow your passion, that you should get a degree that helps you make the world a better place. Maybe that viewpoint was valid 75 years ago, back in the 1960s when very few people went to college, meaning any degree you got set you apart. And when the average four year degree only cost five grand. I mean not per class, not per semester, five grand for the whole degree. But that's not how it is today. Today, 6 out of 10 high school graduates go on to college. That means your teen has a lot of competition for jobs. A lot more competition than college grads did back in the 60s. And today's cost of that degree is massively more expensive than it was in the 60s. That means there's now one undeniable fact. It's more important than ever. That any college degree your teen pursues must lead to a high paying income in order to justify the cost. Look, I'm not trying to denigrate the idea of teens wanting to follow their passion. I'm just saying that following a passion is a hobby or a side gig, not a full time career. At least not until that gig is generating some serious income. There's a sad reality out there. That reality is that too many well meaning adults are thinking about what College was like when they went decades ago. Too often those adults ignore. They're oblivious to the economic reality of college today that teens are facing today. If you let a teen pursue a degree that doesn't lead to sufficient economic reward, you're setting that teen up for failure and ruining their life. And if the cost of college is a money pit, then student loans are the shovel. This is huge. So we're going to have to spend some time on that topic and we're going to do it right now. This is huge. Because student loans are so astonishingly common. More than half of all students get student loans and they leave college with an average debt of more than $41,000. And the truth is, these loans will ruin your teen's life. Hey, that's not me saying this. A survey of those with student loans found that 71% said that because of their student debts, they have been forced to delay buying a car, buying a house, getting married, having children, and moving out of their parents home. This is why 78% of US adults say college is not worth the cost. And it's why 61% of graduates say that if they could do a do over, they would choose a different major so they could get into a field that offers better job opportunities and higher income. So this is your opportunity to help your teen learn from all the mistakes all those other people made. Help your teen decide right now that they will attend an inexpensive college or university and then help them select the right major and make sure they avoid student loans. Yeah, that's the key. Avoid the student loans. Go ahead. Pay a lot for the degree, Go to an expensive school. I don't care, so long as there's no debt to do it. But student loans are so common that there are 43 million Americans who have them. So everyone now just thinks, well, student loans are okay. They're unavoidable. Wrong. Student loans are not okay. Quite the opposite. They're dangerous. And a big reason they're dangerous is because student loans operate differently from every other kind of loan. So I want to make sure that you and your teen understand this, because this will help you understand why you must stay away from student loans. First of all, I'm not condemning indebtedness. Loans are an important part of our lives. Without them, we can't buy cars or houses. Entrepreneurs can't start businesses. Farmers can't grow crops. Governments can't serve their citizens or defend their nations. We all rely on loans to get the money we need to achieve our goals. That all makes sense. You might not have $500,000 to buy a house, but thanks to your income, you can afford the monthly payment. And that is what lets you buy the house. So let's make sure you understand how loans work. When you go to the bank to ask for a loan, the bank asks three simple what will you do with the money we lend you? How will you repay the money? And how can we get our money back if you fail to repay us? It's easy for most borrowers to answer these questions. If you asked to get a mortgage, you told the bank, we're going to use the loan to buy a house. We can repay the loan thanks to our income. And if you're worried that we don't repay the loan, we'll post the house as collateral. So if we don't make payments every month, you can sell the house to get your money back. Those are all good answers, and that's why the bank was willing to make the loan to you. And then the bank does two things that makes it even safer for them. First, they don't lend you 100% of the house's price. They lend you just 80%. You have to put up the other 20% as a down payment. And second, the bank gives the money that they're lending directly to the seller of the house. They don't give it to you first. These tactics give the bank three benefits. First, if they do have to foreclose on you because you don't make the payments, they only have to sell the house for 80% of its value to get their money back. Second, by lending you only 80%, they have that much more money available that they can lend to other borrowers. And the more loans they make, the lower the risk of the lending activity. And third, by giving the loan proceeds directly to the seller means you never have control over the money. That prevents you from using the money for a different purpose than you promised the bank. I bet you never thought about any of this. In fact, I bet you never gave any thought at all about how mortgages really work. So try this quick little quiz. Fill in the blank. A mortgage is a loan against what do you think the mortgage is a loan against the house? No, that's not correct. The truth is that mortgages are not loans based on the value of the property. Mortgages instead are loans against your income. Trust me, if you don't have enough income, you're not going to qualify for the loan. And that takes us to the second half of the loan. First half was the amount of the loan. The Second half is the interest rate that the bank charges you. The interest rate is based on the lender's risk when loaning you money. Mortgage interest rates are really low because the bank's risk is really low. If you don't pay, the bank seizes the property to get their money back. That's why mortgage rates are low and it's why credit card rates are high. 21% on average. Credit card rates are high because there's no collateral. If you don't make your credit card payment, the credit card company can't seize the sweater you bought or re grab the beer you drank. The lack of collateral translates into more risk for the lender, and the lender compensates for that higher risk by charging you a higher interest rate. This is how every loan home loans, auto loans, business loans, personal loans, but not student loans. Student loans are different and those differences explain why they are a deadly trap for college students. Let me explain the differences. First, when a student asks for a student loan, the lender will say okay to as much as the student asks for. If the school year costs $20,000, the lender will loan $20,000. It won't demand that the student make a down payment. In fact, student loan providers often offer loans even more than the cost of tuition and room and board, so the student can also pay for books and transportation and so on. That'd be like a mortgage lender not only giving you a 100% loan, but giving you a 110% loan so you can also buy furniture. That's never going to happen with your house. Only student loans do this. Second, the lender doesn't require the student to have an income. It'll make the loan to the student anyway. Third difference. Lenders don't require the student to make any monthly payments until six months after they graduate. That could be almost seven years from now. Can you imagine buying a house and not having to make any payments for seven years? Here's the fourth difference, and this is the most awful difference of all. The lender giving money to a student for student loans gives the money directly to the student. They don't send the money directly to the college, they give it to the teenager. They leave it to the teenager to pay for tuition, room and board and related expenses. We're talking tens of thousands of dollars to 18 year olds. Guess what a lot of them do with the money they get? 16% buy clothes, 13% spend the money at restaurants, 3% take vacations, and another 3% use the money to buy alcohol and drugs. Oh my. That's not even the worst of it. No, here's the worst part. 37% of students drop out of school. That's 16% of all U.S. adults. One in six Americans are college dropouts. But the student loans they got, they were not conditioned on the students graduating. When they drop out of college, they must still repay the student loans. And that brings us to the fifth way that student loans are different from all other loans. You cannot discharge your student loans by filing for bankruptcy. With every other type of loan, going bankrupt eliminates your obligation to repay. Not so with student loans. You'll still have to repay them no matter what. Two million people learned that the hard way this year. A few months ago, the Department of Education started garnishing the wages of borrowers who had been in default on their student loans. And if you get your paycheck garnished, that means your employer will be told that you've defaulted on a debt. Because garnishments are coordinated through employer payroll. That means you could have a career threatening problem in front of you. Six million people haven't made payments on their student loans in 90 days or more. The New York Fed says 9 million borrowers have experienced a drop in their credit scores because of this. One final point. I said that lenders usually give out student loans even to teens who don't have an income. But some lenders do require an income. And that means they want a parent or other relative to co sign the loan. By co signing, you become legally responsible for repaying the loan. And if the teenager fails to do so, 90% of student loans have been co signed by parents or grandparents. Four million parents owe $65 billion to parent plus loans. And nearly 200,000 retirees have had their Social Security checks garnished by the federal government because the students didn't repay. Okay, I think you get the message no to student loans. But don't think you're going to solve the problem by getting a free ride, a grant or scholarship. Only 11% of students get one of those and the average they get is less than $16,000. That's only a third of the average cost of college. So grants and scholarships are not your answer. The real answer is choose an inexpensive college and graduate in four years. Those who do that end up with a third less debt than those who graduate in six years. If you ignore me, if you ignore this advice, you're going to end up stuck with student loans for decades. 42% of all student loan borrowers are still paying off their debt. Twenty years after graduating, 25% of all student loans are held by Americans over the age of 50, and 3.5 million Americans over age 60 have $125 billion in student loan debt. You must make sure that your teen avoids student loans and graduates debt free. But how do you choose an inexpensive school? That's the right question, and next week I'm going to reveal how you can minimize the cost of getting a college degree. Join me next week for that. Until then, please support this series by pre ordering my new book, the Truth About College from your favorite bookseller. If you pre order the book right now, you'll get a special workbook, 20 conversation starters, to help adults and teens talk about college. This exclusive workbook is only available if you pre order the book and if you pre order three copies of the book. Hey, they're great stocking stuffers. You'll get both the Conversation Starters Workbook for everyone plus a special invitation to join me in a private webinar where you can ask all your questions about college. And you'll get the link to the webinar so you can watch the video recording anytime in case you can't join live. And if you're a financial advisor, you can get big discounts on bulk orders. The book is a perfect holiday gift for your clients. Same goes if you're an educator or a guidance counselor to get this book into the hands of your students. To learn more about these special offers to just click the link in the show notes. Join me next week for our final episode where I'm going to reveal for you how you can minimize the cost of getting a college degree and discover the 12 mistakes that students make when going to college. See you next week. And in the meantime, please share this podcast with all the parents and teens you know increased awareness and actionable intelligence about the forces that are shaping our world. This is the Truth about yout Future with Rick Edelman.