Student Loan Reduction Strategies
Tuesday, March 4th, 2008It appears that I shocked a few people when I wrote about my thoughts on maxing out your student loans to get every penny that you can. Of course, there are the same arguments about other kinds of debt as well. I have received my fair share of email regarding my advice on the use of debt.
Debt is a Tool.
It is that simple.
Loans, mortgages, credit cards etc. These are all tools that, if used correctly, can not only help you manage your cash flow but increase your wealth as well. Yes, debt can be terrible if you can’t control it, but it can also be your best friend if managed correctly.
I already talked to you about the power of using a mortgage as leverage to build wealth and why lenders are more eager to hand out money when it is backed by an asset such as real estate versus consumer debt - like a car loan!
Why is This Article Titled “Student Loan Strategies”?
Well, as mentioned in the previous article on student loans, the student loan is some of the easiest money (debt) that we can obtain as average individuals. It is even easier to obtain than a mortgage because you are not required to prove that you have an established income. The debt is backed by your future earnings - how’s that for pressure!
Anyway, as we get back to the moral of the story and we understand how we can leverage our student loan money so we might graduate without a negative net worth, there is a way to combine the above strategies in order to profit while getting your degree.
Kiss The Dorms Good Bye!
This strategy is directed toward the parents of children who are on their way to college. So, if you are a college student, or about to be one get your parents on the phone!
To the parents…
Your child will have to live somewhere and either you or they will have to foot the bill regardless of where they hang their hat, so why not profit from it?
The strategy is to purchase a house with as many bedrooms and bathrooms as possible in a location that is as close as possible to the university. Yes, you will be renting this house out - but your child will be managing the rental.
College rentals can be unique and very profitable in that it is possible in this situation to rent “by the room”. While most residential real estate rents by the unit or the house, the college market will allow increased returns by renting by the room.
An Example
A 4 bedroom home that would normally rent for say $1000/month as a unit can often be rented by the room in the college market for between $350 and $450/month per room. As you can see the potential for profit is much higher and the potential for your child graduating without a mountain of debt it also greater.
This strategy requires more management as you must collect rent from each person separately instead of collecting one check from the entire house. If you trust your child and they are responsible, this should not be a huge issue as they will be living there to manage the property.
This will also help your child to learn to better manage finances and learn business skills such as management, marketing and basic accounting.
The Benefits
Ideally, the monthly profits (cash flow) from the roommates can cover expenses, repairs, vacancies etc. or may be used to have your child live, essentially, for free!
However, the best part about this strategy is that over the course of the 4-5 years that your child is in college, you will be gaining equity in the home courtesy of your child’s college roommates. This equity can be crystallized by selling the home when the child graduates and using the equity to pay off the student loans for example.
If you have a steady income and a good credit score, buying a house for your child to live in while going to college is typically a sound strategy.
If you don’t know if you have good credit or not, you can check out your credit score for free at Experian.
The Kicker
If you have more than one child that attends the same university, this strategy can have a compounding effect as the younger ones enter school and the rooms continue to be rented out, your equity grows and grows.
If you are fortunate enough to realize a substantial capital gain along with your home equity, you executed this strategy exactly as my good friend and his parents did when I attended college. I only wish my parents and I could have undertaken this strategy instead of paying off someone else’s house!
I hope you enjoyed this example and are able to benefit from it. I share this with you, not because I profited from it, but because I was a victim of it! If it helps your child start their professional life without the same $40,000 in student loan debt that I had, then it has been worth the time to write this article.
Stay tuned later this week when I will tell you a story about what I learned from falling victim to this strategy and how it catapulted my net worth right out of college!
