Tuesday, March 4th, 2008
It 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.
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.
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 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!
Monday, March 3rd, 2008
I’m about to let you in on the secret of how I used my student loans to build wealth. Now, coming from a frugal individual like myself, this secret may shock you.
Are you ready? Do you have your notepad and pen? OK.
I maxed them out.
Yes, that is correct. I completely maxed out every penny that I could in student loan funds. I took advantage of every student loan program that I could find and you should too!
Why You Should Max Out Your Student Loans
No Collateral Needed
The premise behind student loan programs is that the financing institution is banking that your education will allow you to repay the loan at some point in the not too distant future. These programs are put into practice to assist those of us who came from poorer backgrounds as a way to enhance our futures by financing an education. The education is then supposed to lead to a successful career that will allow us to be a contributor to society instead of a drain on society.
This means that your future is all you need for collateral. This is great for students, if it used correctly. When you view student loans in this light, they hold more wealth building power as financial tool of leverage than a mortgage does!
How To Leverage Student Loans To Build Wealth
First off, don’t take my heading the wrong way. I lived rough in college – but I had a purpose!
Most student loan programs, or the ones that you should take advantage of, have deferred payments until after graduation. Essentially, this means that you have access to FREE MONEY for at least 4 years!
*Note: Some programs require minimum – interest only payments.
Student loan money is meant to be used for tuition, books, and living expenses. The first trick to leveraging this student loan money is to ask scholarship or grant money after you receive your loan. I accomplished this by simply approaching the financial aid department at my University for additional funding. I would make an appointment and plead my case days before the semester would begin. It wasn’t often that I received less than an additional $500.00/semester.
So there I was with an extra $500 in free money along with my student loan that would pay for my tuition, books and allow me to live comfortably. This was the beginning of my strategy. Read on to the end of the article to find out how to leverage this money!
Get A Job
Put time and experience on your side.
It is essential that you have a job in college. I know that sounds obvious, but I’m heading in a different direction with it. I don’t suggest working full time or finding the job that pays the most money; I’m suggesting that you get a part-time job in your field of study.
Working at even a menial job within your field of study will at least give you some experience when you head out into the workforce with your hard earned degree. This will often allow you to skip the entry-level positions and actually earn a mid-level salary right after graduation.
Live like a peasant and invest like crazy.
Because repayment of student loans is deferred until after graduation, sometimes up to one year after, it provides the perfect opportunity to leverage free money to your advantage and harvest the growth of investments over a short time period.
As long as you invest the money and don’t use it to live “high on the hog” in your college years, this strategy works. Depending on the investments you choose and their performance, you could graduate with a positive net worth! So, don’t go and blow the money – be smart.
We have all heard the stories of the poor college student living on Ramen noodles and kool-aid. Well, that’s how I did it. Actually, mine was more of a macaroni and cheese and canned tuna – I need my protein!
Anyway, I took all of the money that was left over from my scholarships, student loans and part-time job and rolled it into certificates of deposit that matured in the year I was to graduate. I would have invested in the stock market, had I had the knowledge that I do now.
Hindsight is always 20/20!
This has been the basic strategy of leveraging student loans, if I have skipped over something or if you have any suggestions, please share them in the comments below.
Friday, February 22nd, 2008
I have received a handful of e-mails lately asking to hear my story about overcoming more than $40,000 in student loan debt to having no consumer debt and a net worth of more than $250,000 in just three years.
The title of this post is rather misleading because I do appreciate the wealth building power of leverage as I mentioned in my article detailing mortgages. Of course, mortgages are financial debt instruments that the vast majority of people require in order to purchase a home.
Why I Use Credit Cards
I also utilize one credit card on a monthly basis. I use a credit card for a few reasons:
1.) It helps me to track my expenses. I simply download my card statements to a financial program such as MS Money and divide my expenses in to categories. If I use my credit card for all of my purchases, it makes analyzing my budget a snap.
2.) It saves me money. Yes, using my credit card saves me money. When I use my debit card, my credit union charges me a fee per use (or more accurately a monthly fee that includes a number of debit transactions). When I use my credit card, the credit card company charges the business where I used my card instead of charging me personally.
Yes, you could argue that it still costs me money indirectly as the business would factor that charge into the price of the product – but please bear with my example.
3.) I receive rewards from the credit card company for using my card. My particular card offers me 2 points for every dollar I spend which, if used for travel, equates to approximately 1.75% cash back – not too bad!
I do advocate the use of credit cards for these purposes if, and ONLY if, you use them for managing monthly cash flow and not for accumulating debt. This means that you must pay off the entire balance each month – no exceptions.
To help you sort through the thousands of Credit Card offers to find one that suits your needs, I suggest using a service designed to match you up with a card that will benefit you and not take advantage of you.
My Stance On Auto Loans
Several folks have inquired about vehicle loans, asking if I own a vehicle and if so what types.
Vehicle loans are the biggest mistakes that I could ever think to make. Not only do vehicles depreciate, but they also require fuel, repairs, insurance and maintenance. There are no two ways about it – owning a vehicle is expensive.
That being said, my wife and I own two 2003 Hondas which we paid for with cash. We purchased a 2003 Honda Civic in the fall of 2005 and a 2003 Honda CRV in the fall of 2007. Yes, I do adamantly believe in purchasing high quality used vehicles that are fuel efficient and known for reliability.
Why Honda? It is simple really. I owned a 1991 Honda Civic hatchback in college and it had over 300,000 KMS on it and ran like a top. I simply filled the gas tank and changed the oil – I was hooked.
This has been a quick outline of my current stance on debt.
I also have no problem advising anyone to take out student loans to invest in themselves and their future. However, you must be careful not to “live too high on the hog” on borrowed money while in college.
Stay Tuned For The Rest of My Story
In a future post, I will tell you how I graduated from college with fewer student loans than most of my classmates and how I managed to pay off the balance within a year after attending my final class!