08111 The borrower is the slave of the lender: why student loans, credit cards, and all other forms of debt are dangerous to you, the planet, and the future
Debt, n. An ingenious substitute for the chain and whip of the slave driver. — Ambrose Bierce
All debt is dangerous, but the most dangerous debt in the United States is the student loan.
It is the only debt, besides taxes, that cannot be discharged in bankruptcy court.
There are credible reports of student loan lenders lying to borrowers and advising them to take actions that benefit the lender and disadvantage the borrower. There are so many reports of abuses like this that the practice of lying to borrowers and advising them to take actions that benefit the lender and hurt the borrower could be considered a standard business practice in the student loan industry.
Laws exempt student loan lenders from most of the basic consumer protections that other borrowers rely on to ensure their lenders don't cheat them. Never assume that the government will protect you from fraud and abuse in the student loan program because it most definitely does not protect you from loan abuses. Student loan lenders can lie to borrowers without any consequences.
If a student loan goes into default, lenders invoke drastic penalties so that the principle increases rapidly and the interest rate zooms up. This politically inflated debt will never go away unless paid in full. It will negatively impact the defaulting borrower’s life until paid in full.
Student loans increasingly burden young people coming out of college today. During a time when they should be establishing families, starting new businesses, and saving money to buy a house, student loans complicate their finances..
Many former students fall prey to predatory programs like “forbearance,” where they postpone payments for as long as two years. However, during that period, the interest continues to accrue on the loan and if not paid, they add the interest to the principle. This significantly increases the size of the loan and the future interest payments.
Is a student loan a good deal?
The blunt truth is that student loans are not always a good deal for the borrower. They are, however, always a good deal for the lender.
The famous pro-loan propaganda statement is that people with college degrees “on average earn a million dollars more” during their lifetimes than people without degrees.
To develop this statistic, the student loan industry averages the incomes of high-priced lawyers, medical specialists, and corporate executives with those of low paid social workers and teachers. For many of the lower paid “college educated” jobs, skilled blue collar work would provide better financial return than the jobs they earn with their degrees. As a result, many student loan borrowers must repay high dollar student loans with low dollar hourly wage work instead of professional salaries.
The implication that “everyone” who goes to college earns more than those who don’t go to college is a delusion fostered by expensive advertising campaigns paid for by the people who financially benefit from student loans.
In 2012, half of everyone who graduated from college in the last few years works for cheap hourly wages in jobs that have nothing to do with their degrees or does not have a job.
Should you borrow money for your college education?
You can only answer this question after long and thoughtful observation of your situation. Here are some of the questions you must ask and honestly answer.
How much can you earn with your degree? Be brutally realistic in your answer.
How quickly will you be able to find a job once you get your diploma?
What is the total amount you will borrow? What will your payments be each month?
How long will it take to pay off your loan? What is the total amount of interest you will pay? What is the total cost of this loan (total borrowed plus total interest)?
How much income will you have left over each month after paying your student loan?
If you do not have a scholarship, and you depend on student loans for all, or almost all of your education expenses, you had better be sure you have a good dollar job waiting for you upon graduation. If there is anything doubtful about your earnings, take the worst case, not the best case.
If you depend on student loans to pay for college education, and you aren’t sure you will have a good job waiting for you, or if you aren’t confident about the earning power of your degree, you should —
- Transfer to a less-expensive school if you are at an expensive state or private school, or
- Drop out of college to earn some money and go back to school later with money in hand and pay cash for your expenses.
For many students — at both state and private schools — student loans are not a good deal. They are tickets to a lifetime of indentured servitude to a giant vampire banking institution that will cheerfully suck your surplus dry.
The new government Direct Student Loan program has some benefits for lower income graduates, but it is a political program. Under its provisions, your payment is tied to your income. After a certain number of years, any balance is forgiven. Alas, there is a bitter pill hidden in this seemingly good deal. If the government does pay-off the balance, the government will also classify the amount they forgive as income! You will have to pay income taxes on that amount and there won't be a payment plan for the amount forgiven. It will be due and payable on tax day in the year following your loan forgiveness.
What the government gives, the government can take away, so you’re not safe until you pay the loan in full.
Most students are better off without any student debt.
“No student loan” does not mean “no education.”
You can go to school part time while you work to pay your expenses.
You can live a frugal lifestyle while in school.
You can go to school one year, work a year, go back to school for a year, and then work a year, to get yourself through school.
By using these strategies, it may take longer to get your degree, but you will end up with a degree without the debt. Over the next 40 years, you will be happy you weren’t in a hurry to get out of school and that you earned your degree without debt.
Unconvinced? Read more before you make your final decision.
Should I default on my student loan? http://www.peakoilblues.org/blog/?p=329
Read some of the student loan victims stories at http://studentloanjustice.org/victims.htm.
Read more info at http://studentloanjustice.org/argument.htm.
The best advice is — don’t get a student loan!
If you already have student loans . . .
Do not believe anything that your lender tells you without first checking it with an independent source for corroboration. Always assume that the advice your lender gives you will benefit the lender and hurt you. Get independent financial advice about your student loans.
Pay your loans off as quickly as possible. Pay more than the loan requires you to pay each month so that you pay the loan off quicker than you would otherwise. This means you will pay less interest. If you have a ten-year loan, every dollar you pay extra early in the game is a dollar you won’t pay interest on for ten years.
Suppose you have student loans totaling $15,000, paying 6.8% interest for 10 years. Your monthly payment is $172.62.
If you pay it out for the standard ten years, you will pay $5,714 in interest, for a total loan cost of $20,714.
If you make an extra payment of $20 each month, you pay off the loan in nine years instead of 10, and the total interest payment is $4,843, a savings of $871.
The extra payments over the nine years total $2,060, which means that you would make 4.2% interest on those extra payments in terms of the interest you did NOT have to pay.
Now let’s look at another, less rosy scenario.
Suppose instead of making extra payments, you put your loans into FORBEARANCE. It seems great because you don’t have to make payments. However, every quarter that interest gets added to the principle of your loan.
At the end of two years forbearance, the principal of the loan has increased to $17,116. The monthly payments increased to $193.82. The total interest paid increases to $6,416. The total cost of the loan is now $23,532 —
- $15,000 in the original principle, plus
- $1,684 in capitalized monthly interest payments for the first two years, plus
- $6,416 in monthly interest payments once you start paying back the loan over its ten-year term.
Let’s look at an even worse case. Suppose you went to a private school and came out with $45,000 in student loans at 6.8% interest. We assume you applied for and received a 20-year payback time, so your monthly payments are $343.50 and you go into forbearance for two years.
The principle of your loan increases to $51,443
The monthly payment once you start paying the loan increases ton $392.88.
The interest you pay on the new principle totals $29,802.
The total cost of the loan is $81,245
If you have debt, you need to learn about amortization.
When you make payments on a loan, each month the payment consists of principle plus interest.
The interest payment is the amount of interest owed for that month. The formula is:
Principle owed on the loan TIMES the annual interest rate divided by 12.
The principle payment is the amount of principle that must be paid each month so that the loan is paid off in its stated term with its equal monthly payments.
The proportion of the payment dedicated to principle and to interest changes each month. Each month you pay off some principle, so you no longer pay interest on that principle. Thus, the amount of interest decreases each month and the amount of principle increases each month. At the beginning of the loan, most of the payment is interest. At the end of the loan payment period, most of the payment goes to principle. This is called the amortization of the loan.
This is why extra principle payments made early in the life of a loan save you so much money. At the beginning of our $45,000 loan described above, the amount paid each month on principle is only $88.50. All of the rest of the payment is interest. So every ten dollars extra principle you pay early in the loan will save you $30.40 in interest of the life of that loan. It's like an investment that triples your money!
Many spreadsheet programs include amortization software. You fill in the amount of the loan, the interest rate, and the months of its length, and it gives you a spreadsheet showing the payments for each month. There is a column where you could plug in extra principle payments and see how that affects the term of the loan and the total interest paid on the loan.
You need an amortization spreadsheet for every loan you have.
Extra principle payments do not have to be the same amount each month. If you are short on cash, make only the basic payment. If you have a windfall, pay more on the loan. Every dollar paid ahead is a dollar whose interest payment goes away. That’s what you want.
The second most dangerous borrower trap is CREDIT CARDS!
If you have a credit card, the only thing to do with it is chop it up right now and recycle the plastic. That’s all that there is to that.
There is no good reason to have a credit card, none whatsoever. It will continually tempt you to spend beyond your means and you will pay more and more of your income in interest to the big vampire banks. If you want to buy things online, use a debit card. Ignore the advice to "establish good credit" by borrowing on credit cards.
Use a credit card — make yourself a slave.
Pay cash — learn to be free and you will be independent of financial domination.
What about mortgages? Business loans?
The borrower is always the slave of the lender. The word “mortgage” derives from Latin words meaning “death grip.” Until you pay the loan in full, you run the risk of losing all of your investment and your home if you default on the mortgage. Millions of people learned this to their own personal grief when the economy started its long collapse 2007-2008. Since we expect more such hard times in the future, you should think hard about signing up for any debt that lasts as long as the typical mortgage.
Thirty years of interest more than doubles the price of the home. For many years, people have paid off long term loans with cheaper dollars than they borrowed, because inflation has been constant since World War II.
In the present economy, however, you can’t count on inflation that will allow you to pay off your loan with inflated dollars. We may experience deflation instead, in which case you will pay the loan off with dollars that are more valuable than the dollars you borrowed. Meanwhile, as part of the general deflation, the value of your home may decrease. You better believe the bank won’t lower the value of your mortgage to match the market value of your home.
It is best to save your money and pay cash for a home or a car or whatever it is you want to buy. You may buy a smaller home or apartment than you would have if you had borrowed the money, That’s not necessarily bad. Bigger homes and apartments mean bigger bills, bigger taxes, bigger repair expenses, bigger bills for furnishing and other interior accouterments. The future doesn’t need more big houses. The future — the planet, the people — need appropriate scale housing for your life and household.
Businesses that depend on debt are not sustainable. It’s better to start smaller, and go forward without borrowing money, than to try to pump yourself up with an amphetamine finance rush that may put you at risk of complete collapse later on if credit suddenly goes away.
Youth is a time when you learn knowledge and skills you will need in your life. One of the most important things you can learn today is how to live without debt. The borrower is the slave of the lender! Declare your freedom today!
The bottom line on debt is simple:
Pay cash for what you need, whether it is an education, a house, a car, whatever it is you want. Make payments to yourself and pay cash. Don’t voluntarily enslave yourself and your family to banks and lending corporations. Learn to defer present gratification for future economic security.
Lies ride on debt’s back. Close your ears to its temptations.