Tag: debt

How to Skip College and Gain a $200k Head Start

What’s the real cost of college as a path to a career?

It’s not just the time, the boredom, the low quality, or the money.  It’s also the opportunity cost (what else you could be doing) and the cost of entering the professional world with few valuable skills and a mistaken belief that you’re prepared.

This great article in TechCrunch details how universities created the skills gap – the gap between what the market demands and what grads actually have.  There is also a perception gap.  Employers are twice as likely to say that grads are not prepared than the grads themselves – students think college is preparing them for a career, but the market begs to differ.

82% of grads have no job lined up upon graduation.  62% of degree holders are currently either unemployed or working jobs that do not require a degree.

New numbers on student debt just came out, and it’s at a record-breaking $37k per student average.

My colleagues and I ran some back of the envelope numbers comparing college to the Praxis experience.  It’s a 12-month experience (6-month professional bootcamp + 6-month paid apprenticeship), and we wanted to see how it stacks up.

(I should make clear that Praxis is not just a college replacement or alternative.  We also love to help college grads that want a better start to their career than blasting out resumes and hoping for something decent.)

Being conservative, assuming pay well below what our grads actually average, and no raises for 4+ years, and not factoring in interest payments on student loans, we sketched out a little comparison:

Praxis

  • Length: 12 months
  • Cost: $11k tuition – $14,400 earnings during the program = ($3,400)
  • Debt: $0
  • Job after graduation: 96%
  • Starting salary: Let’s say $40k ($50k is average)
  • Net benefit over 5 years: $2,400 (in program) + $170,000 (at 40k, if no raises for 4 years after graduation) = $173,400

College

  • Length: 5+ years on average
  • Cost: $100k (minimum)
  • Debt: $37k average
  • Job after graduation: ??? (82% of grads do not have a job lined up. 62% of degree holders have no job or a job that does not require a degree)
  • Opportunity cost: $173,400 (assuming you had done Praxis instead)
  • Net benefit over 5 years: -$37k debt -$173,400 opportunity cost = ($210,400)

I’ll be the first to tell you that averages and aggregates are not a guide to your life decisions.  None of this can tell you what’s the best path for you.  There is no sense in remarks like, “College is a good/bad idea for young people”, and the same goes for Praxis.  There’s no answer for “young people” in general.

All that matters is each individual.

Take the time to examine your own life, goals, situation, and what makes you excited and fulfilled.  Consider what the next year or two or five could be like for you given your various options.  Don’t just follow the dominant path or rebel against it because you saw some numbers somewhere.

Don’t do stuff you hate.  Don’t do what others want or expect.  Don’t do what’s supposed to give you prestige.  Do what makes you more of who you want to be every day.

Your Student Debt is Unfair

You hear a lot of complaints about student debt, and how maddening it is to be $40,000 in the hole at age 23 and still not have a job that requires a degree.  The case for the unfairness of student loan debt is that these kids didn’t know better.  It’s kind of a pathetic excuse, but it’s often true.

12 years in an education system where you are constantly pummeled with the promises of higher education and the perils of any deviation will make you overvalue a degree.  You’ll never be warned about the cost, or how debt can limit your options.  You’ll only be told about the magic $1 million in lifetime earnings that is supposed to find you as soon as you find your major and graduate.  It’s a system. Obey it, and the statistics will magically bring you what they bring the average of the past aggregate, as long as your behavior correlates with theirs.

Starry eyed teens get grants, aid, scholarships, loans, and complete a bunch of paperwork with their parents to just get in to the best possible college they can based on rankings they’ve never really studied.  They get endless praise upon graduation and more upon heading off to college.  Finally, they’ve made it!  The rest of life will simply unfold successfully as if on autopilot.  What’s the worst that could happen now?  You’re getting a degree, so you’re set!  You’re on the right side of the data!

Young people get good enough grades, do some extracurriculars, and get the degree.  Once more they are celebrated.  Then, for perhaps the first time in 20 years, they leave the confines of a controlled environment shielded from the world of value creation and exchange.  No one is overly impressed with their ability to fit into the system.  People want to know what they bring to the table.  Can they crunch meaningful numbers without being assigned?  Can they sell?  Can they code?  Can they digest the complexities of markets and customers and make judgments on the fly about how to preempt problems?  Not really.  Those things take experience and context wholly lacking in most educational institutions.

So they struggle.  They don’t like what they do, or they can’t find work much better than what they could have gotten right out of high school.  It’s OK though, they have time to learn from the real world right?  Except they’ve got college debt to pay in addition to living expenses.  That awesome company they were going to volunteer for in order to gain skills?  Not so easy with the need to earn enough to make loan payments.

Grads are in a bind and they feel kind of ripped off.  They feel betrayed.  They feel lied to.  Where is that high school guidance counselor who pushed them to college?  Will she pay the bills?  Where are the parents who were so proud?  Will they want their kid to move back home?  It can be pretty rough.

So yes, it’s unfair.  But the worst possible way to respond and improve things is to say it’s unfair over and over.  Say it once, get it our of your system, move on.  The fairness doesn’t matter.  Sometimes you’ll act on bad information.  Sometimes you’ll have regrets.  Sometimes other people’s plans for you aren’t best and you’ll suffer for following them.  So what?  Talking about how sad or unfair it is does nothing for you but reduce the chances that you’ll actually make things better.

Yeah, you were led to believe this degree would pay for itself immediately and without difficulty.  Yeah, because you were handicapped by the system you were incapable of realizing for yourself what the decision to go into debt might mean and how it could play out.  That’s the past.  What will you do today?

The good news is, it’s not that big of a deal unless you let it be.  Laugh at it, roll up your sleeves, and reboot your expectations about the world while building every day.  Devise a payoff plan and a life improvement plan.  Lots of people have done it, so can you.  The past is past, you are where you are, and no amount of bitterness, protest, or hoping for some political savior to bail you out will do you good.  In fact, it might destroy you.

Oh, and if you have kids of your own someday, let them experience enough of the world outside the walls of schools so that they know better than to blindly follow the advice of authorities seeking to do them good.

Want to Make Better Decisions? Get Some Skin in the Game

If you follow sports you’ll notice something.  Vegas is better than the experts at predicting outcomes.  You could chalk this up to the wisdom of crowds, but this can’t be the only explanation, because in surveys and polls the crowd doesn’t do very well compared to Vegas either.

The reason Vegas is better on average than individual experts or surveyed masses is because people choose better when they have skin in the game.  It’s one of the reasons democracy is a bad way to determine the policies people want and grocery stores don’t survey their customers to decide how to stock their shelves.  When it’s free, people take different and dumber risks.

This is why my colleague and co-author Zak Slayback wrote recently that you should burn your backup plan.  It’s why some people get neck tattoos.  It’s why Bruce Wayne had to climb without the rope.

Even worse than having no skin in the game is having the opposite.  A cushion large enough to not only catch you if you try and fall, but one that can sustain you even if you don’t try at all.  Economists call this the moral hazard in the world of financial regulation.  When third parties insure against risk, people and institutions make worse decisions.  Think high risk home loans underwritten by banks who knew that taxpayers would be forced to bail them out if it went south.  It applies on the personal level too.  While it’s easy to call inheritors of wealth financially privileged, I think it’s often harder to discover and live a fulfilling life if you’ve got a huge trust fund.  If you don’t have to win, it’s hard to get the motivation to try.

All these examples might be too easy to agree with me on.  Let’s push a little farther.  I think college funds cause the same problem.  When parents put tens of thousands into an account that can only be used for college, young people will fall prey to the sunk cost fallacy and favor going to college much more than they would without that restricted money.  Once they do, they’ll take it less seriously.  As long as parents are satisfied with grades and activities, it doesn’t really matter.  The degree is perceived as free.  The opportunity cost is overlooked.  The diploma at the end is supposed to guarantee a job and an income, and these are supposed to pave the way to find fulfillment.  Plus, if you pick a major that is supposed to give you lots of career options, you get lulled into thinking you have infinite fallback plans.  Sure, you sat in classrooms or goofed around for the first 22 years of your life, but it’s all good. You’ve got that free degree so no matter what you do, you’re set.

Parents see college as an insurance plan against all problems.  They tend not to care much if you’re happy there or finding your groove or learning how the world works, as long as you get a degree.  Tell them you’re bored and restless and opting out to go start a business or pursue a career as an artist and risk giving them a coronary.  They feel more comfortable with you half-assing it through a moral hazard backed mediocrity.

Forget all that.  It’s your life.  Whatever you do, have skin in the game.  If you don’t or can’t in reality, imagine and live as if you did (a poor substitute, but better than nothing).  Find out the actual cost of your education.  Tally up how much of what kind of work it would take to pay for it yourself.  If it was all on you, would you pay and do it?  If not, why are you doing it now?  (Try the same with things like health care if you want a good shock and some insight into why the health care system is so screwed up.)  What are you willing to give up to get the things you want?  If what you think you’ll gain is less than what you’re willing to part with, why do it?

Are you willing to fail?  Are you so passionate about what you’re trying to do that you’ve got to try it out even if it doesn’t work?  What if the degree fails to bring you anything you want.  Will it have been worth it?  If not, why do it?  “Well, I’ve only got another two years, so I might as well have it under my belt.”  Really?  Compared to what?

If you are like most people and you don’t have any single passion or pursuit to throw yourself behind, no worries.  Go the opposite route.  Try a bunch of stuff and build a list of things you know you don’t love doing and want to avoid.  Avoid them.  Don’t do them because they’re low-risk or paid for by someone else.  That’s like the person who spends money they don’t have on clothes they don’t need because they were on sale.  A $100 pair of useless jeans marked down to $50 is not a savings, it’s a waste of $50.  Keep eliminating things that don’t bring you value and everything else is fair game.

I’m not saying it’s never a good idea to take something that someone is offering to pay for.  The point is to not overvalue the “free” part and undervalue the unseen costs.  Not only are there often strings and expectations and the cost of forgone opportunities, often valuable things offered for free aren’t even enjoyable or meaningful to you.  Don’t do them just because other people would call you crazy not to.  And don’t forget one of the biggest dangers of something someone else is paying for, which is the way it reduces your incentive to take it seriously and get the most out of it.

Look at the actions and activities in your life.  Do you have skin in the game?  The bigger and more important they are, the more you want to have skin in the game.  It’ll make you better and more likely to succeed in every way.

This is not an admonition to simply take more and bigger risks, or to alter your risk tolerance.  It’s an admonition to dig down deep and get to know yourself.  Discover your real risk tolerance.  Be honest about what you find, whether it’s more or less than you wish it was.  Make decisions for you, based on your unique assessment of the trade-offs involved.  Don’t suffer through things because, relative to everyone else’s opinion, they are low risk or a good deal or a safe backup plan.  Get some skin in the game.  The games you want to play.  On your terms.

Your Lack of Income Can Be an Asset

From the Praxis blog.

Let’s say you want to do something awesome.  Maybe you’re interested in being a part of a startup or an entrepreneurial business.  Maybe you’ve got a creative side, and you’d jump at the chance to work on a movie script.  The less cushy your current life, the higher the chance you’ll be in a position to answer when opportunity knocks.  The lower the cost of exit, the easier exit becomes.

A lot of young people just starting out in their careers feel pressure to scratch and claw for a few thousand more in salary and keep up with friends who are moving into nicer houses, driving nicer cars, eating sushi every Tuesday, and shopping at trendy places.  There’s nothing wrong with any of these things, but if you have a stomach for more risk than the average person, and a desire to do some really cool stuff, you might want to resist the urge to upgrade your lifestyle.  Your relatively low income can be a huge asset.

Even the most frugal and self-controlled among us have a propensity to adopt a standard of living right up to our capacity (sometimes beyond).  It makes sense.  In fact, it’d be a little weird if you were raking in cash and sleeping on a park bench, just waiting for the opportunity to use your capital.  Living in the moment is fine.  The thing is, there are so many ways to happily do this.  I’ve found that, whatever the income level, once it’s above a certain very low baseline, you can organize a pretty happy life around it.  The higher it goes, the more you spend and it is damn-near impossible to go backwards.

I knew a guy once who had a great job, making more than any of his peers, but at a place that pressured employees to upgrade their cars, houses, etc.  He soon found himself in a lifestyle that only that well-paid job could sustain.  Then the job turned sour.  He wanted out.  But how to convince his wife, his kids, and himself to downgrade the car, the monthly budget, the mortgage?  Some of these things couldn’t be done at all on short notice.  His high income was not a source of freedom, but a chain, preventing him from doing what he wanted.

So you’re young and and your income is low.  That’s a huge advantage for you.  That means if your friend tells you she wants you to help launch a new business, but you might not get paid for the first six months, you can probably swing it, since you’re already accustomed to eating Ramen and you have no DirecTV to cancel.  Some of the best and brightest are incapable of jumping on great opportunities because they’ve earned decent money quickly, then hemmed themselves in, unable to ever downgrade their short term quality of life.  If you can, you have a competitive edge.

Obviously, no one wants to stay forever on a diet of canned chicken.  But when you’re young, and at the beginning of the discovery process of what makes you come alive, it’s helpful to be free from a huge list of material needs.  You’d be surprised how much an early high income can stall further progress towards your goals.

So if you think you’re poor compared to your friends, smile.  When you consider all your assets and liabilities – your skills, interests, strengths, weaknesses, capital, time, flexibility, etc. – include on the asset side of the ledger the fact that you don’t really need much money to maintain your current quality of life.  It may come in handy when the chance to do something amazing, and far more rewarding in the long term (materially and otherwise), emerges and you’re ready to jump while your buddies have to turn it down to stay with a job that pays for their $15 “happy hour” cocktails.

Debt Can Limit Your Options (even when it’s ‘worth it’)

From the Praxis blog.

It’s hard to find a way to combine your career with your passion. It’s much harder if you need to make a lot of money to pay for your lifestyle, loans, etc. I know a number of people who make lots of money – enough to make that law degree a sound financial investment, for example – but hate what they do. The sound financial investment – trading debt for a ticket to a high paying job – turns out to have limited their options to only jobs that pay well enough to service the debt, and they ended up not liking those jobs.

In other words, the lower your wage requirements, the more flexibility you have early on to explore and test and find work you love. Keep that in mind with each step. Ask whether your present decisions are limiting your future options in a way you might regret.

I don’t mean to pick on law students with the above example, but that’s the one I see the most. People get a law degree because they’re smart, and they imagine a law degree as opening up a lot of career options. But after they graduate and have huge debts to pay, the number of jobs that cover it are limited. If you don’t enjoy corporate law, you might feel trapped.

It’s not just education debt that can limit you to jobs you don’t like.  I’ve also met a lot of people who feel stuck with a high paying job they hate because they bought an expensive house or car. If a nicer house and a less enjoyable job is a trade-off you’re happy with, by all means go for it! But it’s hard to undo once you jump in, so be cautious and thoughtful.

I talk a little more here about how low income can be an asset early in life.

It’s Not About Working for Free, It’s About Being Free

I recently posted about trying to be in a position where you could do awesome work with great people, even if for very low or no pay as it is more likely to lead to better results than doing work you don’t care as much for.

Many people said this was a luxury only the elite or wealthy could afford.  I couldn’t disagree more.  In fact, as I’ve written elsewhere, lack of income can be an asset.  We tend to live up to our earnings.  Those with a less costly lifestyle are more able to jump on opportunities that don’t pay well upfront.  The whole point of the post was that it’s good to be in a position where you are most free to seize on opportunities even if they don’t have an immediate paycheck.  Avoid or reduce debt, cut expenses, maintain a minimalist life, be productive so you can do more with less time, try to save some money, etc.

You may have to or want to work a job you don’t care for and earn money for 60 hours a week but that still doesn’t preclude you from going to that awesome local marketing firm you’re interested in and begging them to do 20 hours a week of work even if they can’t pay you.  I contend that the latter will be more beneficial to you long term than the former, and if you work hard and well might turn into more pay as well.

The post was not about working for free.  The post was about being free.  The freer you are to jump on great opportunities the better, and the more things that make that hard you can eliminate the better.

Waging Generational Warfare Against Yourself

I just read a wonderful book called How They Succeeded.  I was struck by how many of the highly accomplished individuals interviewed mentioned staying out of debt as a key to success.  It’s obvious that being debt free has practical benefits like the ability to accumulate capital, the maintenance of good credit and a good reputation.  But these seemed rather simple and obvious and not enough to warrant the repeated advice.  None of them mentioned personal hygiene or other obvious practical disciplines, so why debt?

I think there are reasons beyond the practical and material for minimizing debt.  There is a psychological loss of freedom that can take place with the knowledge of debt hanging over ones head.  This can subtly subvert free-thinking and creativity and narrow the lens through which one sees the world.

This is probably not the case for everyone in every circumstance.  If you’re involved in lots of business endeavors where you need to operate on credit you may be very comfortable with and adept at handling debt.  I know people who do not seem to have any trouble with a constantly fluctuating personal balance sheet.  It’s not that way for me.  I definitely feel the steady pressure of debt like white noise in the background of all I do.

On the one hand, it seems odd that debt would be problematic.  Borrowing money from the probable excess of the future to subsidize consumption of the tighter present can make financial sense and result in an overall increase in enjoyment of life.  Indeed, if we never changed or grew and our preferences were the same through time, debt would make perfect sense as a way to smooth the ups and downs of material pleasures.  But that’s just it, we change.

This excellent blog post about doing what you love mentions being stuck with the career choices made by your teenage self.  If you are determined to be a lawyer or a doctor at a young age and persist down that path at some point you may realize you no longer enjoy it, but your options have narrowed with your skill set.  You are a captive to the choices of your earlier self.  It’s no different with consumption decisions than educational or career decisions.  Going in to debt is a way for your present self to borrow from your future self.  Think about the level of presumption.  Are you really confident your future self will be the type of person who would think it a good idea?  Might they have other uses to put the debt payments to?

When you go into debt, you are binding another person – your future self – to subsidize the desires of your present self.  It may be a good idea in some cases, but it warrants very careful consideration.  It’s not merely a question of whether your future self will have the resources to subsidize your present preferences; it’s also a question of whether you’ll be happy about doing it.  I don’t want to be bitter at my former self for the financial obligations I have.  I’d rather the self of the past, present and future work together towards the fulfillment of our individual and shared life goals.