Thursday, 25 October 2012

Good advice, Bad advice

I was just watching an interesting show on the sports network about how many professional athletes end up bankrupt a few years removed from their playing career.  It was pretty sad to think about  how these ones lose so much money but when I think about how young they were and how inexperienced  they would be in finances, it's not a surprise.

Actually, it's pretty similar to ones who take on student loans like myself once upon a time.  I was pretty young and pretty inexperienced when I first took out my student loan.   That's why one of the most important things for young people who all of a sudden get a lot of money or all of a sudden take on a large debt is to get good advice.  And that's where the problem lies with both scenarios - where to get good advice?

When you think of sources of getting good financial advice for the future for a young person, what comes to your mind?  A teacher or guidance counsellor perhaps?  How about a financial advisor from a bank or an advisor from the college or institution you plan to attend or how about family, in particular your parents?  At first glance, you would think that these would be great sources of good advice and I am sure in many cases they are.  However for some (myself included) they were not and in some cases were the source of bad advice. Bad advice that cost me dearly.

For example,  in all my classes including classes in economics in which I took, not once did any teacher ever discuss student loans in any shape or form.  Not once at all.   Even the guidance counsellors at my school never once openly initiated talks with students about pros and cons of student loans.  And it's pretty sad because I remember the first day of school in my senior year, the principal was actively pushing us all to graduate and move on to university or college.  I even remember one of the university recruiters answering a question about covering costs by saying, "just get a student loan."  Yes I even got my student loan forms from my highschool but not any advice.  Student loan forms were being passed out like candy.  Bad advice indeed.

What about the banks who issue these students loans?   I don't remember much about them giving me advice.  You filled out their forms, you go to the bank and get them to sign and you send it off.  A few months later (sometimes a lot longer, but that's another blog!) and voila,  you got money. Bbut no advice, not even a brochure about how to manage a student loan or the risks involved in it.  You don't hear much from them, until you get behind in your loan payments(another blog!).  No advice!

Finally, you have your family.  Unfortunately, many parents do not know anything about student loans and have little experience in finances and think getting a loan is a great idea as they have no money to help their child go to college.  However, there are some families and I remember a few who had money to help their kids to go to school but didn't want the burden of it and wold write letters for their children to student loan stating that they would not support their kids at all for schooling (to absolve them from any financial responsibility in their kids' education).  Or like in my case where my parents were divorced and the one parent I lived with was too poor to help me and knew little of student loans and the other parent who had money but didn't live with me just said, " get a student loan."  Bad advice.

So what's my point?  My point is just like those atheletes, the places where we should be getting good advice, ends up being the sources of bad advice and actually puts us on the path of financial ruin.  Unfortunately this is part of a bigger problem with society in that most of us are inherently selfish and in the end we look out for our own interests no matter what.  It's short term thinking because in helping the next generation now is helping ourselves later.  But that's the problem.  So what is the solution?

The solution for now is for you the student to do your research and look for the pros and cons of student loans.  Fortunately, with the technology of today this can be done.  Also,  don't make any quick decisions about your future regarding school, particularly if you are not sure on what you want to do and don't know how you would pay off your debt.

 In short you have to become your own guidance counsellor, financial advisor, teacher and in some cases parent when deciding your financial.  That is a lot of pressure for a young person and it's a lot of work.  However, the work put in can pay off in a big way down the road.  Yes, you still could make the choice for yourself but at least it will be an informed choice which in a sense is good advice.

Monday, 1 October 2012

What is debt? What one cab driver taught me

Definition of Debt
I thought I would start this off by going to and defining the word "debt".  Here's what I found:

1. something that is owed or that one is bound to pay to or perform for another: a debt of $50.
2. a liability or obligation to pay or render something: My debt to her for advice is not to be discharged easily.
3. the condition of being under such an obligation: His gambling losses put him deeply in debt.
4. Theology . an offense requiring reparation; a sin; a trespass.
So why did I put this here?  Well, I think it shows one of the root problems of being caught in the snare of student debt which is that many do not understand that student loan debt is something that you owe and are obligated to pay back.  Now some might say that I don't know what I am talking about and that everybody knows that a student loan is debt but think about it for a moment and while you do, I'll give you an example.
What one wise cab driver taught me about debt
About 10 years ago at my previous job I met a client who had two sons.  He was from the middle east and was trained as an engineer but when he came to Canada, his credentials weren't recognized and so he ended up driving a cab and was struggling.  He said his sons are working so they can go to school and he was doing all he could to help them and trying to make money to help put them through school.  I said why don't you tell your kids to get a student loan? (Remember, I was deep in student loan debt back then.)  He looked at me with a stern and serious look and said, "How could I as a father allow my kids to take on a small mortgage?  They aren't ready for that kind of financial obligation.  As their father, I can't do that to them and I won't." 
"Wow!"  I said to myself and the reality of a student loan hit me like a ton of bricks.  At that point, I realized that I have a small mortgage to pay back and that's a big commitment that you pay because a mortgage is debt in a big way.  
Student Loans Equal Debt
 And that's the problem, you are never told what a student loan really is.  For example,  I remember guidance counsellors saying, "just get a student loan" like it's no big deal.  I remember the loan forms being passed around like candy at school.  Also, there were no classes or units that talked about student loans and the ramifications of them.  Even my parents said get a student loan.  One parent knew nothing of student loans but wanted me to do better, as she'd always struggled to keep us afloat.  And the other parent simply didn't care. He just said casually to get a student loan.  There's nothing casual about a student loan.  Unfortunately, I think a lot of us were told similar things and got duped.
So when you think of a student loan as debt - and serious debt like a mortgage - that you have to pay back your mentality changes.  If you have a mortgage, you make sure that you make the payments each and every month.   And prior to getting a mortgage you think about how you'll repay it as opposed to saying that "I'll get around to it after graduation and once I get a job."  Also, with a mortgage you realize that you owe the bank money they lent you to purchase your home and know that you have to pay them or there could be consequences.  A lot of people got student loans (me included) and treated it as "free" money and never really gave thought to the consequences of taking on a debt that equals a small mortgage.
So if you are thinking of taking a student loan in the near future, remember the cab driver and hope that you have a parent, friend, teacher or someone smart enough to recognize what a student loan truly is: debt.