Even An Average Student Loan Debt...

Puts You On The Road To Serfdom

by Arturo F Munoz

The average student loan debt today is as large as the average amount of household savings in a retirement account: $24,000. That means that junior owes to a bank as much money upon graduation as mom and dad have managed to accumulate for retirement throughout all their career lives.

Mom and dad, however, never started their careers with massive debt. They didn't start down the road of life chained to a rail, unlike junior.

What are junior's prospects?

The borrower is servant to the lender. And when you are in debt for life, you are a serf. If you have borrowed your way to graduation, then you have ensnared yourself. You've lost your freedom. It matters not whether you think you're just an average student taking on an average student loan debt burden. Look at this video, then read on.

There's Nothing Average About An Average Student Loan Debt

No human being is average. An average is a mathematical abstraction. You are no abstraction. You are a real soul with a desire to live and fulfill some purpose in life, for which you need to be free, so that you can meet this purposeful destiny.
To the great apostles of political freedom the word 'freedom' meant freedom from coercion, freedom from the arbitrary power of other men, release from the ties which left the individual no choice but obedience to the order of a superior to whom he was attached.
These are the words of Nobel laureate F.A. Hayek in his superb book The Road To Serfdom.average student loan debt road to serfdom hayek

If you review your life, my friend, I doubt that you could argue that you've lived it under repression, where you've been coerced by an arbitrary power to break your ties with your beloved family and friends to be forced to obey without any other choice a superior to whom you were now dependent.

If you are or have been, on the contrary, like any typical student who has wished to join the ranks of the collegiate, by attending some university campus somewhere, then you voluntarily took on debt. With it you bought into the propaganda that a college degree was the best investment that you could make in your young life.

You may even have bought into the belief that an average student loan debt was no big deal since, being average, most students were assuming it to be "the thing to do for anyone going to college."
The new freedom promised, however, was to freedom from necessity, release from the compulsion of the circumstances which inevitably limit the range of choice of all of us. Freedom in this sense is, of course merely another name for power or wealth.
Doesn't this sound more like you, nevertheless? Isn't this what you really wanted? Wasn't it a desire for freedom from necessity and from having to confront the simple fact that you live in a world where you cannot do everything that your heart desires, that encouraged that voice to whisper in your ear: "With a college degree in my hands I will have the power to become wealthy"?

So, you went ahead and fell for an ancient trick. You had the expectation that you would succeed in showing off to others how free you truly could become, merely by postponing the inevitable – having to pay that average student loan debt.

Yet this trick chained you to a rail along the long road to serfdom. For you will have to pay off those loans. And you will give up far more than they're worth for it. And who cares if others are now slaves along with you?

Is it not always better to be an insignificant freeman than an average slave?

The Average Student Loan Debt Is More Than What You Owe A Bank

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 makes it virtually impossible for you to discharge student loan debt through bankruptcy. For as long as you can make money in any way, you will be required by those in real power – your masters, the lenders – to pay what you owe them.

If this "investment" that you made doesn't pay off, if this average student loan debt proves unweilding, then you literally won't be able to pay off your loan as you've anticipated; that is, you won't be able to pay it off according to your time line or even your liking. But pay it you shall for as long as you're alive making traceable money somewhere, somehow.

You will be a slave fettered with electronic chains to your lender's collections agency. An agency can garnish your wages if your disposable earnings per week exceed thirty times the federal minimum hourly wage.
average student loan debt shakedown
Put another way, this means that if you make $154.50 or more per week your wages will be garnished.

Your disposable income, which is whatever money you have left after paying all required taxes and national insurances, will not be yours but will belong to the lender by federal law.

What's the likelihood of this happening to you? Well, you do the math.

Let's see what should have been the most that you should have paid for your college education. If you've paid more than you should have, then you're screwed.

To estimate this valuation we must calculate what's known as your capitalization rate or the cap rate of this college "investment" that you're the proud owner of. Of course, this is a calculation that you should have made way before taking on any student loans. But this exercise should prove valuable to you in many other ways.

Let's start.

The cap rate is a very useful tool because it helps you figure out whether you should buy an income-producing asset by borrowing for it. Do you think your college education is an asset that can generate income for you? Then let's determine its cap rate.

To begin this calculation we're going to use an example to make things easy to understand. We're going to estimate first the cap rate for an actual business. Then we will use your average student loan debt to estimate your own cap rate for college.

Let's say that there is an in-home seniors care provider business that you want to buy. It's going for $25,000. This business produces $2,500 per month after taxes and insurance. Annual net income therefore is $30,000. Let's say the bank charges 5.25% fixed interest for your loan, and you want to pay the loan in 15 years.

How much of the loan are you paying per year? Dividing 100% by 15 tells you that you're paying 6.67% of the loan every year. This is your repayment rate. You also already know that you have to pay interest of 5.25% per year for 15 years. So now add the 6.67% repayment rate to your 5.25% interest rate. You end up with 11.92%. This is your cap rate or 0.1192 in decimal form.

Here's how to use your cap rate to determine whether buying this senior care business makes sense.

Take the $30,000 worth of annual income and divide it by your cap rate of 0.1192, which will give you $201,342. This is the maximum amount of money that you should pay for this business. If you buy it by borrowing $25,000 at 6.67% for 15 years to make $30,000 per year, then you are buying it at a bargain price.

Now let's estimate a cap rate for an undergraduate in the social sciences going into an entry level job and see how he fairs having embraced an average student loan debt of $24,000.

Should You Have Sought Even For An Average Student Loan Debt?

Junior has consolidated his loans at a rate of 6.75%. His average student loan debt repayment plan calls for paying $24,000 over 20 years. He believes that he will average a gross salary of $50,000 per year. His cap rate is 11.75% which, when divided into $50,000 yields $425,532 as the maximum that he should have paid for his college education. Pretty nifty, huh? Seems like junior made a great decision, except for a few intrusive points.
    average student loan debt death star
  1. What if junior can't get work, can't break into his career field and ends up working at a job that doesn't require a degree, making half of what he expected?

  2. What if junior doesn't have the average student loan debt but more like $35,000, $50,000, $80,000 even $125,000 or more in loans? What then should his education have cost him?

  3. What if junior, being a wage earner rather than a business owner, gets stuck in a tax bracket that doesn't allow him to net out more than $40,000? After all the median household income in the United States is $46,326.

  4. So half of American households live on less than this income amount gross every year. Only 34% of all U.S. households make more than $65,000. Only 17.8% make more than $118,200 a year and just 2.67% make more than $200,000. College doesn't guarantee you an individual income in any particular income bracket.

  5. More importantly, we must apply the cap rate to junior's net income, which is the money from his wages that he has left after paying all his interests, taxes and insurance expenses. That's called junior's disposable income.

  6. How much of a personal disposable income would junior have if he had to pay a big student loan, a ton of credit card debt, FICA, unemployment and all kinds of other taxes, plus his insurance premiums for his car, property and health?

The U.S. Census indicates that per capita disposable income in this country is around $35,000. But that's just the nation's total disposable income divided by the total population. What if your personal disposable income is only one-third of this?

Do you think it farfetched?

What if I told you that 1 in 5 people filing for bankruptcy right now are college students and that this is just a point along a trend going back for 2 decades?

Here's what the Networks Financial Institute at Indiana State University had to say about young adults of college age and beyond. Does it sound like people who have lots of personal disposable income?
Americans aged 25-34 have the second highest rate of bankruptcy (just after those aged 35 to 44). The bankruptcy rate among 25-34 year olds increased between 1991 and 2001, indicating the GenXers were more likely to file bankruptcy than were young baby Boomers at the same age.
average student loan debt forgiveness And what if you owed $80,000 more than the average student loan debt and you had to pay it at 6.75% for 15 years because of minimum monthly payment requirements by your lender?

Now we're talking!

Do the math. Your cap rate would be 13.42% and your disposable income $11,655, which means that the most that you should have paid for college should have been $86,848.

Yet you paid $104,000 for it. That's a 20% premium beyond what you should have paid for your education. Now, how smart of an investment was that for an educated person?

Can you say "I'm broke but can't go bankrupted." Say then, "I'm a serf of my lender."

You might think that you're safe so long as your average student loan debt stays, well, average. But even if you had loaded yourself with just an average student loan debt, in conclusion this burden leaves you at a disadvantage because, had you spent the money in building a business, you would have benefitted, in this example, from a net income of $30,000 rather than a personal disposable income of only $11,655, since businesses face tax deductions that wage earner do not. So as a business owner you end up ahead of an employee.

In the end, debt proves to be a terrible deterrent to entrepreneurship and risk-taking, despite the promise of riches that a college degree might have lured you to believe would be within you reach if you borrowed for it.

But if you cannot get a job to pay your loan back, and you can neither get out of debt nor escape it through loan forgiveness, then you need to look at entrepreneurship in a different light, because this may be the only way that you could achieve deliverance from the life of serfdom that even an average student loan debt burden will force you to serve out.

Return to Has College Student Debt Killed The Entrepreneur In You? from Average Student Loan Debt Puts You On The Road To Serfdom

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