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You Must Understand These Two Cardinal Rules of Debt

Personal_Finance / Debt & Loans Mar 29, 2015 - 02:31 PM GMT

By: Investment_U

Personal_Finance

Andrew Snyder writes: It’s a tough subject. Nobody wants to admit they spent years of their lives - and thousands upon thousands of dollars - in an effort that may quite easily turn out to be detrimental to their financial well-being.

On Friday, I spoke to a small church group about what it takes to build lasting, liberating wealth. It was the second time we met and I knew going into the evening that it wouldn’t be easy.


I learned during our first session that the majority of the folks I was talking to were swimming in student debt.

They weren’t looking for riches... they simply want some breathing room.

There is no doubt student debt is a quiet yet dangerous headwind for the American economy. Students are graduating from school with huge piles of debt and job prospects that can barely afford them groceries, let alone allow them to tackle a stack of loans.

One young couple I talked with has six figures’ worth of debt and a couple of great-sounding degrees on the wall... yet only the wife has been able to find full-time work in the two years since graduating.

There are plenty of folks responsible for this mess.

Uncle Sam certainly deserves a poke in the chest. Washington has caught flak in recent months because it readily admits it’s lost track of the issue. Sure, it backs most of the loans and creates the slippery conduit that allows students to pile on loan after loan with a few clicks of a mouse... but it can tell us virtually nothing about delinquency rates or who is eligible for loan relief.

In fact, when the Federal Reserve recently went searching for data about the issue, it was forced to go to credit-tracking firm Equifax... not the Department of Education right down the street.

Then, of course, plenty of blame needs to go to our education system that’s more about prestige and connections than actual education.

For example, the University of Pittsburgh is often touted as the most expensive public university in the country. In-state tuition runs a student nearly $17,000 per semester. Meanwhile, students at Bismarck State College pay just over $4,000.

Why the huge gap?

Some would say the value of the diplomas (the “resume value”) from each school is different. But it’s hard to argue the actual education is all that different. It’s not as if the expensive schools have access to better textbooks.

The difference in price is largely a function of a greater perceived value. That’s a major problem America must tackle.

Finally, I suppose, we need to blame the students for simply not knowing any better.

It’s hard to blame an ambitious young student for getting sucked into the vague and glitzy promise of higher education, but most college borrowers break a cardinal rule of debt.

That’s what I focused on with the church group. No matter the circumstance, no matter the promise, the rules of debt are the same.

They are incredibly powerful... and they’re simple.

In fact, there are only two rules. Abide by them and you’ll never have to worry about being smothered by debt.

Rule No. 1: Never take on debt that you don’t have the income to pay off.

It sounds simple, right? Yet every day countless students lock in decades’ worth of monthly payments... with little more than a hope and a prayer that they’ll have a job.

Sadly, it’s not just students. Much of the mortgage crisis came thanks to homebuyers with budgets dependent on rising incomes to pay the bills. They took on a loan with no concrete way to pay it back.

One kink in their plans... and it’s hell.

Rule No. 2: Don’t borrow money for assets that don’t produce income or have any chance of appreciation.

This is why I beg readers to understand that mortgages aren’t bad and yet car loans should be despised. It’s also why credit cards should be outlawed.

Sure, we can argue a student loan creates an appreciating asset... your education. But that’s not always the case and the value of an education is slipping by the week.

At this point, I’d rather my kid be a trade-school-educated plumber than a debt-burdened art historian searching for a job.

We argue America is not facing a student loan crisis. Yes, more than a trillion dollars’ worth of debt on an intangible, potentially depreciating asset is surely a problem.

But the real crisis is that most folks don’t understand why this situation is so dangerous and, more importantly, how to protect themselves.

Good investing,

Andrew Snyder

Editorial Director

Source: http://www.investmentu.com/article/detail/44552/two-cardinal-rules-of-debt

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