Monday, December 19, 2016

Save Yourself from College Debt

I hardly delve into describing strategies where one can earn a positive rate of return over time. Today I shall elaborate a bit on one that may be helpful to those who believe going to the university is an investment.

Firstly, I will describe the basics of savings. The most rudimentary mechanism is keeping one's money in a savings account which is cash within a demand deposit. At this point in time one can only earn is very small rate of return. It is one offered by a banking institution.

The rate of return offered through a banking institution tends to move in tandem with the fluctuation in yields which is affected by the monopolized benchmark. Of course private contracts can be influenced by any point of reference, whether it be a rate of interest on the free market, or a simple mark up that is decided bilaterally.

Higher rates of return can be effectuated through riskier savings vehicles. Some are packaged, and some stand alone. Some are debt instruments, and some are more liquid, such as equities. Debt instruments are less liquid and less risky. Equities are more liquid and more risky.

There are also other types of contractual bets that attempt to predict the future value of some other underlying instrument. These are called derivatives. They are called hedges or insurance. It is a bet in the fluctuation of the value of the reference instrument. One wins, the other loses. Blackjack.

Insurance is of the most safe savings mechanisms one can find. It is a pooling of liquidity, with the promise to return the same amount paid in, plus a percentage more at a certain point in the future. This would be called the settlement period.

Americans today have taken for granted these basic savings vehicles due to the heavy reliance placed upon entitlements. All entitlements are government programs which are funded by government debt. Government has also exacerbated the welfare consumption of Americans by creating moral hazards. Their monopoly of banking insurance has proliferated speculative bubbles.

Here is one simple way a college student looking to make themselves debt free can do so without looking to the pampering of government when they graduate. This pampering burdens all other Americans in the form of inflation. And unfortunately, the majority of college grads are not necessarily a boon to the economy. Their debt renders them a net burden while in college. America is overleveraged.

A Universal Life Policy with flexible premiums is the best way to accumulate a pool of capital to use in the future, as the asset will cancel out the obligation after college, or at least decrease it's size. With Option A, that is, the option that allows for greater cash value to be accumulated until the age of 100, would be the best choice. The insurance portion levels off at a certain age.

By depositing much more than the minimum every month, one could generate enough cash value so that by at least age 40 or so one could take out a policy loan or surrender the policy and take the cash value, using that to pay off their school loan obligation.

Indeed the surrender would discount the final value, but at least it would help to decrease the student loan obligation. With the Policy Loan, you simply keep paying the premium until death which would also include a smaller mark up, keeping in mind the accumulated interest needs to be paid off for the Policy Loan throughout the remainder of the contract.

The greatest benediction is that the Policy Loan need not be paid back. It will simply be deducted from the death benefit at settlement. This will simply leave for a smaller estate.

Best bet, stop going to college altogether.

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