Misconceptions about Student Loans and Student Loan Debt, and How Young People Make Money

A question that comes up on personal finance subs is, how is it possible for people in their late 20’s or early 30’s to have a lot of money, and especially given the media narrative that millennials are broke and struggling under the weight of student loans?

Studies that purport negative net-worth for millennials are misleading and portray the situation as worse than it actually is, due to methodological flaws. This is because, according to such studies, student loans are subtracted from net-worth, so a grad with a $150k loan will have a net-worth of negative $150k, which seems very bad, but at the same time is not the same as immediately owing $150k. The negative net-worth is based on the erroneous assumption that the debt must be paid immediately in full, which it is not. A $150k unpaid student loan is NOT the same as having a -$150k bank balance or negative Paypal balance, in which any incoming funds are immediately deducted until the debt is paid off. If you have a lot of student loan debt and are making $10k or more a month, it’s not like all that money goes to the loan, but rather a small portion of it every month. If you get a windfall, it’s not like you must pay off the loan at once before you can do anything else with the money. It’s true that if you default the creditor can try to collect by suing, but this takes a long time and wage garnishment and asset forfeiture requires a court order (although there are exceptions for federal student loans, in which the court order can be bypassed). Similar to Tesla, a student loan is more like a capital expenditure (a large one-time expense rather than a recurring one), that in the long-run is offset by recurring income. Hence, similar to valuing a firm, an individual’s net worth or propensity to earn money has more to do with recurring earnings (as given by an earnings multiple), less any one-time expenses such an student loans. This is how Tesla is so valuable as a company despite having so much debt, because the anticipated earnings vastly exceed what Tesla owes in loans.

If your wages are growing faster or as fast as student loan interest , which for high-paying occupations they typically are, and you have a lot of money left over every month after paying your dues, the remaining money can go into investments such as stocks and real estate, that exceed the rate of interest. Historical data shows the S&P 500 has an annual return of 11% (including dividends, and also including severe bear markets of 2007-2009 and 2001-2003) whereas student loan interest is only 4-7% a year. The wage premium from having a degree, especially if you major in STEM or go to medical school, makes it worthwhile in the long-run despite the student loan debt. Let’s say you get a $100k student loan to get a master’s degree in a STEM subject, and the interest on the loan is 6% fixed, and the duration is 15 years. The payments are only $850 a month, which relatively speaking is tiny if you’re earning post-tax $70+/year, which is not uncommon for STEM graduates. So although your net worth is negative $100k by conventional metrics, you’re in a very good financial position. This is how it’s not that uncommon for millennials to have a portfolio of real estate and or stocks valued in the mid to low six-figures despite having unpaid student loan debt. That’s how you see stories on /r/finance, /r/wallstbets, /r/personalfinance, /r/financialindependence/, and /r/investing of young people who are defying the doom and gloom headlines that purport that all young people are crushed by student loan debt and broke; yes, some are, not many are not. Although this is a contrived example, an extra $60k/year (after subtracting annual student loan payments), is a pretty good deal.

This is why I think the student loan crisis, despite the high figures cited by the media, is sorta overblown and why the alternatives to college (and the anti-college movement, in general) promulgated by the likes of James Altucher and others, is, at best, a waste of time, and at worst, a recipe for failure. Pundits falsely equate college with conformity, but there are as many pundits dissuading young people from going to college as there are advocating for it. So telling people to not go to college is not rebellious or contrarian advice, but rather just plain stupid advice. Making matters worse, the wage gap between college grads vs. high school grads has only widened since 2009, just as the anti-college movement hit its peak. So these people who are advocating against going to college could not have chosen a worse time. Same for the unemployment gap for high school grads vs. college grads, which has widened since 2009. The odds of someone without a degree becoming rich and or successfull, unless they have a high IQ, are pretty slim. That is what the cold, hard data says. Selling books on Amazon, installing WordPress templates, driving an Uber, and other ‘alternatives’ to college as recommended by these pundits, will barely make minimum wage and involve a lot of effort for little pay, and plus you’re competing with low-skilled workers from overseas for many of these freelance jobs. Even Peter Thiels’s fellowship program of paying entrepreneurs $100,000 to dropout of college produced very few successes even though these applicants were chosen by Thiel himself, so they must have had a lot of potential compared to the typical college drop-out.

Overall, those who make a lot of money at a young age tend to major in good-paying subjects (math, economics, finance, etc..), get good-paying jobs in their early 20’s, and are diligent about saving and investing, and it also helps if they started investing around the market bottom of 2009, and it has been a huge run..even bigger and stronger than the bull market of the 90’s–and with very low inflation, so the gains are magnified even more so. Same for buying a home around the bottom in 2009-2011. Of course, having a degree is no guarantee of success, and many degree holders are struggling, but having a STEM degree (or economics or finance) improves your odds, and most of the success stories I have read involve people with degrees.

Others make a fortune through speculation, such as buying Bitcoin and altcoins in 2015-2017 and then selling at or near the peak in early 2018. Others are making a fortune trading stock options, as shown by the popular sub /r/wallstbets, where millennials strike it rich earning as much money in a few days as a typical worker makes in 2-5 years. Without much effort I can easily find a many examples, so it’s not like I am cherry picking the biggest winners and ignoring the losers. In spite of the efficient market hypothesis, it seems some people have a knack for making easy riches in the option market at a rate that exceeds what can be attributed to chance. What they do is they look for a ‘hot’ stock that has some momentum–like Tesla or Netflix–and then buy the short duration call options on it, and then due to momentum continuing, are able to flip/sell the options a few days or weeks later for a huge profit. Favorite stocks include Amazon, Facebook, and Tesla, which are fundamentally strong and meet the criteria of the HBD investing thesis. Or they buy cheap index options, such as SPY or QQQ, and sell them a few days or even hours later for a large profit. As an example, Tesla stock surged from $260 to $330 in the span of a week, and some of the shorter duration options increased by up to a 1,000-percent in price. My own take on the efficient market hypothesis is, markets are mostly efficient–maybe 98% or so–but that 2% allows smart, cunning traders with small positions (less than a few million dollars) to make large profits consistently, whereas large firms and hedge funds cannot move capital as quickly and lack the nimbleness of retail traders.

There is some degree of survivorship bias in that successful traders and people who become financially independent at a young age are more inclined to create posts boasting about it whereas those who are less successful are silent, so it may seem like people are more successful than they actually are. If you have a forum of 10,000 traders, it’s a guarantee everyday at least a handful of them will make money, and will then post about it, but the majority, who are less successful, are not heard, so the result is a lot of posts about successes and few about failures.

Lastly, what about high school grads or college dropouts who enter the workforce? The mythical dropout who amasses a fortune as his peers struggle with student loan debt, is mostly just that-a myth. Despite all the hype by likes of Mike Rowe and others, the evidence suggests that ‘the trades’ and low-skilled work, in general, is not that great. I was unable to find any success stories of young people becoming rich with the trades or low-skilled work. I’m sure some exist, but the problem again may have to do with selection biases in that ‘blue collar people’ may be less inclined to post on Reddit than ‘white collar people’. Part of the problem with the trades is injury and inconsistent pay. Also, one often has to be inducted into a guild, which means there is likely some degree of favoritism and nepotism involved, and also there is a lot of certification and regulation involved. It’s not like you can just ‘be a roofer’ or a plumber right out of high school. Furthermore, most low skilled people work in the service sector, which pays worse than manufacturing or the trades. Stories of low-skilled workers bequeathing millions of dollars, such as a 96-year-old secretary donating $8 million (although being a secretary is not necessarily low-skilled) get a lot of media attention, because it is so rare. Tech fortunes and legal fortunes however are much more commonplace.

High school grads who try to enter the workforce–especially in today’s hyper-competitive economy where living expenses can be very high and job positions for unskilled positions are scarce–fare poorly due to low pay and inexperience. Someone without experience is going to enter at the bottom of the tier and make minimum or close to minimum wage. Making matters worse, high school grads will likely be competing with college grads even for low-skilled job openings, and are at an immediate disadvantage. There are a lot of headlines about ‘more job openings than workers to fill them’ or companies being unable to find enough workers, but companies have also become choosier. It’s not like they are unable to find workers because they are creating too many jobs, but rather because not enough applicants meet the lofty requirements, as discussed in this excellent article Employers Can’t Find Workers, So They’re Making It Harder to Get a Job.