• This newsletter follows a 3 Pillars framework each month: grow income, reduce expenses, and save more.  

• Week 4 is up for grabs topic-wise so I usually answer questions submitted.

• Send your questions to me at [email protected] and I’m happy to do for you.

This week’s question: What is the biggest gap in financial education?

It’s no secret our educational system doesn’t do a great job of preparing people for the financial realities of life after school.

With loan forgiveness in the headlines again, I believe there is something all political parties should be able to agree upon: We can better prepare high school students for their own future and how to finance the education required to get there with a simple projection or calculator.

The Certified Financial Planner Board of Standards has had a guideline for decades regarding the amount of debt one should take on as a consumer, the 28/36 rule.

“Establish a 28/36 debt to income ratio: In other words, try to spend no more than 28 percent of your monthly income on housing expenses and no more than an additional eight percent on debt, so that total debt service does not exceed 36 percent of your monthly income.”

Meanwhile we throw our kids to the wolves with no instruction on what is a reasonable amount of debt to take on when financing their post-high school education.

With a simple cost benefit analysis, high school students could get an idea as to whether their debt being taken on to finance an post-secondary education is responsible. This could apply to trade school, community college, the various for-profit schools that provide professional certifications, etc.

See below as one example:

• This student borrowed $100,000 for their education

• Starting job pays $60,000

• Using the above mentioned 28/36 rule, they really want to limit all consumer debt to $1,800 per month

• A 10 year payoff schedule should be the default. If it takes you more than 10 years to payoff a financed education, there’s an imbalance.

• Assuming a 10 year payoff schedule below and a 6% interest rate, this graduate is already occupying 23% of their monthly income to repay this loan before factoring in any home, auto, or consumer debt.

• This does not factor in pay increases, promotions, etc that could help accelerate the loan repayment but from this simple example alone, this high school student would know this amount of debt is likely not setting up them up for success.

• If schools had a generally agreed upon basic framework to complete a cost benefit analysis that was taught to all students, could that setup our graduates for a strong start in life vs. the current student loan debt crisis that has affected so many?