HI 118 - Venture Alliance Takeaways and the Student Loan Debt Bubble

Welcome to the Heroic Investing Show. As first responders, we risk our lives every day. Our financial security is under attack. Our pensions are in a state of emergency. A single on duty incident can alter or erase our earning potential instantly and forever. We are the heroes of society. We are self reliant and we need to take care of our own financial future. The Heroic Investing show is our toolkit of business and investing tactics on our mission to financial freedom.

Hello and welcome to episode 118, episode 118 of the Heroic Investing show where we focus on challenges unique to members of the armed services. First responders, firefighters, police officers, EMTs, also veterans and retired members of those forces. But we also focus on those that are common to all investors. Individuals who are looking to get some passive income to replace their W2 job, perhaps to start a business or venture off on their own to become an entrepreneur, an investor and someone who has more flexibility with their time. Today's guest on the show is yours truly. I'm going to do just a bit of a monologue here today. It probably won't be extremely long episode, but I wanted to give you my takeaways from a couple of recent events. So I was in New York City with the Jason Hartman Venture Alliance Mastermind on this past weekend, Memorial Day weekend. And again everyone, happy Memorial Day and thanks for what you do to continue to put on the uniform for those of you doing so, those of us who have hung up the uniform and are off pursuing other things, and that might be golf, it might be our own personal businesses like myself. But regardless, thanks for continuing to do what you all do. When I was up in New York City here for the Venture Alliance Mastermind, you know, it was a pretty decent sized group this year. I was there with my good friend Pat Donahoe and of course Jason Hartman and many other close friends in that group. It was interesting that we were in New York City and that I came across an article that I wanted to dive into a little bit and it has to do with what, where money is flowing around the country and yet another unintended consequence, something that's building that's very, very similar to what we saw with the real estate bubble that led up to 2007, 2008, and then the economic crisis that was felt, frankly across the world as a result of having pumped a bunch of money into that bubble of real estate. And so the current bubble, and this is no surprise to everyone, probably is the student loan bubble. You know, I would say there's, there's a bubble and a few different places. You know, Peter Schiff would say that there's just an overall credit bubble, and I think he's probably right. But there's likely, I think would be a good argument that there's not a bubble right now in real estate, at least not a significant one or a substantial standout one. But there is certainly a bubble in some other areas. Like there's an auto loan bubble, a car loan bubble, and then there is certainly a student loan bubble. Before I get to that, though, I wanted to talk about how the national bird, the crane, C R A N E. Of course, I'm just being funny. The ones that are used to put up buildings has migrated into New York City. Without question. I'm sure it's. I mean, I know it's in major cities across the country and across the globe. Seems that that national bird, the metal crane that indicates lots and lots of a building in major cities has historically been an indication of a top of a market of a time where there's lots and lots of money sloshing around and looking for a home. And so as part of the Venture Alliance Mastermind, we did a tour, riverboat, dinner cruise, and went up the Hudson and turned and then went around by the Statue of Liberty and went up the east river back down to see the Statue of Liberty at sunset. I'm telling you, it was an amazing, amazing event. It was beautiful. But what I kept seeing, and I was sitting next to Patrick Donahoe, an awesome economist and individual, but gets me into deep discussions that I learned so much about. We were talking and studying on our iPhones, as you can do nowadays by Googling and doing research. We were trying to figure out the amount of money that it cost to build these new skyscrapers, for example. And I really didn't have a good feel for the scale, but one World Trade center or the Freedom Tower was pretty close to $4 billion. It was 3.8 billion. That one probably does not surprise you too much. What was surprising is that the, you know, relatively short comp to it, luxury condominium buildings that have been going up and there's, you know, I would say there's 20 or 30 of them that have replaced old warehouses and things like that on the waterfront there in New York City and surprisingly, are pushing down rental prices. We had my friends Sean and Tanya that we're visiting but that live in New York City, they were saying that for the first time in a while, their rents have kind of stabilized and there's a lot of, you know, demand and you're starting to get other features like amenities and, you know, move in bonuses and things like that they haven't seen in New York City in quite a while. But you know, these new residential buildings, skyscrapers, some of them are mixed use, have certainly increased options in New York City and have kind of reduced down the price wars and things. But even those buildings, you know, when we were researching them, they were three to three and a half billion dollars for each one of these buildings. And so you think about, you know, what drives the economy in New York City and how is it reasonable that buildings of that size, that scale, that expense can continue to be going up in that city. And it's really the financial industry, right? So it's, you know, there's other markets that fall out below that. There's, you know, the financial industry creates growth in, you know, of course, the construction industry and the services industry for all the people that, to serve the popular, you know, the people who are building these and that are running the service, the financial industry. But there's just an incredible amount of money sloshing around the US economy right now looking for a home. And one of those homes that it has been going to is new construction. Clearly, I mean, it's probably very difficult to try to put to work the level of money that Blackstone and other major hedge funds need to put to work and all the foreign investment and stuff that coming into the US and so those need to go into very, very large projects that have a lot of price tag behind them. Right. So building billion dollar buildings, that was hard to say. Constructing billion dollar buildings, maybe that's easier, is one way in which you can put a tremendous amount of money that has been created out of credit lending from the Federal Reserve over the last decade and other places get that money put to work. And so that's certainly one way they're spending it. It is building very large, expensive buildings in New York City and other places. But what I really wanted to talk about was the student loan debt crisis. What brought me onto this topic was reading a newspaper, the Wall Street Journal. It was the weekend edition. I don't know if any of you had seen it, but on the front page and then in a later section, almost two pages dedicated to a story about the $1 million student loan debt. And the quote under it from the gentleman who was interviewed was, should I be doing this? And this was fascinating to me. And it was also an indication of the bubble, the credit bubble or the student loan bubble that we saw develop in real estate. So the subtitle there is that UT orthodontist and his name is Mike Maru. So Utah orthodontist and 100 other people in the United States now carry seven figure student loan debt, meaning that their student loan debt was, is over a million. They've accrued over a million dollars of student loan debt. So when you initially think about that, you know, I was trying to do the math and I thought, my gosh, what Was that? Like $200,000 a year for graduate school? Maybe he had a little bit of undergraduate, you know, loan debt still remaining and then he went into graduate school. But still, no matter how you slight that, it would have to be, you know, 150 to $200,000 a year and it probably was over 100,000. But the part that was not obvious to me that I hadn't been thinking about too much as I'm leading up to, you know, my kids starting to consider whether they're going to go to college or not. Both of them, you know, now in high school or soon to be in high school and one of them graduating soon. I was thinking on the order of, you know, 40 to $50,000 for student loans per year could be, know, the upper end. And I realized that, you know, if you send them to Harvard or some other super expensive places or medical school, maybe it would top out above that. But I really have to admit I didn't think that, you know, $200,000 was in the realm of reasonable annual costs to build up from student loans. But one of the things that I came to appreciate that I had not before appreciated is what you can finance in your student loan. So you're able to put your housing, your living expenses, food, you know, groceries, probably your automobile to, you know, to take you back and forth to school. So there's a lot of stuff that can get wrapped up into student loans now. And I just flat did not recognize that we had distorted things to the level where we were. People are able to actually finance thousands of dollars every month for living expenses in addition to books and tuition and all and all of that. So that's how this gentleman was able to, you know, with a family, a growing family in his 30s, build, amass such a large amount of debt. So one of the things that I wanted to dig into here was simply, you know, kind of the numbers. Before we get there though, a couple other quick points. So I've noticed a lot of clients, I've been talking with several of my clients and as many of you know, I'm in the personal finance industry. I am introducing individuals to ways in which they, you know, alternatives to saving, growing their money and funding our retirement. Predominantly it is traditional, more of a traditional approach. Not the more typical stocks, bonds, mutual fund approach that you hear of today, but a more traditional move back to traditional finance, personal finance that guys like Carnegie talked about that was around in the 1800s and that is insurance based financial planning. So it's a concept of protecting, storing, growing and protecting meaning from being confiscated or lost, but also from loss through the slow and sometimes fast drip of taxes. So a lot of my clients that I talk with comment that they have large student loans. I mean, it's not uncommon to hear 100, 200, $250,000 student loans, but that they're in deferment and for years and years. And the alarming trend that I've been recognizing with my clients is that many of them are in school for seemingly unrelated things in college. And I asked what's the thought on going to school for that? And when you dig down deep enough, one of the primary reason for being in school is because if you remain in college and continue to have mounting debts where you're continuing to pay for education, you were able to put off making payments. And I've had a couple of clients actually comment to me something that I was getting a little bit concerned about, which is that they are in school solely so they don't have to make their payments because they can't afford to make the payments. So imagine that like you have some crazy lending organization that's, you know, they're crazy only because they're backed by the US Government. So, you know, they have kind of a guarantee that even if this loan goes bad that they'll still be made whole. They're willing to loan to someone for no better reason. You know, the person is, you know, the business model is I would like to borrow this money so that I don't have to repay my other loans because in fact I can't afford to pay those other loans. And in our infinite wisdom here in the United States, we chose to make student loan the one thing that you cannot default on. So why would you make a law that you're unable to default on a loan unless you knew that everyone was going to go do that? Right? So it's just another indicator that, you know, the people who are making these loans, the organizations making these loans know that they're a bad business deal. So much to the point where they said if we make these deals, you have to protect sus government, meaning that you can't let these people walk away from these really bad deals that they're making, you know, bad financial deals. So back to a little bit closer, back to the story here. So the second point on that and getting back to the story, it says that Mike Maroo, an orthodontist who had gone to school in California for his medical program, is currently paying $1,500. So almost 1600. 1600amonth. But that's not enough to cover the interest. And I think that's probably obvious for you on a million dollar loan, even if it was amortized out 30 years for like a home mortgage, you know, your loan amount would be somewhere around $5000 a month. And so he's only paying 1500. And since it's not enough to cover it, they're allowing him to do that. But what it's doing is it's causing the loan balance to go up every month because he's not paying enough of it. Right. He's just kind of making a small portion of it. So people see that happen with credit cards. And I can remember back when I first, the moment that I realized that we were in big, big trouble before 2008 and 9, this was probably, I mean, I wasn't really early the game, it was probably late 2007 and I was reading an article again in the Wall Street Journal and it's one of the few times, you know, in the military as an active, active officer and that you just don't have a lot of time to read. At least I didn't, I didn't have a good routine to do that. And so I happened to be in a school, a one week program in my command training pipeline. And I had an opportunity. I was waiting on this lecture to start in a big lecture hall. I remember exactly where I was sitting and I have the Wall Street Journal open, drinking my coffee and I read that the most popular loans, a majority of loans started in that month were reverse amortized alone. And at the time I didn't even know what that meant. But when I went and studied it, I realized the same thing that we just talked about here with student loans and specifically people, because the housing prices, the home prices had risen so much there in 2007 and 2008, people could not afford to make the monthly payments. So we had played with every lever at that point that we could. We had gotten a bunch of adjustable rate mortgages and reduced the rate as far as anyone market could bear. They had extended out the mortgages out to 40 years plus. They had gone to interest only loans, so you didn't have to pay the principal at all. We'd reduced the down payment amounts, done everything that could possibly be done to extend that buying spree in real estate and to put it, you know, they done liar loans so you don't actually have to qualify. Right. So everyone remembers these things. But the last thing was that, hey, listen, we've done everything we can and people can't afford the monthly payments and so they just artificially lowered the monthly payment. So somebody who should have been paying a $3,000 principal and interest payment, the banks just simply said, listen, we'll let them pay 1000 instead of 3000. We'll just add the other 2000 to the loan balance and we'll just keep increasing the loan balance as you go along. So now that's what's happening with student loans because people cannot afford the student loans. Okay, so a little bit here on the scope or the scale of this problem in America and then we'll kind of get into a few of the numbers to talk about, you know, what Mike Maru has decided to do and what likely we'll see a lot of other people do. So, okay, the scope, you know, There are about 50 million people with student loan debt, 50 million people in America with student loan debts. And about 6% or two and a half million of those, two and a half million people have loans that are, you know, increasing and that are having to start to look at these reverse amortized loans or the paying less than they can actually fund. And so they're, you know, the average buyer, the average investor only has about $17,000 in loans, but there's about two and a half million that are over 100,000 that are starting to look at this kind of reverse amortized process. And the article goes on to say something else that's fairly sobering, that more than a third of the borrowers from one of the government's main grad school lending programs annotates that more than a third have gone into some form of federal loan forgiveness program. So I know there's several of those, but the most popular that came out a couple of years ago under the Obama administration was one called wage garnishment, or the concept was that you would make payments from your income that could not exceed one third of your monthly income, as I remember it, but you would make those payments for 20 years and then all would be forgiven. And that's something similar to what Mike Maru had gone into here with, has started here with his program. Okay, so digging a little bit more into Mike Maroo's specific situation and one of the, you know, with the program that he's in and what they use the money for. So he, as I mentioned, was in college in California, and the amount that he was paying was $91,000 a semester, excuse me, a year. So USC program that he was in, $91,000. And when he added in living expenses, their rent, food, clothing, or not clothing, but their food and other expenses, he was racking up $137,000 of living expenses. And of course, the interest that went with that, initially it was at 4.75 and, and then went up over 6%. So this program he's in called Grad plus, was created by Congress in 2005. And its intent was, after removing all of the loan limits, was to allow grad students to borrow for expenses like rent and other living costs to allow them to focus more on school and so that they did not have to borrow from private banks. So again, you know, when you think about the Federal Reserve printing money and we don't have a buyer for our money to an extent, by doing things like removing limits and allowing students to borrow for whatever they wanted associated with college, that creates a buyer for, you know, the new money that's being created from the Federal Reserve. So I don't know that it's a substantial one. It's not like foreign governments buying the money, but it is to an extent, creating a source, a use for the funds. So after finishing his program, of course, Mike got into a great practice where he's, you know, earning 230 or so thousand a year and they purchased a home of 400,000 that's got, you know, panoramic views of the mountains. He drives a used Tesla and they've taken a couple of vacations. None of this am I saying is necessarily inappropriate for them. But without entering the government forgiveness program, and specifically what he's agreed to on that program is to make monthly payments of 10% of his discretionary income. And they've got a calculation for that. And then after 25 years, his remaining debt is forgiveness. Essentially it's being covered by taxpayers, right. To pay off the commitments to the original lenders. His interest rate is 7.25 and his balance has been growing about 148,000 a year. So why is that happening? Well, because his unlimited, or if he were not in that program, his payment, required payment would be $10,500 per month. And his actual income from his job is, you know, after expenses is 13,000amonth. So clearly it would take up or after taxes is what I meant to say. So it would take up almost all of the family's income, even with, you know, a large successful practice income that he has. But now we're getting to the catch. And I'll stop with all the numbers here in a moment. So remember, he's got over a million dollars right now of debts. He's in this program where he'll make payments of 10% of his income, discretionary income for the next 25 years. And assuming he makes payments at that level, his debt will continue to increase because again, he's doing this kind of reversed amortized, minimal payment. And at the end his debt will have grown from 1 million up to $2 million. And at that point that larger 2 million dollar debt will be forgiven and you know, handed off to taxpayers to make that whole. Really what we'll do is we'll add it to the national debt and likely no one will pay that. But here's the catch. And this is the part that, you know, debt forgiveness really does not catch. And this gets people who have had these debts really caught up in indentured servitude for quite a while. And likely he will have to go through an additional forgiveness program of some sort to get rid of this. And that is that when he is forgiven the debt of $2 million after 25 years of making payments. So now, you know, he's going to be roughly 60. He will have a tax bill on a forgiven 2 million dollar debt that is on the order of $700,000. So when you're forgiven debt, it's looked at as a gift to you from the taxpayers or from the government of $2 million to settle your debts. And so that his tax on $2 million in today's tax world would be, you know, the equivalent of making that $2 million that year all in one year. And that's a $700,000 set of additional taxes that he'd have to pay that year. Likely the gentleman's not going to have $700,000. And so he'll have to then, you know, kind of snowball waterfall that into some other type of debt forgiveness or pay down plan that will take another decade or so. So now he's in his early 70s and starting to think about the concept of saving for a retirement that quite frankly is not going to come. So that's just the impact of one concept or one aspect. A student loan, a poor decision made on the path to student loans that can change your life, you know, for the rest of your life you can make some decisions that will result in even with one of the best high paying jobs in America, result in you not being able to pay off your debts and start looking for a program to save for retirement until you're at the retirement age. And I have so many clients coming to me today with this situation. You know, we have 100 plus thousand in debts. We've put 10,000 or 20,000 into our 401k. That's not even sufficient to pay off the debts to start saving in the positive realm for retirement. And they're within 10 years of retirement. There's not an easy solution to that. Those are individuals that will be working for many, many years beyond what, you know, people think today are going to be a normal retirement. So not intended to be a pitch about what we do at Paradigm Life or about, you know, my approach or even a political statement. It is just a warning that, as you know, those of you that are my age and have kids that are approaching college or have already started to make those decision, please be very careful and run the math and think about what the unintended consequences or what the long term consequences are. And I'd love to, you know, help you out, you know, use some of my calculators and some of my experience of what I've learned with the college options out there. I am not against the US Education system. I'm certainly not against being becoming educated. I am against saddling America's youth with an inability to make decisions like I want to, you know, quit my W2 job and go start my own business because you lose those opportunities when you get into programs like government forgiveness where you're tied to making that W2 wage garnished income because you made some poor decisions going to college. So. All right, Gary's office soapbox. I hope I added some value with this little Bit different podcast this round and look forward to hearing from Jason on the next episode and then some great, great episodes that I've recorded with some patriots out there that you will soon hear from in the coming weeks. Thanks so much and have a wonderful week.

Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out the show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional, and we also very much appreciate you reviewing the show. Please go to itunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.