By William A. Foster, IV
“There are two types of (people) in this world; there are those with guns and the ones with butter. The guns; that’s the real estate, the stocks and bonds, artwork that appreciates with value. The “butta”; cars, clothes, jewelry that don’t mean shit after you buy it.” – Melvin (Baby Boy)
When I arrived at my HBCU many years ago, two decades ago now, it was true before, it was true then, and it is true now – you know on an HBCU campus when refund checks have been disbursed. New wardrobes show up and fashion shows commence across campus, “new” used cars show up with rims and sound systems, and in some cases trips to Jamaica for spring break are coordinated. A full range of African American consumerism is in full bloom. The problem of course is that majority of these refunds are part of a financial aid package that largely includes student loans. This means students are being handed thousands of dollars (with no financial aptitude) that will in their future life turn into tens of thousands of dollars of student loan debt to pay back. But Jamaica will be fun, right? Or in the words of the classic philosopher Riley Freeman (of the Boondocks) after blowing the food money their granddad left them “Now before you start hating, ask yourself – be honest, ain’t I clean though?”
The ripple effect is acute to put it kindly. HBCUs, although significantly cheaper, often find their students graduating with more student loan debt than their counterparts. A result of poor endowments, lack of family resources, and again, poor financial aptitude. Student loan debt, even more so than credit cards, maybe the easiest debt for a college student to obtain. It is also the cheapest unsecured debt that most of us will ever see or have access too in our lifetime – and there is the rub. There is good debt and bad debt. As simple as it can be put, good debt helps you acquire assets that generate income. Bad debt does not. Again, good debt, if used properly helps you acquire assets that can in turn pay off the debt and once paid off continue to pay you passive income. The best example of this I ever witnessed was a classmate of mine who had a part-time job while in school was using his refunds as down payments on rental properties buying one or two a year. By the time we graduated he owned 5-6 rental properties that were all cash flowing. Those rental properties will pay for the mortgages AND his student loans. Eventually leaving him with rental income and appreciation from the properties. Meaning when he takes that trip to Jamaica he could really afford it.
A few things to think about before we get into our tips. Upon graduation, do you expect for someone to give you $10,000 or more dollars? Upon graduation, how will you come up with the deposit for your first apartment? Upon graduation, will you have an emergency fund or savings of any sort? For most HBCU students, there is a resounding no to probably all of those questions, which is why refunds should be treated as close to an “inheritance” as most of us will ever see. If we are smart about it, this will give us the foundation to build transformative wealth.
TIP 1: Learn to say NO. Say no to yourself, to your friends, and for a lot of HBCU students – your family. The last part being the hardest for some. It is a poorly kept secret on a lot of HBCU campuses that a lot of students send portions of their refund checks home to help their families. Unfortunately, their families are not likely to be helping them pay their student loans after graduation. Without learning to say no you are likely to succumb to your own consumer desires, friends or classmates peer pressure, and families dependency. Just like when flying, put your mask on first. In other words, make sure you establish your financial foundation before overextending yourself to help others. Financial security and stability should be a paramount concern. If you are unsure what that means, always ask yourself this question as you build wealth – if something happened and you could never work again – how long would you be financially okay?
TIP 2: Call a financial advisor and open a brokerage account. There is a misconception that that financial advisers are for the wealthy. This is simply not true. They are for whoever is willing to use them and the earlier you acquire one the more likely you are to make a long-term plan for wealth creation. Remember, you building wealth is in their best interest. If you need help finding a financial advisor, do your homework. There are vultures out there like in any occupation, but there are quality people in the profession as well. This is one time where Google is indeed your friend. A great place to also go – your HBCU’s business school. Just to understand what this has the potential for in the short-term. Imagine your refund is $2,000 a year and we will use the prior five year returns of the S&P 500. The returns on the $2,000 invested each August over the past five years would be worth $14,020 today. Which means the student would have increased their assets by 40 percent with a student loan interest rate that has been under 5 percent for over a decade. There are however downside risk and that should be explained to you by the financial advisor. If they do not explain this, fire them immediately and find a new one.
TIP 3: The financial advisor can help you with this one as well, but it is a specific type of account. Opening a Roth IRA. It is another type of brokerage account, but the difference is you will not have access to the money until you reach the ripe retirement age of 65. The beauty of this account though is you will never pay taxes on the money earned in it. Retirement is often something that African American are ghastly unprepared for financially. If you contributed $2,000 a year to the account during your five years in college and graduated at 22 you would have $10,000 in your account. If invested in the market, which has a historical annual return of 12 percent, and you simply contributed $50 a month going forward for the next 43 years that would give you at the age of 65 over $2 million tax-free.
TIP 4: Open a CD ladder at your bank or credit union. Every year when you get your refund, go to your bank (preferably a Black Owned Bank) and open a certificate of deposit (CD). Your freshmen year get a four year CD, sophomore year get a three year CD, junior year a two year CD, and so on. Assuming you are getting a minimum of $2,000 in refunds per year and it takes you like many students these days five years to graduate, when you walk across the stage you will have $10,000 to start off in the world with. This will not have the same impact as the previous tip, but is more for those who are a bit more risk averse. While you may not increase your assets by 40 percent, there is also no chance of you losing any of the $10,000 either. If you are not familiar with CD ladders, call your bank, visit the library, Google, and of course as always – your HBCU’s business school.
TIP 5: Start a business. When I was in undergraduate, I wanted to open up a jazz club, but learned very quickly and harshly that nobody wants to lend to just a good idea. Banks, the SBA, and others expected you to have some skin in the captain also known as a down payment of capital. It is also unlikely that you will be able to call home and have family fund your amazing idea. Often times, your refund can serve as the seed capital for your business. Remember, Michael Dell founded Dell Computers in his dorm room. You do not need to be a business major to start a business. You need an idea. It certainly is prudent to visit your HBCU’s business school and ask for guidance on things like setting up the proper paperwork. While there, you may have recruit an accounting student as your CFO and a marketing major as your CMO. Some HBCUs actually house the region’s Small Business Center that is funded by the SBA and they have a lot of free resources at your disposal to help you get on your way.
TIP 6: Create a real estate partnership. Believe it or not, there is still a lot of valuable real estate that is available to be purchased in and around HBCUs. It also protects HBCU communities from gentrification that we have and are seeing around HBCUs like Howard, Texas Southern, Prairie View, and others. If you can find three other like-minded class mates who are all willing to contribute their refunds that would be $8,000 a year and $40,000 by the time of graduation which would give the group buying power of $200,000 worth of real estate. Be it a single-family, duplex, or other kind of rental property. Your refunds could be the start of a real estate empire that in turn would pay off all of you and your classmates student loans and build wealth over the years. Definitely do your homework on this one. Take a real estate class from a reputable place, speak with a local real estate investor who maybe open to mentoring, and of course see what resources your HBCU business school has on the topic.
In the end, whatever you choose to do with your refund, make sure it counts. Remember, this is still debt – whether it becomes good debt or bad debt is ultimately up to you. Getting more financially educated whether you receive a little refund, a big refund, or no refund is vitally important for all HBCU students and their futures.