Earning a degree from a community college is a challenging, yet strong long term investment. The difference in lifetime income for a college graduate versus having just a high school degree is in the hundreds of thousands of dollars. Having a degree also makes it easier to simply get an interview.
While having a long term view on education is easy to understand there are times when the long view can often defy what is assumed to be common knowledge. Consider a student’s personal savings; should it be used for emergencies or should one seek out a short term loan instead? The answer, somewhat surprisingly, depends on the discipline and foresight of the student.
Imagine a college student with $1000 in savings facing a $500 auto repair bill. That $1000, as a long term investment with a miserly 2.6% interest rate, is worth over $3,100 in 45 years. If $500 is removed from the savings account for the auto repair the future value is only $1,587. Since there is no pressure to pay the $500 back to savings the total long term loss is $2,087.
When many people hear the phrase, short term loan, they often get very defensive even though taking out a short term loan could keep the students savings intact. While it’s true that these loans are expensive, the amount is paltry compared to the long term loss of spending the savings. Payday loans, for example, will cost around $16 per $100 borrowed, or $80 for the $500 loan. Websites like Go AAGP offer secure online applications and a scam alert section. If a student takes out this kind of loan there will be a lot of pressure to pay it back on time. This same kind of pressure will not exist to replenish the savings account. In one sense, taking out the loan is a form of forced savings.
To avoid some of the stigma associated with short term loans it must be pointed out that banks also offer payday loans. In an effort to distance these loans from the payday lending industry, banks market them as direct deposit loans. These bank loans are usually half the price of a standard payday loan, but they require the borrower have direct deposit. Something most community college students do not have.
Another option for emergency cash is a collateral loan. If a college student has savings in a CD or dedicated savings account, there are banks that will loan money using the savings as collateral. Other valuable items such as jewelry, silver, art, coins and other items with a measurable value can be used to secure a loan. These are the sundry items that pawn shops are quick to use as collateral on a loan.
All Chicago community college students should be well aware of the terms and conditions of any loan. This includes the interest rate, when payments are required and the total term of the loan. All loans, including payday loans are often the means to a long term cycle of debt, but when used properly, a payday loan is a tool that can help offset financial emergencies.