How My Student Won $2,915,374 in One Month!

The Hidden Opportunity Cost of Student Loans, Scholarships and Financial Illiteracy

In May my student won over $2,915,374 dollars!! Sounds unbelievable right? Well if you look at it the way she has learned to look at scholarships, students debt, investing and opportunity cost, this statement is very true for her. Here’s what happened.

This past April, all of the students at Jackie’s school received a school e-blast and at the bottom was an announcement stating, “Scholarships available. Please visit your counselor to be nominated.”

This was the first strategic lesson and a brilliant move on behalf of the scholarship committee. Had the committee announced, “We have a $40,000 scholarship available! Go see your counselor to be nominated!” there would have been an influx of students bordering the hallways around the front offices to sign up. But by omitting the scholarship amount, only those who took initiative for deep reasons actually went to inquire about the opportunity.

Brilliant.

“One main thing Alumni360 taught me was how to take initiative,” commented my former Alumni360 student, Monica. ”If you have an idea or see an opportunity that fits you, just go for it. Too many of us sit on the sidelines holding down the benches due to fear or apathy.”

So true.

My student, Jackie was well primed to jump up off the sideline bench and into this opportunity. Being from a family of low wealth, Jackie knew she needed assistance with college costs. She also knew, because of Alumni360, opportunities just don’t fall in your lap.

“Ms. Letford,” she told me, “I just kept hearing your voice telling me to go for as many scholarships as possible. What have I got to lose?” So she went all in.

After an interview, two short essays and a basic application, Jackie received the phone call that literally changed the trajectory her life.

Here’s why.

I looked at all of my Alumni360 students financial aid packages for 2019. They all had zero Expected Family Contribution because of their low family income but they also had about $10,000 in loans per year. Why they call it ‘aid’ when they are still graduating with over $40,000 of loans is beyond me.

Jackie is on the road to graduate debt free because of that random e-blast that landed in her inbox. Jackie would have graduated with $40,000 worth of loans and by the time she was 32, she would have paid back over $48,000 to a bank or US government. This heavy debt of $400 a month for ten years would have certainly put a damper on her ability to save, invest and place down payment for a house.

Just recently a friend of mine, who is a brilliant public servant said, “Genein, I graduated with $90,000 worth of debt and have been paying on it for five years. Today it’s now at $120,000. I have to pay at least $700 a month just for the interest alone.” My heart broke once I heard this and went back to my students to work even harder so they don’t find themselves in this situation.

Jackie winning $40,000 is a HUGE blessing but the hidden game changer is the strategic investment component to the story.

Jackie has been learning about financial literacy and investing from Alumni360 for a few years and just became the latest recipient of our Seed for Change program. This program helps young employed students understand the importance of investing early, due to compounding interest, and jumpstarts their investments with a $100 seed from a donor. This donation says, “I believe so much that you should start your investment career early that I will donate $100 to help you begin your journey!” We also help them set up their account with a low fee investment company of their choice. Jackie chose Ellevest, an investment company that understands the investment needs of women.

But here’s the kicker. Since Jackie attended our Alumni360 investment bootcamp and now understands the effect of compounding interest, her goal is to employ a ‘Wealth Tax’ on her professional income’, – a mandatory payment to herself.

“I want to pretend I have a student loan payment when I graduate, but instead of giving it to the bank, I’ll be giving it to myself by putting it in my investments,” she shared with the younger Alumni360 students who are hoping to be in her situation soon.

This is a game changer.

If Jackie stays diligent and disciplined to invest her ‘student loan payment’ from age 22 to 32 years of age, instead of giving the bank $48,000, she will have over $75,000 in her account if it performs at a 8% rate of return. If the market does 10%, she would have over $84,000 in her account by 32 years old. But that doesn’t make her a millionaire… just yet.

If she left that money in her account at age 32, without adding anything else to it, by the time she is 65 it will have grown to $1,707,311 at 8% rate of return and a whopping $2,915,374 at 10% return.

Now Jackie is an intelligent young entrepreneur who is majoring in business, so I know she will most likely hit that millionaire mark well before age 65, but you get my point.

Most people don’t understand that time is the most critical factor for allowing your investments to grow therefore when we delay starting our investments until our 30’s or 40’s, it hurts us more than we realize. Factor in the dismal stats for people of color and women investment participation is even lower and begins later in life.

Student loans are a threat to our students being able to break cycles of low family wealth, especially in our black and brown communities. With Alumni360, we are working hard to make sure our students graduate with $5000 or less in loans. Our goal is ZERO of course! We are also making sure our students have access to financial literacy, entrepreneurship training, as well as know how to tell their powerful stories to win scholarships.

This is how we break the strongholds of systemic poverty.

MISMATCH BETWEEN CASH FLOW AND TIME HORIZON

Now Morgon Housel from the Collaborative Fund made some great points about youth and investing in his ‘Laws of Investing’ article.

“Career realities create a mismatch between cash flows and time horizon, antagonizing the power of compounding.

Well-meaning financial advisors will speak to 23-year-olds and say, “You’re so lucky, you have 45 years before retirement. Compounding can grow your money 20-fold during that time.” The confused and realistic 23-year-old will reply, “That’s neat, I make $16 an hour and have $58,000 in student loans.” By the time that student’s career has taken off and they have substantial cash flow to invest they’re usually in their 40s or 50s, when the power of compounding has diminished by perhaps 90%, tempting them to take more risk to meet their goals.

Investing is the equivalent of the NFL only being allowed to recruit players in their 50s – well past their prime, with performance far short of what their younger selves could achieve. Some people’s earnings power will peak when they’re young. But when the world is that good to you when you’re young you’re bound to assume your paychecks will continue indefinitely and fail to take advantage of your blessed time horizon.”

The gap between what’s possible on a spreadsheet and practical in the real world will always be vast unless we become more strategic with our youth earlier in life.

BEING STRATEGIC ABOUT BUILDING WEALTH

Since most of our youth has to combat the issue of student loans and an unknown workforce, being strategic with building wealth earlier in life is key. That’s why I started the Seed The Change program with my students. The commitment is minimal but the outcome will be life changing. The professional mentor donates $100 seed and reviews the ‘Basics of Investing’ packet with their mentee. The employed student commits to opening a ROTH IRA with a low fee investment firm and will contribute at least $25 a month. They also pledge to not withdraw the funds until retirement. The professional investor and student will connect at the end of every financial quarter to review their investments and have a dialogue about the market. The minimal commitment is a year that consists of four investor support meetings.

This may not be a perfect solution (young adults have financial struggles ALL the time) but at least it’s a start. The student can pause their investments when needed and it gives them a chance to be more responsible about those types of decisions. To hit $1.7 million by 65, you would need to save $486.97 per month starting at age 25, assuming an 8% rate of return, CNBC Make It previously reported. But if you waited a few years and started saving at 30, you’d need to contribute $741.10 per month to reach the same goal with an 8% rate of return. Starting early eases the savings burden significantly.

THE COST OF INACTION

Not only in finance is the price of action vs inaction critical but also in other areas of life. What is it costing you, financially, emotionally, and physically, to postpone action? Don’t only evaluate the potential downside of an action. It is equally important to measure the atrocious cost of inaction. If you don’t pursue those things that excite you, where will you be in one year, five years, and 10 years?

So, like my student Jackie has showed us, it pays off to take action and just go for it! What have you got to lose? Tell your story, submit your applications, and be observant of opportunities that could possibly change the trajectory your life.