Michael Ellsberg’s fun look at why student loans and education don’t mix well

The Education of Millionaires is a great book by Michael Ellsberg.

He does a brilliant job of making the case for why we should look at funding our college education, and the college education of our children, using the principles of bootstrapping.

Here’s a great quote on that subject from his book.

“Hey, I’ve got an investment opportunity for you.

It’s going to require an investment of about $45,000 to $200,000 on your part over several years. Given your current finances, you’re going to need to borrow a large part of that amount, that is, invest on margin, but that’s OK, the rates are pretty low. (One thing you should know, though, is that if the investment goes under, you’re personally on the hook for that money, until you pay it down, for the rest of your life. There is no way to discharge the debt in bankruptcy, and your future wages and social security benefits could be garnished if you can’t pay.)

The business I would like you to invest in is, well, sort of in the exploratory/development phase. It doesn’t really know what business it’s in, to be frank, or what product it sells. In fact, it may not even know that for a few years. The chief executive in the business may have to move back in with her parents at some point during this time – before she figures out the business’s mission, revenue model, or core competency. (Oh, and by the way, the CEO is quite immature. She is often irresponsible and from time to time becomes distracted by side projects, like partying.)

The business you’re about to invest in has absolutely no knowledge or experience in sales or marketing. It doesn’t even really know how to keep its own books or balance a budget, and often runs up a lot of credit card debt. It’s not even sure it wants to be a business; the CEO may want to start a nonprofit, pursue a passion in acting, or go help orphans in Botswana. The chief executive has no business network or contacts to speak of, and in fact, has no experience whatsoever running a business.

Wanna invest?

Unfortunately, this is precisely the way many people in America go about investing in themselves today. It’s the opposite of bootstrapping. It’s high-expenditure, high-debt up front now, and revenue (if at all) much later.”

That last sentence is very important.

He describes the way people are investing in their educations as “high-expenditure, high-debt up front now, and revenue (if at all) much later”.

That is a very, very risky approach to getting your education. It is a big part of why 60% of people who take on student loans are harmed financially as a result.

I wrote more about Michael’s book (from a bootstrapping your business perspective) at Philip Campbell’s Blog.