By Mark Kantrowitz
Paying for college is too complicated. There are a lot of details and a lot of decisions.
Wouldn’t it be nice to have a bunch of simple rules for making the best financial decisions?
That’s the goal of a twisdom. A twisdom, or tweetable wisdom, is a concise insight or practical rule of thumb. Preferably, twisdoms should be written in longhand, instead of the “tweet speak” that substitutes cryptic abbreviations for plain language, such as “b4” for “before.”
The challenge of expressing advice in 140 or fewer characters forces you to distill the essence of an idea or insight. Every word counts.
For example, consider advice about reasonable debt. How much student loan debt can a borrower reasonably afford to repay?
Traditionally, the credit underwriting criteria used by lenders are often expressed in terms of debt-service-to-income ratios, such as limiting mortgage payments to no more than 28 percent of the borrower’s gross monthly income and all debt payments to no more than 43 percent of gross monthly income.
College financial aid professionals have historically used a similar approach when advising students about affordable debt. They frequently recommended that borrowers devote no more than 10 percent of monthly gross income to repaying student loans, with 15 percent as a stretch limit. For example, the U.S. Department of Education wrote in 1998 that, “In general it is believed that educational debt in excess of 10 percent of income will negatively affect a borrower’s ability to repay his or her student loan and to obtain other credit.”
But, debt-service-to-income ratios are ineffective rules of thumb, because they require computation to apply to a borrower’s personal situation. Even then, a limit on monthly loan payments does not easily translate into a limit on the amount of debt.
A much better approach involves a simple comparison, such as
Total student loan debt at graduation should be less than the borrower’s expected annual starting salary.
This rule of thumb is the equivalent of the rules concerning debt-service-to-income ratios for student loan debt, but much easier to use and to remember. It streamlines the calculations a prospective borrower might otherwise need to make, presenting people with a polished result. Just as you don’t need to know how a transmission works to drive a car, you don’t need to know the mathematical justification for a twisdom to use it. The immediacy of the twisdom makes it much more effective in influencing consumer behavior in a helpful manner.
The elegance of this twisdom also communicates other concepts. For example, this twisdom not only answers the question about affordable debt, but also conveys the idea that borrowers should keep debt in sync with income, a powerful concept.
Another twisdom expresses the need to limit education loan debt, criticizing the concept of good debt vs. bad debt:
Education debt may be good debt, because it is an investment in your future, but too much of a good thing can hurt you.
Other twisdoms distill empirical data into sometimes surprising facts:
If total student loan debt is less than your annual income, you’ll be able repay your student loans in ten years or less.College costs triple in the 17 years from birth to college enrollment.It is cheaper to save than to borrow.Every dollar you borrow will cost about two dollars by the time you repay the debt.Students who work 40 hours or more a week during the academic year are half as likely to graduate as students who work 12 hours or less a week.People who save for college and for retirement will have more money for retirement than people who save for retirement and borrow to pay for college.Students who drop out of college are four times more likely to default on their student loans than students who graduate from college.Save a fifth of your income for the last fifth of your life.College students who graduate with no debt are twice as likely to go on to graduate or professional school, as compared with students who graduate with some debt.
These twisdoms may seem “obvious” and “common knowledge” now – perhaps another sign of their effectiveness – but their development took a tortured path involving a lot of detailed mathematical analysis.