As a freshman in college I was faced with a dilemma. How do I finance my education without using interest-bearing debt? I wanted to avoid using debt for two reasons:
- As a practicing Muslim, I wanted to adhere to Islam’s strict prohibition on dealing with interest.
- I wasn’t sure how much debt it was going to take to graduate. Consequently, I couldn’t tell if I would be able to afford my interest payments when they became due.
So I went where any college student goes when they need money: My parents.
My parents proposed a financing method that allowed me to pay my tuition, adhere to my religious convictions, and guaranteed I would be able to afford my payments when they became due.
For every $X I needed , I would commit Y% of my income for 5 years after I graduated.
So basically, every Semester, when it came time to pay my tuition, the percentage of my income I would be committed to sharing with my parents increased by:
(financed amount/$X) * Y%.
So if they financed me with $10,000 and our agreement was for me to commit 0.5% of my income for 5 years in return for every $5,000 I received, the percentage of my income which I am committed to sharing with my parents would be:
($10,000 / $5,000) * 0.5% = 1%
This arrangement gave me a number of advantages over my debt-using peers:
For starters, I was virtually guaranteed to be able to afford my payments. If I was earning $100,000 after I graduated, I would owe 1% of that annually i.e. $1,000. Similarly, If I was earning $50,000 after I graduated, I would still only owe 1% of that annually i.e. $500. So my payments were designed to increase and decrease according to my ability to pay. This dynamic is the opposite of what I would have gotten if I used debt. With debt, when you earn less, your payments increase as a percentage of your total income. On the other hand when earn more, your debt payments decrease as a percentage of what you earn. No wonder the poor keep getting poorer while the rich keep getting richer!
Additionally, my arrangement with my parents helped ensure I was making a sensible choice of major. I ended up getting degrees in finance and computer engineering in case you are wondering. If I had decided to major in Music, my expected income would have decreased substantially and the percentage of my income I would have been asked to commit would have increased accordingly. Those using debt to finance their education don’t have the benefit of this added insight when choosing majors.
Finally, I had the luxury of taking my time and choosing the job I really wanted after I graduated. I know graduates who were under so much pressure to start making their student loan payments, they accepted the first job they were offered regardless of whether or not it fit their career objectives. For many, this ends up putting them on a career trajectory they don’t want.
I should mention here that my agreement with my parents stipulated that my payments would only count if I was gainfully employed full-time . Additionally, the percentage of my income which I ultimately ended up committing was less than %10 of my total income, so I remained motivated to work because I needed the 90%+ I was keeping. Not only that, I was always motivated to maximize the 10% I was not keeping because that’s the only way to maximize my remaining 90%.
So if you’re looking for a way to finance your education without using debt, consider finding someone you trust and selling them a portion of your biggest asset i.e. your ability to generate income. Some things to consider before making such an arrangement are:
- Make sure you’re comfortable disclosing your income to this person.
- Pick someone who can help advance your career. If someone is sharing in your income, they will be incentivized to see you do as well as you possibly can. So if this person happens to have contacts or experience in the field you ultimately want to enter, this can prove even more valuable than the financing itself.
- Make it absolutely clear in your financing agreement that the financier has zero authority to make decisions for you. They can offer their help if you ask for it, but they have no say in where you ultimately choose to work for example. Remember, you’re entering into a partnership with your financier, not indentured servitude.
- Don’t commit a large percentage of your income. Make sure you are always motivated to maximize your portion of your income. It’s only fair for the both of you.