The Power of TIME v. PERFORMANCE

One of the key freedoms in the U.S. is the freedom of choice. Freedom to choose what to study, what schools to go to, what career to pursue. The data demonstrates that as your education level increases so does your earning potential. That increase in earning potential comes with a corresponding increase in tuition, and the multitude of students pursuing higher education in order to increase earning potential has resulted in the student loan crisis. The irony is that, while higher education does a wonderful job of convincing prospective students to cut larger tuition checks or take out loans to fund the bills, it does an abysmal job educating students on how to monetize their education in order to repay the debt. 

The student loan crisis is well documented. There are over 44 million people in this country that owe student debt, and the average debt as of 2018 was $38,390. The average salary of a college graduate in 2018 was $50,390, yielding an after-tax net of approximately $39,000. To service the debt based on a 10-year term at an interest rate of 4.79%, this recent graduate would have to pay $4,839 annually, or 12.4% of their net income. These payments would continue for a decade and are based solely on national undergraduate averages. Add in grad school, and the numbers grow, and interest rates increase.

While there are many career choices in this country, how you get compensated can boiled down to two categories:

1. Compensated for your TIME
2. Compensated for your PERFORMANCE

The majority of career opportunities compensate people based on TIME, not PERFORMANCE. There are multiple reasons. For one, it is more cost-effective, and aligns with the modern view that human beings are a disposable resource that can be replaced, rather than an investment to be cultivated. When compensated for time, however, there is no opportunity to accelerate the return on the educational investment by paying off the student loan debt in fewer years. The inability to accelerate the paydown effects every aspect of financial life, and I’ve heard the stories time and time again and they all have a similar narrative, yet how they end is based upon the choices that the people in them make.  

I know of a gentleman who graduated from what most would consider an accredited Tier 1 undergraduate school with a degree in chemistry. The education was funded through student loans, and the balance was about double the national average. By their early 30s, they had spent their career in the science field, and had been compensated based upon TIME. Although he was well paid, after over ten years he still had considerable debt remaining. Every single financial choice he and his growing family made was governed by the remaining debt. Where they lived, how much and whether they could save, what they drove, the clothes they bought, and the vacations they took (or didn’t take) were all dictated by the large percentage of income that was consumed by debt. And, since he was compensated based on TIME, there were few opportunities to dramatically earn compensation above and beyond base comp to accelerate the pay down of debt.

In the 10th year of their career this gentleman made a choice. A choice to make a transformative change in not only the nature of the career but in how he was compensated. I know, because my company hired him and went through the process of investing in him through training and learning. Our comp plan for the role he accepted has a base salary, but also aggressive incentive comp based upon performance. The switch was difficult, often uncomfortable, and required learning an entirely new industry. The result was that in his first eleven months he was able to pay off 100% of his student loan balance. Think about that for a second. . .

Ten years of working in a situation compensated for TIME created significantly less paydown than one year working in a situation compensated for PERFORMANCE.

Now free of the burdens of the debt, this gentleman now has meaningfully more disposable income, his credit is no longer burdened by debt, and his ability to create savings is a reality. A transformative change for him and his family. 

Choose wisely, your financial future is most certainly at stake.