In just the last week, two readers emailed in with similar situations. They are beginning to set up their debt snowball plan, and both have large student loans (large, as in excess of $50,000, more than half of their annual salaries).  Fortunately, both readers took advantage of consolidation opportunities and have locked in very low rates on their student loans.  Still, they are concerned about owing so much money on school loans in addition to other smaller debts.

We basically subscribe to the Dave Ramsey “baby steps” method of managing our finances, though we’ve tweaked his plan a bit over time to fit out needs.  According to Ramsey, things like large, second mortgages should go to Baby Step 6, “Pay Off Home Early,” which comes after paying off other debts, setting up an emergency fund, and funding retirement and college savings.  I believe this is also a good spot to move large student loan debts.

Both readers indicated it would take “years” to pay off their student loans.  If they could pay off the student loan debt, and all other debts within 12-18 months I might offer different advice, telling them to stick it out to become debt free before jumping on the remaining baby steps.  However, putting other goals on hold for years could be detrimental to their financial health, particularly the missed opportunity of compounding growth for things like retirement and college savings.

My advice is to continue to pay minimum payments on student loan debt until the following three things are in place:

• All other non-mortgage debts have been paid.
• A solid emergency fund of six months of living expenses is funded.
• Contributions are being made to retirement and college savings accounts, if applicable.

At that point, I would continue to pay my mortgage payment, and begin tossing every additional penny I could scrape together towards repaying the student loan.  When it is gone, use that same intensity to pay off your mortgage early.  The entire process may take ten or fifteen years, but when you reach that point you can begin to build some serious wealth.

Please share your thoughts in the comments section, in the spirit of helping out these two fellow readers. In other words, feel free to disagree with me!

Photo courtesy of .craig

We have all read stories of shocking things people have done to get out of debt.  However, a recent US Weekly story takes things to a new level.  According to the story (via Fox News), the 22 year-old Sacramento State graduate has agreed to give up her virginity in exchange for repayment of her student loan debt.  Some Nevada house of ill-repute has agreed to host the “event.”  Disgusting.

Where to Begin

There are several sides to this story that I find particularly troublesome.  I won’t get into the morality or immorality of prostitution, but I will say that this is a perfect example of the biblical reference, “The borrower is slave to the lender.”  This girl must be feeling completely hopeless to agree to sell her body to release her from the bondage of student loan debt.  There are certainly many other reputable alternatives to debt repayment.

• Charity for Debt.  Many programs are cropping up that allow graduates to volunteer their time to a cause sponsored by someone willing to repay a portion of their student loan debt.  This is a fascinating concept, and one that I hope catches on.  If I had enough money sitting around to pay off this young lady’s student loan debt, I would offer it to her through the Charity for Debt program.  She could volunteer her time to a worthy cause, avoid turning to the world’s oldest profession, and I would receive a tax deduction.  Everybody wins.

• Get a job.  I know, how old-fashioned.  After only two years of college I recognized student loans were not the way to go.  I got a job and decided to work my way through the remainder of school, and through the student loans I had already accumulated.  Try to find a company that offers tuition reimbursement if you are still pursuing a degree.  If you are already finished with school, but still paying for it, hold your lifestyle in check those first few years and throw everything you can at repaying those loans.

• Seek help from a family member.  Often times, extended family members may be willing to help shoulder the costs of college.  Services like Freshman Fund allows family and friends to contribute to a student’s college savings plan by offering a single point of contact online where family can make donations.  Behind the scenes these donations can be spread around 529 college savings plans as designated by the student or parent.  If already out of school, it is still not too late to accept help from family.

This article underscores the importance of living a debt free life.  When you are deep in debt your options may be so limited that you turn to things you wouldn’t normally in effort to escape the debt trap.  I hope this serves as a cautionary tale for students entering college, and that they will seek alternatives to student loans.

Student loan debt in America is becoming an ever increasing crisis. The average student leaves college with over $45,000 in debt and in 2007 students borrowed $18.5 billion, up 6% from 2005-2006. This growing trend is causing many young Americans to question if college is worth the investment all together. Also, many graduates can not afford to pursue social, teaching, and civil jobs after college because their incomes are just too low to pay off the large loan debts needed to graduate. Charity for Debt is a new non profit, which hopes to help with this alarming trend by decreasing student loan debt in America through a unique process.

Charity for Debt connects students who have large student loan debt with sponsoring donors who will pay down their debt at $20 per hour in exchange for time spent volunteering at a local charity the donor chooses. Sponsored students work an average of 5 hours per week, earning $100 per week, paid directly to the student’s loan company. Donors usually give $1,000 to sponsor a student for 40 hours of volunteer time and are typically individuals or small businesses. Students compose weekly journals describing their activities, positive outcomes, and takes photos of their experiences. This content is then captured on the student’s online volunteer portfolio where sponsoring donors can easily see and comment on the results of their donated dollars. The student gets their debt paid off for helping a great cause and the donor can help the student and the charity at the same time, doubling the good will of the donated gift!

The Charity for Debt founders (Jonathon and Brandon) are two young, IT oriented individuals with entrepreneurial backgrounds who hope to positively change the world with their model and business expertise. They have already been contacted by a NBC Today Show reporter about a potential news story once a pilot program has been started. Jonathon and Brandon are currently trying to raise $10,000 to begin two pilot programs in Washington, DC and Dallas, TX. They have raised $6,000 so far. This unique approach to helping the student debt crisis, supplying reliable volunteers to charities, and creating transparency for its donors could bring them the success they deserve.

The preceding content was a guest post by Jonathon Lunardi, co-founder of Charity for Debt. Jonathon and I shared a few thoughts via Twitter, and then email, on the student loan industry and his mission at Charity for Debt. I asked him for some information I could pass along to my readers, because this is such a fascinating concept.

To view more about this model and become involved by donating, signing up as a volunteer, or partnering as a charity/non profit, please visit CharityForDebt.org.

A perfect storm may be brewing in the financial world, and this time it is not the fault of sub-prime mortgage lenders. Student loans are getting out of hand in this country, not because they are a bad product, but because of the amounts some students are willing to borrow to fund their education.  Stories abound of students graduating with thousands of dollars owed on student loans. These loan payments sometimes represent as much as a new graduate’s housing costs (and many can’t afford housing because of the loan payments). The rising costs of tuition, a proclivity for borrowing, and changes in federal loan lending legislation are setting up a late-summer crisis for 2008-2009 college students.

Lenders and colleges are getting creative, and government legislation is not helping. An unintended consequence of the College Cost Reduction and Access Act is that federal subsidies are drying up for private lenders that make federal loans to college students. Many colleges are ending their alliances with these types of lenders, and instead pointing students to borrow directly from the federal government through their respective colleges. This will practically shut out private lenders, and we have already seen what taking away privatized options has done to other government programs (think Social Security, for example).

Of course, none of this matters to those who choose an alternative to student loans. Fortunately, there are several other options to borrowing money to attend school. However, similar to other areas of financial life it has become the norm for high school graduates to assume thousands of dollars (and sometimes hundreds of thousands of dollars) for the privilege of obtaining a college degree. I took on some small student loans myself early in my college career, but thankfully I took a different approach when I returned to school and worked full time to pay my way. Here are some alternatives to financing your college education:

• Work. Work is a sure-fire money making scheme. College educators tend to frown on student employment citing poor class attendance and lack of participation in other extra-curricular activities which add to the college experience. Baloney. I don’t have a problem with someone working to pay their way through school. In fact, I encourage it. Graduates who have worked their way through school enter the job market with experience already listed on their resumes. They also tend to take school more seriously when they are footing the bill. Employers like to hire candidates who have worked their way through school because it speaks to the potential employee’s dedication, perseverance and all-around work-ethic.
• Tuition Reimbursement Programs. Many companies now offer tuition reimbursement programs where employees are reimbursed for some or all of their tuition for pursuing degrees related to their careers. Some of these programs reimburse employees based on grades earned (100% for an “A,” 90% for a “B,” and so on) which provides an extra incentive to perform well in school.
• Military Service. A commitment to military service comes with the perk of paid tuition upon completion of required duty. The G.I. Bill pays for military service personnel to attend classes that lead to a college degree, and even some vocational courses that lead to a degree or certificate. This is an excellent way for aspiring physicians to attend medical school. The government will typically cover the costs of your medial training in exchange for a promise to serve as a doctor in one of the Armed Services. During times of war, this can be a risky proposition, but maybe not as risky as financing $120,000 to attend medical school!

Bottom line? Stay away from student loans if at all possible. Consider alternative sources of funding, such as the ones mentioned above. If you do not have the money to attend college right out of high school, work for six months to a year and save up for tuition. As part of this strategy, look for employers that offer tuition reimbursement. UPS reimburses part time employees for tuition expenses beginning the day they are hired through their Earn and Learn Program. Not a bad deal for slinging boxes a few hours in the evenings.

Looking for finance options? For a great loan quote visit Rebuild.org.

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