While much has changed since this post originally ran, I’m convinced student loans continue to be the greatest source of financial struggle for young people. Just last year, it was announced that student loan debt exceeded credit card debt for the first time. More recently, we learn that total student loan debt will soon exceed one trillion dollars.

With increased borrowing comes increased defaults, up from 6.7 percent in 2007 to 8.8 percent in 2009. It is all rather sad to me. Skyrocketing tuition prices are forcing more people to borrow. More legislation by the federal government is causing tuition prices to skyrocket. It’s a vicious cycle.

We continue to save for our kids’ education, with the hopes that they will be able to attend college debt free. To do so, they may have to work, or go to a smaller school, and/or work their butt off for scholarship opportunities. At the rate tuition is increasing, it’s unlikely Mom and Dad will be able to fully subsidize their education.

Here’s the original post from 2008…

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.

What are your thoughts on student loans, and more specifically, the latest proposed changes to the federal student loan program?

We’ve been using Dave Ramsey’s formula to pay off debts, not incur new debt, etc. We are down to 2 debts:  Student loans (consolidated) with a $151,000 balance @ 3.875%, and the home Mortgage, $165,000 balance @ 4.5%. We have 6 kids, so lots of household expenses (mostly groceries), but we can trim a little more fat.

We have $1,000 in savings for emergencies (just replenished after an unexpected 800 car repair). We pay cash or we don’t buy it.

Income is around $80,000 per year, with no great increases in the foreseeable future (government employee).

At this point, we’ve been throwing extra money at both of these debts and don’t seem to be getting anywhere. I was awarded a public-service award that will pay up to $10,000 per year on my student loan debt (payable quarterly) for up to 6 years. This year the award was $8,900. Of course the student loan company used the money to advance my due date and not pay towards principal, but I had it placed on principal eventually and continue to make my normal payments.

My gut tells me to focus on the student loan debt, especially because I have the award to help and pay the mortgage at its normal rate, but then I look at the interest rate being higher on the mortgage and think I should pay it off first.

I do use the student loan interest deduction on my taxes. Last year was the first year we had enough expenses to justify itemizing deductions, so I don’t think that will be something that will happen every year, we just had an extraordinary amount of medical expenses.

Thanks for any help you can provide us!

Thanks for writing, Jackie. It sounds like you have your hands full with six kids and significant student loan debt. However, it also sounds like you guys are making smart decisions with an ultimate goal of debt freedom. Congratulations on clearing all consumer debt – that’s a great first step!

In my mind, I would probably treat both of these debts in the same manner as I would a mortgage. In “Baby Step” language, that’s near then end of the process, around Step 6 – Paying Off the Mortgage.

My reasoning for this is that both debts will take some time to pay off, even with a healthy $80,000 household income. I’d hate to see you guys not make progress on the remaining baby steps over the next several years while focusing solely on student loans and the mortgage.

Now, as far as interest rates go, that wouldn’t necessarily be the determining factor in deciding which to pay off early when the time comes. As Chris at MyTotalMoneyMakeover.com writes,

A common misconception about paying off debt is that you need to go after the high-interest-rate bills first. The reason is because big rates mean more money is going out the door. The sooner you stem that, the more money you’ll save.

That’s the wrong way to gauge which bills should go first. You could spend months paying off a high-interest-rate loan and become disappointed when you still see an outstanding balance. You’ll subconsciously think that you’re not making progress, and you’ll stop paying extra. Then the balance grows back and frustrates you even more.

Getting out of debt is all about modifying your behavior. You need a plan that shows you the progress you’re making. That’s what the debt snowball is. Instead of automatically paying on the loan with the big rate, you list your debts smallest to largest by amount owed. This is the key to you not falling off the wagon…

Read the rest of Chris’ post here.

Because your student loan debt and mortgage are essentially equal in terms of balance, interest rate and tax deductible eligibility, I’d look at the decision of which to pay off first from more of an emotional or personal perspective.

Student loan debt is unsecured debt, meaning you can’t sell something to pay it off. You also can’t get rid of federally guaranteed student loan debt by declaring bankruptcy. You can’t “downsize” into a smaller student loan, and now that you’ve already consolidated, you can’t refinance down the line to lower your payment. That means you are pretty much stuck with it

Some may argue that you are just as stuck in a mortgage these days, as it’s generally harder to sell a home in this market. But that’s not true in all cases, and if you have even a small bit of equity, you could afford to negotiate a price that would attract buyers in a crunch.

If it were up to me, I’d start whittling away at the student loan debt before paying off the mortgage. I would only do so after establishing a solid emergency fund (our family’s goal is 6-12 months of basic, household expenses…closer to 12 months). With a large family, I’m concerned you do not have enough put away for emergencies.

With a fully-funded emergency fund parked in a high-yielding, safe savings account, I’d then look to put away money for my own retirement (Dave recommends 15% of your income), and then begin setting aside some for the kids’ college – well, with six kids it might mean setting aside A LOT for college!

Continue to make your mortgage payment and minimum student loan payment until these other goals are achieved. By that time, your household income will likely have increased a bit, and you can throw even more each month towards paying off the student loan debt early. When that debt is cleared, take the money you used to send to Sallie Mae and add it to your mortgage principal.

Have a realistic, long-term goal to be 100% debt free, but do challenge yourself. If the goal date is too “long-term,” it may never get done.

Good luck on your journey to debt freedom – it’s a tough hill to climb, but the view from the top sure is sweet!

Ask the Readers: Any additional advice for Jackie? What would you do if you were in her shoes?

Trivia question: Which type of debt is more prevalent in America – student loans or credit cards? If you said credit card debt, then you might be in for a surprise. A recent study showed Americans have more student loan debt than credit card debt (Americans owe $826.5 billion in revolving credit, most of which is credit card debt, and $829.785 billion in private and federal student loans).

There could be several reasons for student loans overtaking credit card debt. For example, many Americans are becoming more financially aware and are spending less and repaying their credit cards more quickly. Credit card companies are also tightening their purse strings and not approving as many cards as they did a few years ago. It’s also easy to point at the rising cost of college as the culprit.

Regardless of the reason, this new trend is alarming. Student loan debt is crippling the cash flow of a number of Americans and it should be avoided if at all possible.

Are student loans necessary? Before taking out tens of thousands (or even hundreds of thousands!) in student loan debt, ask yourself a few key questions to determine if the student loans are worth the cost, and if you have any alternatives.

Do you need to go to college? A college degree not only doesn’t guarantee a job, but it also doesn’t guarantee a high paying job. Before you go to college because “it’s expected of you,” or “that’s what the cool kids do,” you should take a few minutes and try to determine your career goals, what is required to achieve those goals, whether or not you need a college degree, and if it is worth the expense. Many times college isn’t the answer and taking student loans while you try to determine your career goals is a recipe for disaster.

Does your degree justify a high priced college experience? Do you know how much your college degree is worth? Take a few minutes to examine your prospective degree and how much you might earn when you enter the job force. You can most likely justify student loan debt if you are completing courses toward one of the highest paying college degrees. But can you justify thousands of dollars in student loan debt if you are working toward one of the lowest paying college degrees? Maybe, but you should temper your expectations.

For example, some entry level positions pay in the low $30,000 range and don’t go up much from there. These are noble professions, such as teachers, social workers, and similar professions. But they probably don’t justify financing $30,000 a year for tuition from a private university. Make sure you will be able to repay your student loans when choosing your degree and your school.

Alternatives to student loans. Take a look at all your options before taking out student loans. You may be able to attend a lower priced university, or even take your entry level classes at a community college and transfer to a four year college after you complete your basics. This saves both time and money. Consider living at home during part or all of your schooling to save money, or consider applying for a RA position to get free room and board. Some schools charge a flat rate per semester, regardless of how many course hours you take. If that is the case, load up on hours. You’ll finish more quickly and spend less money. Apply for scholarships and grants. Cash in savings bonds. Work part time or apply for a work study program. Tutor other students. You can join ROTC or the military and then use Tuition Assistance or the GI Bill to pay for college. You could also find a job that offers tuition assistance and go to night school.

There are literally hundreds of ways you can save money on tuition to avoid taking out massive student loans. And in this day and age, that looks like a more attractive option than mortgaging your future for tens and thousands of dollars in student loans.

About the author. Ryan Guina blogs about personal finance, money management, and military money topics at Cash Money Life and The Military Wallet.

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!

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.

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.

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.

Image Credit: meyshanworld