The Student Loan Meltdown

The following post originally ran here at Frugal Dad back in April 2008. I occasionally peruse my own archives to see what I was writing about years ago, and I found this one particularly relevant to recent discussions about the student loan program.

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?

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