Are Student Loans the Source of the Next Financial Meltdown?

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 college studentshelping. 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. Not a bad deal for slinging boxes a few hours in the evenings.

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  1. This might just be where the next meltdown hits as the financial market as a whole stops trembling. This sector might be susceptible to some nasty tremors, especially since there are so many schools that are shady with their loans.

  2. I graduated college in 1997 with $38k in student loans. I have always regretted borrowing this money versus working through college. Recently I got this debt paid off, a huge burden off my shoulders.
    Debt for anything is bad bad bad.
    This entire industry looks as if it will implode, the federal government subsidies are ending, the bonds many student lenders issue are not attractive to investors – the spreads are too low and the bad debt too high. I had friends who would borrow $10k -$5k for tuition and $5k for beer money. I bet they really regretted that later.

  3. I graduated with a bachelor’s degree in 1998. With that degree, I also had over $20,000 in student loans. My dh had even more than that when he graduated. We combined our loans and make one monthly payment equal to a car payment. We’re still paying those loans 10 years later… they are a huge burden and, while an education is something that can’t be taken away, we have many friends/family members with technical school degrees making twice as much money as we do. We both worked part time throughout our entire college careers. Our parents could not help with our tuition – yet neither of us were eligible for grants.
    It seems college has been the *gift* that just keeps on giving – in the form of debt!

  4. Great post!!! I am Stumbling it.

    As a matter of opinion, college is over-rated in our modern society. Children “graduated” by age 15/16 an were expected to join the working force. Those who desired scholarly employment continued their education (usually while working for the school they attended) for a few years, then they joined the workforce. It is ridiculous today to expect to graduate with $20,000 to $200,000 IN DEBT before you’ve even entered the workforce! Holy cow!

    Surely, some jobs require intense education, but do ALL? College is way, way too over-rated in this country.

    I have a few college-entry level kids. We expect to continue teaching them at home (we’ve homeschooled) while they take online courses and a few classes at the local colleges (one of which includes Hamilton College).

    Our economic instability in this day and age should only encourage us to reassess they way we do things as a society. College is one of them.

  5. Great post. One of the dumbest things I EVER did was get those %@#*& student loans! THey have been a shackle on my financial life for over 20 years. I still have about 5 years left to pay on them….


  6. me and my wife are paying a big portion of our income on student loans. We have both decided that we will NOT push our kids to go to college, especially when you break it down on a per hour level. Meaning 480 per month is equivalent to 3 dollars an hour. Vocational technical/apprenticeship is a better deal.
    On the flip side, the ease of loans i believe are driving the costs up.

  7. Just so that you all know, the GI Bill is not what it used to be. Back at its inception, during WWII, it would cover all the costs of tuition for the duration of your degree program. The current GI Bill gives you a monthly stipend ($1100 for full time students, but nothing more even if you’re going more than full time), and only lasts for 36 months of schooling. Which means that your benefit will run out some time during your fourth full year.

    Sure, it’s nice perk, but comparatively, it’s a pittance. Back in WWII, I believe it was something like 1 in 5 adults had been in the military, so basically, the other 4 paid for your schooling. Now it’s something like 1 in 100 people served, but the other 99 can’t seem to afford to provide the same benefit.

    That says a lot about military service in itself. I know this all because I got out of the Navy a year ago, and have been going to school ever since. It’s really hard though, because even if I was single, I would have to work in order to maintain a minimal standard of living. Couple that with trying to raise a family (wife and 3 kids), and it’s darn near impossible to dedicate enough time to your studies for most people. I’m lucky I have a wife who understands, and helps to support me with my schooling by reminding me when I get home and start passing out that I need to study.

    But it turns out that less than 10% of veterans end up using their college benefits fully because of that extra strain on them. So please, don’t think that the college money that they use to tempt so many people into joining “voluntarily” is really what you think it is.

  8. you are also missing another major option here. Community college. if you can spend three years there, and two years at university, you can essentially cut the debt in half. it’s one year longer, but it allows you co work while you go to school. There is no difference in credits, although a counselor can help you greatly in the assurance of a transfer to university. I currently spend about 600 dollars a –year– at a jc. then i can transfer to another college and get my degree and justify packing on a little debt for the small amount of time i will spend there.

  9. @Joel: You make an excellent point regarding the reduction of GI Bill benefits. I could think of about a dozen programs off the top of my head I would gladly cancel to fully fund veteran benefits. Thank you for your service.

    @Vince: You’re right, that is a great alternative and one I should have mentioned. I attended a large four year school my first two years, when I should have gone the community college route and transferred in. Lesson learned!

    • Frugal Dad,
      I stumbled across this post and comment while perusing your archives (great info!). I know this is a very old post, but I don’t want some misinformation to prevent you from recommending military benefits as a viable option for college tuition in possible future posts. Enlisting in the military provides two avenues of paying for college. While you are enlisted, you can take advantage of tuition assistance. Tuition assistance caps at $250 per credit hour and $4500 per year. This applies to both reservists and active duty Soldiers. As a reservist, I attended online classes part time while working full time, and working part time for the Reserves. I never paid a dime. I even witnessed some “F.O.B. Rats” complete coursework during a deployment! More power to them for pulling it off.

      The G.I. Bill has had defeciencies in the past, but the Post 9/11 G.I. Bill has recently kicked in and is a huge improvement over previous versions of the G.I. Bill, especially for reservists. Depending on active duty time served, the G.I. Bill will pay up to 100% in state tuition, $1000 stipend for books and supplies, and monthly basic housing allowance (the national average is about $1300). The 36 month limit is true, but that’s good for a four year degree (nine months a year).

      I’ll break my circumstance down so you can see the benefits for someone who served part time (knowing that full time benefits are even better). I was enlisted in the reserves for 9 years, I served two deployments, good for about 28 months of active duty time. The classes I took while enlisted were paid for by Tuition Assistance. This was totally seperate from G. I. Bill. Somehow I had the forsight not to activate the G. I. Bill until I was separated from the military. Between credits earned for military training and the courses I took with TA, I have completed about 40 credit hours towards a degree. I am kicking myself for not taking more advantage of TA, but I could have done worse, I suppose. Granted, fitting school in around deployments and training is tough, but I know of many people who obtained their degree totally on the TA’s dime, and at schools like Kansas U and Kansas State. Now that I am done with my service, I am enrolled fulltime in online coursework. The time I did serve earned me 80% percent of tuition paid through Post 9/11 GI Bill (the remaining 20% is picked up by my employer via tuition reimbursement), this also includes $800 of yearly stipend, and because my coursework is 100% online I get half of the national average for basic housing allowance which comes out to $670 a month. If I had one class at a brick and mortar school, I would be eligible for full housing allowance. The full housing allowance rate where I reside wouldn’t be much more than the $670, so the extra hassle is not worth it to me (I work full time, family, etc). However, someone living in Laguna Hills, CA could be eligible for $1700 dollars a month in housing allowance alone! What a great oppurtunity.

      So, even at 80%, G.I. Bill is essentially paying for all of college. Now, someone could sock away the stipends and housing allowance and use that money to pursue further education once the G.I. Bill runs out. I will use my housing allowance money to pay off my wife’s student loans. So, basically my military service paid for my schooling and will pay for the majority of my wife’s schooling as well. Not a bad deal, if you ask me. Not to mention the professional training and experience I gained in the military was invaluable to me in the private sector.

      I know this is a lengthy post, but I hope I’ve convinced you that the military is a great way to pay for college and learn how to apply those skills as well. There are positives and negatives to joining the military just as there are pros and cons to any career choice. However, I hope you continue to encourage people to explore this oppurtunity if it fits their needs.

  10. I graduated with a Bachelor’s degree in 2005. I received a full-ride scholarship to an expensive East Coast private school that even covered my housing food. However, the cost to attend that University increased by thousands of dollars each year, and my scholarship did not grow to cover it (what a sham!). I worked almost full-time (35 hrs a week) but still ended up with $25K in student loans (all paid directly to the school, no “beer” money here). It would have cost me $180K to attend the school without my scholarship, so I got a prestigious degree for 14% of the cost (plus interest of course). However, I *still* don’t think it was worth it financially speaking, and will recommend to anyone who will listen (my theoretical kids?) to go to state schools and other cheaper options. Luckily, this school and many others are putting “fixed tuition” programs in place so you know what you’re getting into from the start…

  11. I graduated with a BA and an MA (the MA was in education), plus $50K worth of student loan debt. I “followed my heart”, as far as the degrees I received and the kind of work I wanted to do. Now I wonder what I was thinking.

    I work at a university, and am pursuing a second master’s degree part time—this time, I’m getting tuition benefits, so I’m paying cash for everything. I advise students constantly to avoid student loans like the plague. Do ANYTHING, repeat ANYTHING to avoid them. Perhaps if you’re getting an MBA or a Computer Science/Engineering degree, it might pay off. But better to take 7 years to get through school while working full time than to get out earlier with the student loan monkey on your back.

    Thanks for this post—I’m going to have to start thinking about repaying the loans soon, after my CC debt is gone later this year. . . .

  12. The entire Student Loan industry should be shut down. The amount of debt I have is equivalent to a mortgage debt. Due to a few mistakes when I was in college and a loan consolidation that added my husbands on to mine (Thankfully we are still married, so we both can still pay on it). My kids are getting close to college age. I told them college is a must in this day and age, but if they take out even one loan, I will tear them a new one.

    Luckily for them, there are a few programs offered by the local colleges that will give them almost a free ride through school. They both have seen me and my husband struggle with the debt and the stigma attached.

    When we went to college we were told by supposed people in the know that the loans were the best way, or go into the military. I only started to heard about other solutions when I was a Junior.

    So basically we are stuck with a huge debt, nothing to show for it. (it wouldn’t hurt so bad if the career I am in doesn’t require a college degree to do.) It would be easy to say it was all our fault. But too many colleges during my college years were pushing loans like they were drugs. There are many people in my situation. The problem is no one that can change the system wants to.

  13. I have to say that I vehemently disagree with those of you who insist college is not necessary. I took time off from school after three years and scoured Chicagoland for any sort of full time job, not even being picky, and the only sorts of jobs I found that would hire someone without a bachelor’s degree were: Postal Delivery Person, waiting tables, hotel clerk, and other minimum to very low wage jobs with zero health or retirement benefits. I am an fairly intelligent and capable person with strong work experience behind me (having worked two jobs throughout my entire first years of college to help pay for tuition and rent) and yet I heard time and again, “Come back once you have your bachelor’s degree!” or “If you had a college education you’d be a desirable candidate.” After working and not being able to save anything off of the meager pittances I earned as a degree-less kid in the work force I made up my mind to go back to school and couldn’t be happier with my decision. Right now I am struggling to find a private student loan to fill in where my (admittedly generous) grants from my school and federal loans weren’t sufficient, and as much as this pains me, I know it will be worth it. The issue, I believe, is that students in America don’t take their educations as seriously as they should. Higher education is a beautiful thing and extremely necessary. Wonder why you can’t find a decent paying job out of college? Perhaps you should watch the news and listen to employers discuss the lack of work ethic most of their 20-30 something year old employees possess and the fat that foreign graduates are more desirable candidates as they work harder and are more grateful for the work given to them. Our American lifestyles are too lavish and irresponsible to keep up with our struggling economy. Perhaps you should sell your oversized SUV and save the money on car payments and gas to take public transportation instead (or purchase a used, more economical vehicle). Perhaps your rent or mortgage payments are too high and you should have shopped around for something more in your budget? As Americans we all love to possess things and we covet our vacations and possessions above all else, but if we had to take out money for student loans then maybe we should do what everyone else in my family and extended family has done: stay at home until you pay a large portion of it off, THEN go out and rent on your own and have a pseudo Hollywood lifestyle.

    Intelligence is a terrible thing to sacrifice. Don’t blame “going to college” for the student loan crisis. Blame our government for being irresponsible with its budget and funds and for screwing the middle class as much as possible. It’s not the middle and lower classes benefiting from the FAFSA, nor the very poor (they just aren’t going to college period) it’s those who can afford an accountant or other financial advisor who knows how to manipulate the system. Blame colleges for being too greedy and for putting all of their basketball and football stars on full ride scholarships, paying for their housing and giving them cars, while telling struggling students “Sorry, there’s nothing we can do for you.” There needs to be more responsibility taken by Universities and the government. For instance, Northwestern has taken a novel approach in telling its students that it will no longer allow them to borrow more than (I believe) 20,000 dollars in student loans – beyond that, they will fill in the tuition gaps in order to prevent their students from going too far into debt. Plenty of colleges can do this, they just don’t want to.

  14. I worked full-time through college while it is definitely a guaranteed source of income, you must consider that most college students will not be able to find a job above minimum wage–and you really do not make enough money on minimum wage to offset the physical and emotional difficulty a 80-hour/week schedule brings.

    The obvious drawback to the GI Bill option is that…well, you could get killed. Yes, it’s a small chance. But is going to college worth that?

    (I realize this entry is old but people may still be looking at it.)