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?

Comments

  1. It shouldn’t be a huge surprise to anyone. We were able to send both of our kids to four year colleges without borrowing a dime. Smaller schools and scholarships for both.

    In the current job climate, I don’t think I would advise a four year degree unless a student pursues a career that actually requires a degree (medicine, engineering, law, etc). Even then, many jobs that don’t require the person being on site (surgeons, nurses, some health care, some engineering) can and will be outsourced. Many students that are getting advanced degrees with the hope that the degree will land them a job…if you can’t get a job now an advanced degree won’t help. They’ve been sold a bill of goods to line the coffers of universities, a disgrace in my opinion.

    Maybe a shift back to trades is an alternative. Plumbers don’t come cheap….

  2. I, too, believe the next big financial meltdown will come as students graduate from college, are unable to find jobs, and have to default on their student loans. I was fortunate enough to fund about half of my college through grants and only had to take out loans for the rest. I also worked through school so I didn’t have to get additional loans to pay for living expenses. I feel like the amount I had to borrow (~$15k) is overwhelming, but I’ve known and have heard of many people whose student loan debt is the size of a small mortgage. When my children are ready to go to college (in 15 years or so), we will have many discussions about student loan debt and what it means to be thousands of dollars under water before you even have a job. I have no intention of funding all of their education, as I believe they will value it more if they have to foot some of the burden, too.

  3. Here is the funny thing about your article I notice, you rail on the evils of getting loans, but talk about only a few options that are out there. Yes kids can work, they can work for a company that gives tuition reimbursement (if they can find such a company and job without a degree) and going into the military. I can say that I was given the opportunity to work 3 jobs and do all the extra curricular activities and get okay grades. I also during grad school taught which got me free tuition.

    Now for the point of my response, you missed the biggest point. Getting a college degree is almost as required to get a job as it was 30 years ago to get a high school diploma. Unless you want to work in manual trades, anything that requires working with your mind, you have to have a college degree to get a good job. I think what you are missing though is that does someone need to go to a 40k a year private college to get a good liberal arts degree? The answer in no. There is no benefit from that. I live in Indiana, and we have some of the best colleges in the country, as state schools. I know some are not as lucky. But my son can go to a local commuter college for $1500 a semester, and have a 2 year degree from one of the state schools, and when he goes for his BS or BA, he can transfer to the main campus, with 100% credit transfer, and only pay $3k per semester. Done.

    You have to maximize your resources, and utilize what you can in the system. As an employer, when I look at someone’s degrees, I look at the school, and know its reputation, but then look at someone’s work background next. If someone worked while in school, and went to a less “reputable” school, I give them a break and at least talk to them as they probably have the practical skills. Knowledge is great, but application is key.

    The other main issue is that universities are run by .. guess what .. academics. All they want is for students to help them with their research and to get studies as smart as they can be. They don’t care about any of the financial or even the practical outcome of getting a degree. Forestry? If you are to be a forest ranger, they are laying off forest rangers left and right, and they produce 400% more in this degree than current jobs in the entire country. What is someone going to do with that degree?

    At the end of the day, if you go to school and get a degree that is useful, and you work to get more experience, then you will be hire-able. If you go to school, and get a degree in nothing, and don’t work, then you cannot be hired. It is pretty simple. Sorry if I don’t make sense, I have a cold and can barely see what I am typing on the screen.

  4. A note on scholarships -

    Many people consider your senior year of high school to be the year you apply for scholarships. While this is important in deciding on which school to attend, don’t assume the funds dry up once you get into college.

    My state university gave out the “generic” scholarships that you pretty much received based on GPA and ACT/SAT. Once I finished my first semester, I had the opportunity to apply for scholarships within my college and in my particular major. Turns out I received an annual scholarship that covered nearly all of my tuition AFTER the first semester of classes based on my first semester GPA and major.

    So, students, continue to hunt down scholarships throughout your college career. Some of the scholarships within your individual program can be very lucrative and sometimes the individuals sponsoring the scholarship are interested mentoring the recipients of their scholarships too.

  5. We are so indoctrinated to use student loans to pay for school that it is hard to fully appreciate the alternatives. Consequently, there are many untapped resources. In addition to working, tuition reimbursement, and military, there are also many local and national scholarships that students may be eligible for too (as you mention). The point is there are choices.

  6. Our daughter will graduate with $340,000 worth of debt from medical school. The interest rates are close to 9% and they want the interest paid while she is a student or it gets tagged onto the loan. If they can give morgage loans at 3% why can’t they give a more reasonable loan rate? In addion, in this poor economy, the university raised their tuition by $5000 for next year. Yes, she could have done the military route but then her life would not be her own.

    • With $340K in debt, how is her life “her own”? That is a truly staggering load to bear – I hope that she is taking the specialist route and is not becoming a GP!

  7. I find it shocking that you make no mention of the notorious fraud and theft of public funds by deadbeats posing as “students”. They get this money, sign up for classes, withdraw from class(es) and pocket our tax money – that they’ve stolen. There are few controls and less truth-telling because politicians don’t want to touch this one. So it will go on and on. I was honest and judicious and scrupulous about repaying my grad school loan. These days half or many of the seats in many college classes are empty after two weeks. This info came to me from a typical professor….

  8. I had one part-time job when I started college. It wasn’t enough to pay my bills while going to school so I started working full-time (I had 2-3 jobs). I eventually dropped out of school because I couldn’t keep up with my class load and my grades suffered tremendously. I wasted a lot of time and money failing classes because I didn’t have time to complete all of the work, which I very much regret. I paid for tuition with loans and a couple of small scholarships (I worked very hard in high school and got good grades/was involved in many extracurriculars, but scholarships are very competitive and large ones are fairly scarce).

    I am going back to school part-time at a community college now but I’m sure will only be able to afford university again in the future with loans. At just above minimum wage (because I don’t have a degree or a trade), I make just enough to pay my bills and there’s rarely anything left over to save for college.

  9. I believe that higher education is a system that will become one of the next bubbles in this country. Much like the housing market couldn’t support the artifically high prices on homes we all know that the student market cannot support the artifically high prices on higher learning.

    I’m glad I have a degree, and I did go into some debt for it. That debt is not quite paid off, but is also small enough to not be a burden. (I believe it is also charging interest lower than inflation, so it gets cheaper every year…) I would not follow the same path given the chance right now. Even in just 5 years costs have risen enough to get me thinking of alternate methods. I have friends that have school loan debt larger than both of our cars cost together. (Not loans, they are both paid off and were both over 50% down.) These are not cheap cars eaither, we kind of spoiled ourselves on them. My sister in law got her masters at a decent price (compared to other universities she could have gone to ect) and still has a big debt to pay off. What does she get for it? A little job security but that’s about it. (Teacher – I won’t get into my thoughts on unions here.)

    The point is, while I don’t plan for it, I believe that by the time my toddlers get through high school the landscape will be vastly different than now. The bubble will have burst and who knows what will come out. I plan for status quo to be kept due to the high profile education gets meaning that they will need a lot of money up front to go to school without a lifetime of servitude to follow.

  10. Watch that first step! It’s a doozy!

    That in a nutshell, is life. Once out of debt, it’s easier to stay out. I’m still a fairly young 31 years old. Avoiding debt in College was the single greatest step in my life. I’ll admit, I didn’t follow an expensive vocation, I’m a radio news reporter, My tuition was about 2-3k a year, plus books and what not for 3 years. It wasn’t uncommon for my classmates to carry 20k in debt. Before they even start living.

    Try buying a car or house with student debt, it makes it a lot harder.

    On the otherside, I don’t make a ton of money, but I’ve been able to afford a good lifestyle thanks to debt avoidance.

    School is great, but coming out of school with massive debt leaves you further behind than most want to admit.

  11. I’ve read that private loans for college were usually not as good as the government college loans. With state governments cutting back funding for public universities and colleges, tuition has had to rise in response.

    I’m a big fan of state universities for giving the best bang for the buck. If a student has a part-time job it will help even if it doesn’t cover all expenses. If they can get a job as a tutor they can make decent money and reinforce their own knowledge.
    Students should research the job prospects and likely salaries for any majors they are considering. For jobs that pay well, but don’t require a college degree, check into health care. Often after a year or two of training they are ready to make good salaries.

  12. We are getting ready to enter this stage of life with our oldest. As a senior we are looking at all the options to get her into college. Here is what we have found so far. With prices so high everyone is going after scholarships. They are harder to come by and therefore there are no longer unclaimed scholarships available. One kid we talked to had applied for 200 scholarships and was awarded 12. Yes, your ACT/SAT scores will get you money, consider paying a tutor to help you raise those scores.
    Private schools typically give out more money because they have less students. Huge state schools don’t have the money to give to all those kids. After financial aid is handed out, prices between the two aren’t that far off anymore.
    Also take advantage of the college classes offered in high schools. We know kids that will graduate high school with a year of college. The tests are expensive, but tons less than a university.
    It will be interesting to see what happens. I hadn’t thought of it as the next bubble, but it very well could be. Not looking forward to seeing how that is going to play out.

  13. I hope that will be the case. Although I’m quite conservative, I despise the greed I see from public institutions for what is considered “a greater good”.

    A reasonable analogy comparing student loans with the current home loan crisis can be made. The ease of students getting in tremendous debt thereby driving up tuition costs (same as home prices). I can see a crash coming for colleges, especially with the probability of continued high unemployment.

  14. My boyfriend went the military route. He was in the Navy for 4 years joining at age 20. He is out now and transferring to a state school this January 2012.

    They pay for full tuition, $1000 allowance yearly for books and he has a housing/living allowance of $1800 (depends on where you live, we’re in California) for 36 months. He’s going to have to bust his butt to get his degree in 36 months.

    I don’t recommend this route for everyone, but seeing it for myself it’s not too bad for those who are looking into it.

  15. I married while in college. Had a child. Had about 15k in loans. I had every reason to think I was investing in my future and would have a good career.

    Then my son was dx’d w a rare neuro disorder, and my husband disappeared.

    It’s almost 20 years later, and I’m unable to work full-time as I’m caring for my disabled son. We’ll be caring for him, and his expenses, our entire lives.

    I do work, as well as my now-husband. We pay 210.11 a month on my loans-which is uncomfortable given our medical bills. We drive paid for cars, each over 200k miles. We live paycheck to paycheck and have nothing frivolous. But we pay it, and we’ve never been late.

    My loans escalated to over 30k due to my having to defer and forebear them. There were points there where I was literally scraping under cushions for coins to feed us, so I didn’t have a choice.

    I’ve also been paying for over 20 yrs on and off, and have 17 yrs left on my consolidation. I’ve actually paid off an amt more than equal to the original balance. The remaining is all interest.

    I can try to file bankruptcy, but a lawyer said we’re paying the $210, and we’re inadvertantly showing we can afford that. Our chances of getting my loans discharged are nil, she said.

    I’ve no recourse, except if I walk. I don’t want to. But then I get angry. I’ve paid my original loan amt plus some interest. I never thought I’d be caring for a disabled child and would be unable to pursue a full-time career.

    I’m forty. I’ve got seventeen more years to go.

    If I could go back, sure, I’d slap myself silly before signing a note. But I can’t, and now I’m stuck, trying to be responsible and drowning in the process.

    I fear, however, this student loan bubble will end up just as the real estate bubble did-ignored until it’s too late and the damage is too devastating. I hope I’m wrong, though.

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