Out #2: Spend Less So That You Will Have More Money to Make Your Loan Payment

Spending less money so that you have more to pay down your student loans is a no-brainer. However, how can you spend less whenever you think there is nothing you can spend less on or you can eliminate altogether?

The best tool for spending less is to create a spending plan. But you can't create a spending plan unless you know what you are currently spending your money on! The best thing to do is track your spending for a month or two. Every penny gets recorded! At the end of the month, gather up your financial records for the previous year (bank statements, canceled checks, etc.). With this information in hand, you are now able to create a spending plan. Time to start trimming!

There are many great reference books on how to create effective spending plans. I highly recommend Making the Most of Your Money by Jane Bryant Quinn. If your local library doesn't have it, you can request them to get it for you via interlibrary loan.

Ms. Quinn also lists some great ways to lower your expenditures. And there are many ways of doing this.

Shelter - I remember that in grad school every month I spent one of my bi-weekly paychecks on rent! If you are renting, try moving to a cheaper apartment or finding a roommate to share expenses. If you own your home, rent out a room to bring in some extra cash. You can eliminate a monthly housing payment altogether if you can mooch off a financially stable relative or friend for awhile.

Food - Each month half of my other bi-weekly paycheck that didn't go towards rent was spent on food! Coupons are a must for the thrifty food shopper. Shopping at more than one store is prudent. Watch the ads. Items go on sale in cycles, and you will learn to forecast when certain products will go on sale. Most of the time the same items will not be on sale at the same time at all stores. Buy in bulk. If the food will go bad before you use it, start a group of money-conscience shoppers such as yourself and buy together. Split the groceries among the group.

Clothing - Buy used from yard sales and thrift shops. If you want upscale clothing, goto thrift shops in wealthier neighborhoods. Depending on what you are making, you can save money by sewing garments yourself. But most of the time this is true only with clothes made from expensive fabrics (which you probably don't want to spend the money on, anyway). Alter and repair old clothes instead of buying new. If you don't know how to sew, take it to a seamstress and get a quote. Take boots and shoes into cobblers for repairs (such as worn sole).

If you belong to a church or house of worship, oftentimes they have programs to assist with basic necessities such as rent, utilities, food and clothing.

When buying anything online, google "coupons" and the store you will be buying from. Very often you will find a coupon that will offer you extra savings.

If you are thinking about going to college, research if the college you are interested in offers tuition breaks or waivers to employees. If it does, seek employment there. Most colleges (that I know of) offer tuition discounts or full-tuition waivers for staff and faculty (and sometimes includes spouses and children of staff and faculty too). Staff includes AAs (secretaries), janitors, grounds keepers, etc., so you don't necessarily need an education or training to work at a college! You can also look into whether your current employer offers tuition assistance.

Added Countdown to Freedom!

I just added a new feature to my blog ... my countdown to F-R-E-E-D-O-M! I know that it isn't the greatest countdown ticker in world, but I designed it myself - quickly! I knew I wanted it to look something like the ball dropping for the new year in Times Square. The payment of my student loans will be bring financial freedom and a new beginning for me. And I thought the disco ball would bring some glitz :-)

I am hoping to have the $28k balance paid in full by the middle of 2010 and preferably in May, June or July - the 11th anniversary of my last semester as a full-time student. It was the last time I took out student loans. It would take another 3 years (13 years after I left school!) instead of little over a year if I just pay the minimum! I will update the countdown monthly to reflect my repayment status.

Wish me luck!

Out #3: Request a Forbearance or Deferment

I actually don't know many people with student loans who have NOT at one time or another requested a forbearance or deferment of their student loan payments. With both you will either not have to make any payments for a short period of time, or you will have to make reduced payments. Let's take a closer look.

Deferment: Student loan payments are suspended for a certain period of time due to a myriad of circumstances (unemployment, returning to school or economic hardship are most common). Interest will be paid by the government on subsidized loans during this period, but not on unsubsidized loans. If you don't pay the interest on unsubsidized loans during this time, it will be tacked onto the principal and it will compound.

Forbearance: Forbearance may be granted in cases where you do NOT qualify for deferment. Student loan payments are suspended or decreased for a certain period of time due to a myriad of circumstances. You will pay interest on both subsidized AND unsubsidized loans. If you don't pay the interest on either loan during this period, it will be tacked onto the principal and it will compound.

What does compounding mean? Essentially you will pay INTEREST ON TOP OF INTEREST. I will discuss this further in a future post. And while compounding interest is great for investors in order to build wealth, it is a nightmare for borrowers. Ever hear the old adage "money makes money?" Compound interest is one of the many reasons why.

Most pay dearly for this "out", and you can't delay paying your loans forever. If you have a $50,000 loan at 6% interest, you are paying $250/mo in interest. A 6 month deferment/forbearance results in $1,500 in interest alone! If it is not paid, the principal becomes $51,500! In addition there are limits to how long the government will pay the interest on your subsidized loan in the case of deferment.

Here is some further information for those having difficulty repaying their loans:
http://studentaid.ed.gov/PORTALSWebApp/students/english/difficulty.jsp

Pros:
- You will not go into default on your student loan
- Your student loan payment will be suspended or decreased temporarily allowing you time to get on your feet financially
- Deferment is essentially free for subsidized student loan holders
- The principal on your loan will not increase as long as you pay any accrued interest that you are responsible for

Cons:
- The principal on your loan will not decrease during times of deferment or forbearance
- The principal on your loan will actually INCREASE during periods of deferment (unsubsidized loan borrowers) and forbearance (unsubsidized and subsidized loan holders) IF ACCRUED INTEREST IS NOT PAID

Out #4: Return to School in Order to Have Previous Loans Deferred

Ah, yes. Returning to college in order to have current student loan payment deferred is an old stand-by. One leading to even more debt while hoping that the further education will be you ticket to a high paying job in order to pay it.

I have employed this method to dodge paying my loans for awhile. I couldn't find a job after undergrad (please refer to My Story), and I didn't know what to do. I admit that this is the easy way out ... well, for a brief period of time anyway. And in a few years my student loans were back with a vengeance - bigger, badder and even more difficult to pay off!

I went back to graduate school even though I preferred to get another BS degree in a different Engineering discipline such as Electrical Engineering. It probably would have only taken a year or so to complete, but the rules about borrowing additional funds under the student loan program required that I attend graduate school if I already had a bachelors degree. BTW graduate school is more expensive than undergrad and more is expected from you. I still borrowed the maximum I was allowed at the time (around $8k per year, I believe) even though I had a Teaching Assistantship through the university!

Since I didn't have all the required undergraduate classes for an Electrical Engineering Masters degree, I had to take undergraduate classes my first year but still pay the graduate rate. What a racket!

I ended up in the same boat I was in before graduate school, but this time a LOT more in debt.

If you return to school, do your best not to borrow additional funds! In the future I will suggest ways of doing this. Of course, the methods I will discuss are not suitable for everyone. If you go back to school and must borrow money, do your best to minimize the amount.

Pros
- Your student loans will be deferred while you are attending college full-time
- The degree you receive MAY help you to obtain a higher paying job
- You will hopefully be more educated which is something that nobody can take away from you (although you may end up wishing that it could be repossessed to pay off accumulated student loan debt)
- Interest on subsidized student loans will be paid while you are in school

Cons
- You may not be able to borrow to enroll in a bachelors degree program if you already have a bachelors
- The degree you receive MAY NOT help you to obtain a higher paying job or the pay may not be as lucrative as you thought
- The job market may change while you are in school and jobs in your chosen field of study may temporarily or permanently dry up
- If you borrow money, it will be additional debt to what you started with (and hence a higher monthly payment when you leave school)
- For whatever reason you may need to drop out of school, and would have spent time and money towards a degree that you don't have and can't use to obtain a job
- Unsubsidized student loans will continue to accrue interest and will be tacked onto the principal of your loan if you do not pay the interest while in school

Out #5: Skip Out on the Payments and Ignore the Collectors

While most people wouldn't consider skipping out on their student loan payments willingly, sometimes the situation becomes dire enough to warrant it.

If it comes to a choice between paying student loans and paying rent or buying food, most will opt for the latter. And while declaring bankruptcy will rid you of almost all of your other debts, your student loans will stick with you through thick and thin. It's like being married to a blood sucker with no option of divorce.

So, say that your are in a position where you KNOW you will never get on top of your student loans. For example, here is an article from CNN of a music student, Chris, who took out $160k in student loans thinking his payment would be $600 per month:

http://money.cnn.com/2008/10/23/pf/college/student_loan_fugitives/index.htm

Sadly, at $600 a month he would never be able to repay even a 6% interest loan! So, what did he do? He took off overseas.

It is unfortunate that he felt his situation so dire that he needed to leave the country. Fugitive students start their lives over again in a foreign land. Most often the student loan creditors don't go after these fleeing debtors as they are difficult to track down, and it costs the lending agencies a great deal of money to collect.

How about if you just stop paying and stay in the country? Well, your creditors will harass you; they will garnish your wages; they will take your tax refunds; and they will destroy your credit leaving you unable to purchase a home, and sometimes will cost you employment opportunities or apartment rentals. Oh, and those that are in default are unable to secure additional student loans if they need to return to school to retrain.

While I usually don't support ditching your student loans and leaving the country, what kind of life will students have who over borrowed and can't pay? Even those who over extended themselves on mortgages they can't afford and consumer debt have a chance to begin their financial lives again through bankruptcy.

Chris and Carl (the other student discussed in the article) are not alone in their plight. Read the user comments attached to the story. There are many in similar circumstances as well as a few that even exercised this option themselves!

Pros
- You will not have to pay your student loans while you live outside the United States since your whereabouts will be unknown to your lenders
- You will not be harassed about paying your student loan (as long as your creditors can't find you)
- You can start over with a clean slate in a foreign land
- Money you earn outside the United States will not be garnished

Cons
- You will not be able to come home to the United States without the possibility of punishment for dodging your student loans
- You may feel guilty about relinquishing your responsibility to repay your debts
- If you do return to the United States, expect your total student loan debt to have grown exponentially as fees will be tacked on and interest will continue to accrue and compound

In a Hole with No Way Out

So, how about if you borrowed tons of money for school, graduate and find that you can't handle a student loan payment? Well, that is a question with no hard-and-fast answer as it greatly depends on the person who is asking it. Logic dictates that you must

(1) earn more money to make the payment;
(2) spend less so that you will have more money to make the payment;
(3) request a forbearance or deferrment;
(4) return to school in order to have previous loans deferred;
(5) skip out on the payments and ignore the collectors.

I remember finding myself in this situation 15 years ago. I was already licking the pavement financially, so option (2) was out of the question since I couldn't spend less. For about a year, I searched in earnest for an engineering job that would allow me to pay my loans but was unsuccessful. Although my loans were in unemployment deferrment while I was looking for work (3), I couldn't put them off forever! Most people feel responsible for their debts, as do I, so I didn't consider (5). So I opted for (4) and returned to school. I also felt that if I had a recognizable advanced degree, I would be more employable. But there was one problem: I really didn't want to return to school. My heart just wasn't in it. And I am not alone. There are many returning students who borrow more to avoid the payments to the ghosts of student loans past. It can become a vicious cycle leading into more and more debt.

Could I have found another way? Probably. I didn't think it out as thoroughly as I should have. Also, I was young and really had no life experience backing my decisions. If you find yourself in the same situation, it is time to think what the best thing for you to do.

Next: Exploring the 5 methods of dealing with student loan payments you can't currently afford

Not Everyone Needs to Attend College

How often do you hear "the college degree is the new high school diploma." I wonder who started this untrue rumor, and why the general population buys into it. Besides, I remember embarking on my freshman year at General University and observing that there were students enrolled in my classes that had absolutely no business attending college. Sometimes they didn't have the potential to complete their degree, but also there were others who just didn't know what career they wanted. College did not help them decide, and they dropped out after spending lots of money to discover this.

So, say you you work hard, study and get a college degree. Does that mean a job and a good salary when you graduate? Well, no ... it meant unemployment and a huge amount of student loan debt for me. And I'm not the only one. John Stossel hosts a wonderful segment aired on 20/20 addressing the value of a college degree:

Some Debt-Laden Graduates Wonder Why They Bothered With College hosted by John Stossel (01/16/2009)

Essentially, the segment points out that students who graduate from college often end up working in permanent jobs that only require a high school diploma. It also mentions that most higher education institutions provide an inflated statistic of starting salaries for their graduates which was absolutely true in my case. I will discuss how those misleading statistics are arrived at in another post.

Can you begin a career with just a high school diploma? Is there any hope for you to have a successful financial life without a bachelors degree?

Absolutely.

But like with most things in life it depends on many interdependent factors. What kind of person you are and what kind of work you like, the effort and time you are willing to invest, how intelligent you are, and your ability to learn new concepts. I see many high school graduates working low paying jobs like those at McDonalds, but if they make enough money to survive and are happy doing it, then who am I to judge? I have also witnessed many high school graduates start or become partners in businesses that grow and become very lucrative.

An alternative is to continue on with a formal education after high school, but keep the cost and time invested to a minimum. My mom has an AA degree in a medical field, loves her job, paid off her student loans in 5 years, and made more than me since 1999 just up until recently! There are technical schools for a variety of areas such as the plumbing and electrical fields. And before you look down on those occupations, they make damned good money, we need them AND their jobs can't be off-shored!

You don't need to earn a boat load of cash to make it through life. The key is to live on less than your earnings, avoid debt, and build wealth (I will discuss this in another post). However, if a high salary is important to you, here is a list compiled by the government of high earners that don't require a bachelors degree: High Earners Who Don't Have A Bachelors Degree.

But how about if your dream job requires an advanced degree? To work as an engineer, I was required to earn a BS. But to be honest, there are some that have worked along side me with 2 year degrees in computer programming. Moreover, I know of at least 2 jobs that I didn't get because they went to recent engineering technician graduates (2 year degree) instead! The employers felt they learned more job applicable skills (which was true). Expect to attend college 6 years or more for careers as a medical doctor, almost any psychology related field (clinical, behavioral, cognitive, etc.), and law. EVEN THOUGH SOME PROFESSIONALS MAKE A LOT OF MONEY IN THESE FIELDS, IF YOU ARE FINANCING YOUR EDUCATION WITH STUDENT LOANS, YOU MAY BE LEFT WITH ALMOST NOTHING AT THE END OF THE MONTH AFTER PAYING YOUR STUDENT LOAN PAYMENT. Don't believe me? Enlighten yourself, and do some searching through blogs. Blogspace is filled with these poor, peeved professionals complaining about their burdensome student loans.

When I was in graduate school, I met a debt laden lad who recently graduated with his PhD in clinical psychology. Stress of his work and student loan debt consumed this poor soul, and he said if he had to do it all over again, he would become a janitor.

So would I.

Student Loan Debt = Slavery

Is student loan debt really synonymous with metaphorical slavery? Well, for me it is, but for others it may be "no" or even a mixed "yes and no."

First, lets explore what slavery means. Looking at the definition of slavery at dictionary.com it reads "severe toil; drudgery; the state of being under the control of another person".

Second, what does holding a student loan debt, or any monetary debt in general, really mean? Of course that you owe money to someone. Usually the lender, or creditor, expects those funds lent to you paid back over time plus interest.

This is what most people think of when they think of debt. However, there is more.

What are you actually doing when you borrow money and create a debt? You are spending your future earnings! This is extremely risky since you really aren't guaranteed what your future earnings will be. Even if you've worked the same job for the past 20 years, how do you know that it will be there for the next 20? How about if you get sick or disabled and can't work? Borrowing against what you think you'll be making isn't exactly slavery. But there's more.

Time is money, and money is time. Life is made up of time, and we only have a limited and unknown amount of time on this Earth. Ergo,

MONEY = TIME = LIFE

When spending future earnings (i.e., borrowing money), future LIFE is spent too!

Essentially, you will spend a portion of your life toiling to pay your creditor his original investment PLUS his profit which is OWNED by him. So he owns your future money ... your future time ... your future LIFE. And the greater the sum you borrow, and the higher the interest rate, the more of your life he will own.

Sounds like slavery to me!

Of course, the situation isn't as bad if you are making a wage that will allow you to repay your debts quickly. You will spend less time working for someone else, and more time working for yourself. The degree at which you are a slave to your lender is relative and dependent on how much of your life is spent "settling up" with your creditor.

But how about if you over extend yourself? Declaring bankruptcy will clear your debt, and you will start with a clean slate.

NOT WITH STUDENT LOANS!

It is extremely difficult to erase student loan debt. The only way is to prove "undue hardship" which essentially means that you are either dead or in a vegetative state.

So a student loan, both government and private, serves as the proverbial "ball and chain" for many borrowers who were ironically searching for a "better life" through education when taking on the original debt. What if you find you cannot afford to pay your student loans back? Student loan creditors are backed by a fortress of laws to protect THEM. Unfortunately, there are few laws protecting student loan borrowers unlike those with consumer debt (credit card) or mortgages. You will be harassed by lenders, late fees tacked onto your principal loan amount, your wages or social security benefits garnished, and tax refunds intercepted. And this is until the day you die. Your student loan will snowball into a huge amount that you will never be able to pay off (unless you hit the lottery). How does this happen? Compound interest - which I will discuss in a future post. Your life long enslavement will be guaranteed.

I am lucky. I took out student loans and can repay them. Well, for the moment anyway. I make a good salary only IN PART due to my education. I probably make a higher salary than I would have if I didn't have a degree. But does this insure greater wealth for me by retirement than someone who only earned a high school diploma or a 2 year degree? Hmmmmm, not necessarily. I will explore this in later posts.

Next: Not Everyone Needs to Attend College

The Aftermath

This year is my 10th anniversary since leaving graduate school. Many things happened in those years. People came in and disappeared from my life. I moved several times. Although unemployed for a year or so after leaving graduate school I eventually found work as an Engineer and worked in that capacity since then. The depression I felt in graduate school lifted, and now I feel relatively content. I recently paid off my credit cards, and I have a positive net worth. Things are working out for me, even though 10 years ago I never thought that would be possible. However, there is one constant in my life - my student loan.


If I raided my retirement accounts, I could pay my student loan in full. However, I don't want to pay the taxes and penalties associated with doing that. I would have used the money I invested into retirement to pay them, but I thought it more prudent to contribute the maximum that my employer would match. I don't want to throw away free money!


However, I am tired of my oppressive $900/mo student loan payment! My original loans totaled $65k. After my unemployment stints and a few hardship forbearances, the amount rose to $75k! I consolidated them in 2000 and now I'm locked into an 8% interest rate. At that time the rate was respectable, but now it totally sucks! As of this month (February 2009), the balance is around $28k. According to my payment schedule, I still have 3 more years of payments! So, this year I set this financial goal: as long as I remain employed and able to work, I will pay my student loan in full by December 2010 at the latest and July 2010 at the earliest. July 2010 is very aggressive, but I want my emancipation sooner than later! I will post my progress here on my blog. I will be shopping around for debt reduction tickers this week to make it all graphical and pretty. Although I am using an initial amount of $28k as a starting marker, here is a summary of what I've paid so far:

Original student loan amount: $65k
Ballooned student loan amount: $75k
Principal paid (as of February 2009): $47k
Interest paid (as of February 2009): $29k

I encourage everyone to share their stories regarding their struggles and triumphs with student loan debt. Also, during my remaining time in student debt slavery, I will be sharing what I learned in relation to finances, the higher education system and, of course, student loan debt. Please feel free to leverage your thoughts as well!

Have you been enslaved by student loans while seeking the "American Dream" of higher education?