Question: I can’t believe how much student loan debt I have. It feels like I can barely get by each month and there is no way for me to ever get out from under these loans.
I have both federal and private student loans that add up to over $125,000. I graduated with a degree in graphic arts. I’m ashamed to admit it but a lot of my private student loans were used for living expenses and just enjoying the college experience. I can’t afford my payments and soon my private loans will be coming out of deferment with balances that are already higher.
— Stressed Out Beyond Belief
Steve Rhode answers…
There are so many people who contact me who are in the same situation. It may be of little comfort but you are not alone.
Schools have little need to make sure the degree program you are pursuing is going to allow you to earn enough money to repay your loans. The job of the school is to sell students into seats so they can offer their product: education.
Student financial aid offices seem to be mostly focused on helping students to get loans to afford the tuition. They are not there to tell you if you are making a smart move by getting the loans.
Society places a high value on having a college degree and the conventional wisdom is that getting one will be worth it regardless of cost. Yet nearly 75 percent of people with student loans never finish their degree for one reason or another. They are saddled with debt and have no tangible benefit to show for it.
One step that seems to escape, students, parents, and schools is some cost versus benefit analysis of what a specific degree will allow the graduate to earn and how much debt will be sustainable on that salary.
When it comes to repayment, the good news is there are some programs, like the Income Based Repayment program for federal loans, that will allow you to keep your loans current at a reduced monthly payment. Based on your income, payments can be as low as $5 per month. After 25 years of low payments the balance will be forgiven. Your payment will adjust annually.
On the private student loans you mentioned a very key point. It seems your private student loans were not used for qualified educational expenses and thus not excluded from elimination in bankruptcy. For more on this, see my article and find out why many student loans are eligible for discharge in bankruptcy regardless of the common myth they are not.
Question: Should I avoid using a credit card? My friends tell me I should just use a debit card instead of a credit card. What you you think?
— Confused in Credit
Steve Rhode answers…
Excellent question. Most people think banks push debit cards because they are a better, smarter personal finance tool. Nothing could be further from the truth. Banks push debit cards because they earn fees from each transaction.
A credit card is a smarter financial tool to use to complete a transaction with more protection. When you hand someone your credit card you are not giving them the authorization to reach into your bank account like with the debit card. The credit card company acts as a buffer between you and the merchant. If there is a problem with the transaction the bank will fight for you without your bank account potentially being involved.
People can use a credit card without carrying debt. In fact the majority of credit card users never carry a balance. There is nothing that prevents anyone from paying off a credit card balance when they incur it or paying the bill in full before the due date to avoid an interest charge.
Personally, I never use a debit card.
Steve Rhode is the Get Out of Debt Guy. He’s been helping people with personal finance troubles through advice and education since 1994. If you would like to ask a question, visit Get Out of Debt and let Steve help you for free.