Student loan debt has been in the news a lot lately as federal lawmakers grapple with the possibility of extending the current lower interest rates on government-issued education financing, which are set to double this summer. However, many students may have limited knowledge of what they owe on these accounts.

A new study from Iowa State University found that about 40 percent of that school’s student body underestimated how much they owed on their education loans, according to a report from the Des Moines Register. About 10 percent of those surveyed underestimated their outstanding balance by more than $10,000, and just 22 percent carried no student loans at all.

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The researchers say that this study also highlights the pressing need for financial aid offices to step up counseling efforts so kids can better understand the effect these loans might have on their finances for years to come, the report said. The student loan process can often be difficult to navigate and understand for those who have little and, more often, no previous experience in dealing with credit in their own names. Many studies have also shown that college kids tend to lack a general understanding of how finances work, and some have advocated the need for mandates on financial literacy education.

“You’re talking about people who, for them, borrowing is new,” Cynthia Needles Fletcher, a professor of human development and family studies at ISU, told the newspaper. “Yet these are really critical decisions.”

As a means of helping to counteract this lack of basic knowledge about their various outstanding student loans, the school is launching a program designed to increase awareness, the report said. This summer, it will send emails to all its students revealing exactly how much they owe, how much they can expect to pay per month when they graduate, and even a list of all the lenders to which they owe money.

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Recent studies have shown that the average college student now graduates from school with more than $25,000 in outstanding student loans, and that the cost of a year’s tuition has expanded rapidly in the last decade. This, therefore, can be extremely problematic for recent graduates, many of whom may still struggle to find employment within a few months of getting their diplomas.

Image: Sterling College, via Flickr

For the record, I am not now, nor have I ever been, a member of the Hitler Youth. I point this out because based on the comments to my last few columns (which focused on the idea that a National Service Corps could help solve our student debt crisis) it would seem that some of you — not too many, thankfully — seem to think I’m affiliated with the organization. This, as you can imagine, is a bit troubling for a nice Jewish boy from New Jersey.

Here’s an example from commenter JakeFlagg:

“National Service. Didn’t that idea come from the National Socialists of the Third Reich? Hitler Youth? Of course it did, and this ‘admin’ has been on a fascist tear that Americans can hardly believe, but ought to, since we’ve essentially had fascist ideals in place since the 1920′s.”

Then… there’s this:

“Soon nearly 90% of the country will be branded as terrorists,” LSummers29 wrote. “Stock up on food and ammo or face imprisonment Hitler style, it’s your choice.”

[Related Articles: The Other Student Loan Slow Jam: Is It Time for a National Service Corps? and It's Time to Solve the Student Loan Crisis]

Not everyone was so incendiary. Many recognized that we indeed have a big problem, and offered ideas for a solution. After all, Americans now owe over $1 trillion in student loan debt, more than they owe on their credit cards. As real wages for most American workers stagnate and full-time employment for recent grads becomes the exception rather than the norm, college debt is becoming the anvil that hangs from the neck of many graduates. Something needs to be done.

Many commenters suggested an attitude adjustment (in the most positive context) on the part of students to take on less debt, and make sure they can repay the loans they do receive, which isn’t at all unreasonable.

“Just like credit card debt, folks need to take resposibility (sic) for spending what they do not have,” wrote RAH12345.

Others suggest that students now do what many of their parents did — think “work, not “debt” and take part-time jobs to help pay for school.

“It took me 12 years to graduate debt free,” said a commenter using the screen name litnakaro. “Worked full time, went to school fulltime or part-time depending on what I could pay for with cash each semester.”

But while changes by individual students obviously can make a huge difference, I think we need systemic changes to fix a systemic problem. That requires changes in government policy, especially when it comes to higher education, where federal funding plays such an overwhelmingly decisive role.

To that end, here are three ideas for policy changes from our readers that I found most intriguing. Some of them could work in conjunction with the National Service Corps, while others would stand-alone. I’ve also included my own thoughts regarding their impact and feasibility.

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1. Skin In The Game

Moravecglobal:

“All higher education loans are guaranteed by the university endowment. Graduate of a university like University of California Berkeley defaults. The University of California Berkeley endowment repays the taxpayers. Watch UC Berkeley graduate default drop like a rock!”

William concurs:

“Have the federal government lend at 1% to the schools. Have the schools lend at 2% to the borrowers. The total period for the loan is ten years. If the borrower cannot pay, the school is on the hook to the federal government. The schools become banks, the school is also the guarantor. The taxpayer is protected. Watch crappy degrees disappear and degrees get cheaper. In the event that the borrower cannot find a job, the borrower is not obligated to pay during their time of unemployment during that ten year period. Make the colleges have a vested interest in helping that graduate find a job rather than sticking them out into the wind to twist.”

Moravecglobal and William make an excellent point. Today, colleges and universities have little financial incentive to rein in costs. Why should they when the government and private lenders dole out student loans like candy canes at the Santa Chair in malls — not to mention the fact that the debts are non-dischargeable in bankruptcy? And in case you missed it, the New York Times recently ran a great article about the student debt crisis which featured this shocking statement from E. Gordon Gee, president of Ohio State University.

“I readily admit it… I didn’t think a lot about costs. I do not think we have given significant thought to the impact of college costs on families.”

I’m all for proposals that impress upon all the stakeholders — students, universities, government, private lenders — the severity of the issue. These suggestions make one wonder: What do we have to do to make colleges start taking this problem seriously?

2. Reinstate Recourse

Allan Collinge, founder of StudentLoanJustice.org:

“I have an even better idea: return the standard consumer protections that should never have been taken away, such as bankruptcy statutes of limitations, refinancing rights, and others.  It is the removal of these protections that enabled the runaway inflation we are seeing, and similarly it is the return of these protections that will put college prices back in check. Beyond that, I look forward to alternative payment proposals such as what the author puts forward.”

Student loans may seem like any other kind of debt. They do come with interest rates, after all, and they require monthly payments.

But in point of fact, they are quite different. More like tax obligations, student loans almost never go away, even after a borrower declares bankruptcy. And if consumers default on student loans, their options for refinancing are often significantly more limited than with mortgages or other types of debt.

While I agree with Alan in principal, the combination of seemingly unlimited student loan money from the government, and the reinstatement of bankruptcy options, could unleash a wave of chapter 7 bankruptcies among recent graduates. However, assuming the government continues doling out student loan money at will, we should consider allowing student debt to be recast in a chapter 13 bankruptcy, which could reduce principal and interest rates for graduates in real trouble.

3. Get the Government Out

KB9TTX:

“As long as easy money flows from governments to students’ accounts to the universities, the universities will not need to cut costs … or even try to cut costs. Further, many public institutions receive funding directly from the governments. So why is tuition so high then? I assert that in most cases we will find that tuition is legislated to be some proportion of revenues. If a university requests, X in revenues then tuition is set at Y% of X. If X is based on costs of previous period, then X will continue to rise with inflation and special programs du jour. Thus Y% of X will rise too. Since universities don’t “enjoy” the free market feedback loop of losing dissatisfied customers (for every drop out, the government has another student in the queue for a Stafford grant), they have little incentive to reduce costs in a consistent meaningful way to “stay in business”. Therefore, to fix this looming Tuition loan tsunami, get the federal government out of the business of education funding. Let the market place correct the distortion. Let the prices fall back to the levels that a student can work and pay or save for college in a meaningful way rather than the life long 529 plans that so many have to use today (another federal government market distortion mechanism). But certainly, another Federal program isn’t going to solve the problems generated from a Federal program.”

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KB9TTX wasn’t the only commenter to express this sentiment. A number of others pointed out that one reason why college tuitions are rising so quickly now is the same reason why residential real estate prices shot up during the 1990s and 2000s: There’s just so much money to borrow.

Unlike the mortgage bubble, however, which was driven by banks looking to make big profits from securitization fees (Fannie and Freddie notwithstanding), this time around most of the money is coming from the federal government.

On the one hand, I absolutely agree. The current system offers no effective check on tuition costs, and likely does play a major role in fueling tuition inflation.

On the other hand, it’s hard to imagine how to extricate the government from the present scheme without causing chaos. If government support for student loans went away immediately, America’s system of higher education could conceivably crumble.

Phasing out such support gradually also raises all sorts of thorny questions. Would art majors be the first to lose federal subsidies? Or would the reductions be made by type of institution, possibly with controversial private for-profit universities losing support first? While it’s easy to see how government spending is helping to fuel tuition increases, I have yet to see any concrete steps for how such a change might be implemented.

Solving this problem will take time, and I thank all the commenters, even the ones who think I’m a Nazi, for taking the time to think about the issue and what we might do about it.

[Student Loans: Research and compare options for student loans at Credit.com]

Image: Will Hale, via Flickr

Continuing declines in the housing market in some parts of the country have left many homes still “underwater” across America. While these homes may not be physically floating in water, their owners no doubt feel like they are drowning in debt. One reader writes:

My first mortgage is paid.  I took out a line of credit on this house for $81,700 in 2007. I am 72 years old and retired.  I have since moved out of state.  I would like to sell this house, but the homes in this area are only selling for $40,000 – $45,000. I cannot afford to pay the difference. What are my choices?

I am sure you are well aware that you are not the only person in this situation! It’s unfortunately quite common. According to CoreLogic, just over 11 million homes — about one in five homes with a mortgage — are in negative equity, meaning mortgage balances are greater than the value of the home.

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Before we look at your options, there are a couple of things you need to think about here.

First, it’s important to realize that when you paid off your first mortgage, the lender that holds the home equity loan moved into first lien position. So even though this loan may have originally been taken out as a second mortgage, it is no longer a second mortgage. The reason that is important is that sometimes when a homeowner is underwater on both a first and second mortgage, the second lienholder is more willing to negotiate because it knows that in order to foreclose it has to pay off the first mortgage. That doesn’t sound like it’s the case here.

One thing you need to do before you can make a decision about this house is to meet with a tax advisor with experience in issues related to 1099-Cs. If you are able to get out from under this loan without paying the full balance, the IRS will consider any cancelled debt taxable income. You’ll owe taxes on it unless you can show that you qualify for an exception or exclusion, such as the insolvency exclusion, or the Mortgage Debt Forgiveness Relief Act (which is currently slated to expire at the end of 2012 unless Congress extends it). This is vitally important because you don’t want to end up in a situation where you owe the IRS a big tax bill you can’t pay.

[Related Article: A Slew of Tax Tips to Clean Up Your 1099-C Mess]

With that information in mind, you can consider:

A short sale. This is a sale of your home in which the lender allows you to sell the home for less than what you owe. If you are able to sell your home this way you want to get an attorney to look over the agreement to make sure you aren’t on the hook for any deficiency balance.

Walking away and letting the home go into foreclosure. This can be risky because the lender may decide to sue for any balance left after the home is eventually sold. But it is a popular option in some cases.

Filing for bankruptcy. This may allow you to put this home behind you and avoid taxes on any cancelled debt. An attorney can help you figure out the pros and cons of this approach.

[Learn More Here: Underwater On Your Home: Your Six Options]

You may have some tough decisions to make here, but getting advice from experienced professionals who are helping other homeowners in similar situations should help you decide which approach is right for you.

In less than a month, I will graduate from my MBA program at Georgetown University with more than $120,000 in student loans at 7% interest.  Six months after graduation, my grace period will end, and I will have to start repaying more than $1,000 per month.  Here is my strategy for repayment.

Earn Baby, Earn

The first thing I have to figure out is how to increase my income from its current level.  Without more money coming in, there is no chance for me to pay down my debt and maintain my current lifestyle.  Some student loan repayment strategies I’m considering are taking on another job while I continue making money on my hobbies like blogging, graphic design and website development on nights and weekends.

Consolidate my Student Loans

Right now, I have thirteen student loans outstanding.  Once the payments start after my grace period is up, I will have a paperwork nightmare. To simplify the repayment process and fix my interest rate, I am going to consolidate my federal student loans into one loan. Since I do not have any private student loans, I will be able to consolidate through the Direct Loan Consolidation program and avoid paying loan consolidation fees.

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Pick the Best Repayment Plan

There are several student loan repayment plans available to borrowers.  Recently, a new plan was created called the Income-Based Repayment Plan. When I started my business in school, I chose to take a lower salary so I could reinvest more in my company’s growth.  As a result, my Adjusted Gross Income was relatively low last year and the income-based repayment plan may be the best option for me.  It may not be the same for other borrowers, so make sure to consider your repayment options and find the best repayment plan for your situation.

Manage and Track Spending

One of the keys to successful student loan repayment is creating a budget and sticking to it every month. Personally, I use this budget and cash flow worksheet to track where my money goes and set spending goals each month. No matter your method, find a way to hold yourself accountable so you never miss a payment on your student loans.

Rapid Repayments

There are a couple strategies I plan to employ to reduce the amount of interest I pay on my student loans.  First, I am going to make a payment every two weeks, rather than one payment each month.  This method is called rapid repayment. By paying every two weeks rather than once a month, I will reduce the amount of interest I pay dramatically over the life of my loan. Additionally, rapid repayment forces me to apply one additional payment to my loan each year. If I pay once a month, I make twelve payments per year.  If I pay every two weeks, I make 26 bi-weekly payments, or the equivalent of thirteen months of payments each year.

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Apply Future Bonuses and Gifts Toward Debt Repayment

Debt repayment requires discipline and sacrifice.  While I want to take bonuses and gifts and buy fun stuff, I simply cannot.  The top priority after graduation is to eliminate my student loan debt as quickly as possible. In the past, my priority was building up my emergency savings fund.  My new goal is to repay my debt.  The choice is simple.  Repaying my student loans is the equivalent to putting my money into something that returns a fixed rate of 7% each year. With interest rates on savings accounts and CDs paying low interest rates, it makes more sense to apply excess cash toward debt repayment. So whenever I get extra cash in my bank account, I will use it to pay off my loans first.

Image: Donkey Hotey, via Flickr

These days, many people are getting their finances in order as the economy continues to improve and the effects of the recession fade, but millions of families got themselves into trouble so deep that they’re still struggling significantly under the weight of massive debts.

Millions of families are considered “underwater” with their mortgages because they owe more on their loan than their home is worth. Additionally, millions more are also underwater when it comes to their non-collateralized debt, which can be more troubling, according to a new study from the University of Michigan. In all, about 20 percent of all households nationwide owe more in non-collateralized debt (which can include credit card balances, medical bills, student loans and the like) than they have in savings and other liquid assets.

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“Some families have not been able to make substantial headway,” said Frank Stafford, an economist at the University of Michigan Institute for Social Research, who co-authored the report with researchers Bing Chen and Robert Schoeni. “Even if they’re not underwater with their mortgages, they are struggling to save money and reduce their debts.”

In all, the number of consumers who carried $30,000 or more in non-collateralized debts increased significantly between 2009 and 2011, rising to 10 percent of those surveyed from 8.5 percent, the report said. Meanwhile, the number of people who said they had no such debt at all slipped, though marginally, to 47.4 percent from 48 percent. At the same time, the number of families with no liquid assets or savings rose to 23.4 percent from 18.5 percent.

On the other hand, the researchers found that a good portion of non-collateralized borrowing increases were the result of spikes in student loans, which can lead to tens of thousands of dollars in debt for those who receive a four-year degree, the report said.

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Of course, many of the economic problems people ran into during these times came about through no fault of their own. Millions of families were laid off and increased credit card borrowing as a means to make ends meet when other sources of income were not available. Further, these troubles also made it more difficult to pay their various bills, and some prioritized mortgage payments over other types of borrowing to keep their homes.

Image: miquelsi, via Flickr