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.

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Image: Will Hale, via Flickr

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

It’s that time of year when tassels are turned and graduation caps are tossed into the air. And ready or not, a new group of young adults venture out into the real world.

If you just graduated, you might be looking forward to managing money on your own. Certainly, it’s deliciously liberating. But it can also be tricky, especially with credit cards because it’s so easy to spend like a maniac and get yourself into debt.

So to help you get started on the right track, I’ve put together five credit card rules that you should always keep in mind:

Rule #1: Don’t fall for flattery

You’ve probably received credit card offers while in college. You may even already have one or two cards. But once you’re employed, expect to get a ton of mailed offers.

The envelopes will entice you with language such as, “You’ve been selected!” and “You deserve this opportunity!” Card issuers will do their best to make you feel special and wanted.

Banks do want you, but they also want millions of others whom they told are special, too. Don’t apply for a new card unless you actually need it. Make a rational decision based on your needs and don’t fall for the hype.

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Rule #2: Read the fine print before you apply 

If you do decide you need a credit card, it’s okay to consider the mailed offers. But also get online and check out credit card comparison sites, like Credit.com, where you can search for cards based on what your needs are.

Narrow the list down to about a half dozen candidates (maybe less, maybe more, depending on what category you’re looking at). Then read the fine print for each one so you can make an informed choice. You want the card that matches your lifestyle and your needs. For instance, if you’re driving a long distance to work, look at cash back cards that offer a gas rebate.

There’s really no substitute for reading what’s often called “mouse print.” Think of this as an investment in your financial future. When you know how to earn rewards or avoid fees, you’ll benefit financially.

Rule #3: Pay the balance every month

Honestly, this is a rule that everyone—regardless of age and credit experience—should follow. Now is the perfect time to develop this habit. Pay your bill off every single month with no exception. Set up a budget so you know exactly how much you can put on credit cards for a given month. Don’t exceed that amount because if you do, you might not have the cash flow to pay it off. Then you end up paying interest expense.

If you keep spending, this snowballs and before you know it, you’re in credit card debt. It’s a depressing place to be. I’ve overcome it and many others have, too, but you don’t want to be in that position. It will be a financial setback for a long time.

[Related Articles: The Other Student Loan Slow Jam: Is It Time for a National Service Corps?]

Rule #4: Pay the credit card bill on time

This may seem like a no-brainer. Of course I’ll pay on time, you say. Well, good intentions sometimes go awry in real life. You must have a system in place so you don’t forget. You’re an adult now and you’ve got work responsibilities, household chores, dry cleaning to drop off. And, of course, a social life to keep track of.

It’s easy to get really, really busy and let the bills slip. Set up reminder emails or text alerts from your card issuer. Or use free money management software like Mint and set up weekly bill-paying reminders via email. Handle this in a way that works with your organizational style. Just don’t your memory as your sole method.

Rule #5: Make a vow to learn about personal finance

Humans don’t instinctively know how to manage money, let alone credit cards. But even if you weren’t taught money skills as a child, you can teach yourself now.

There are lots of personal finance books out there. I like Clark Howard’s books because he offers good tips for making the most of your money. Liz Weston and Farnoosh Torabi (her books are targeted to young adults) also have some really good personal finance books you should read. If you have a Kindle, you can get most books in ebook format and save money.

And don’t forget, the Internet is loaded with websites that want to teach you how to handle credit or set up a spending plan. For instance, free webinars are  offered by CredAbility. The teachers are certified by the National Foundation for Credit Counseling (NFCC).

But listen, if you ever find that you’re over your head in debt or cash flow issues, ask for help. So many grads already have student loan debt and if you add credit card debt to that, you’ll feel overwhelmed. Being in debt is a lonely feeling and there are organizations filled with counselors who want to give you advice. You can reach out for help from the NFCC or from CredAbility.

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If you’re worried about student loan debt, what it means for graduating seniors and for the future of our nation, congratulations. That means you’re paying attention. Now that Americans owe over $1 trillion in student debt, more than they owe on their credit cards, many people are beginning to see that our country’s current way of paying for college cannot be sustained.

Unfortunately, as I mentioned in this space last week, our leaders are not taking the problem seriously. For all the suave coolness President Obama displayed during his “Slow Jam” on student loan debt, his call to keep the interest rate on federally subsidized Stafford loans at the current 3.4 percent will not have much of an impact. It’s a distraction from the looming crisis.

Here’s the problem, folks: In America right now, an entire generation is mortgaging its future. And the chances that they’ll ever succeed in paying off that debt are growing ever slimmer. As tuitions continue to increase, the job market stagnates and median wages—especially for the young—trend downwards, we are now trapping millions of young people in a cycle of high debt and low opportunity from which some will never escape.

There is a better way.

I call it the National Service Corps. The idea is simple: In exchange for a few years of service to their country, young people would receive significant financial assistance to pay for college.

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The idea is not new, of course. After World War II, the G.I. Bill sent millions of returning soldiers to college and technical school. Some veterans even had their entire tuition paid to attend the top Ivy League schools. The result: A generation of highly-experienced young people, trained in business, engineering and science, led our nation into the longest period of sustained economic growth the world has ever known.

The situation we face now is not so different from what we faced in 1944, when the G.I. Bill was first passed.

Then as now, America faced a new technological era that swept away millions of jobs that were never coming back (think Dustbowl farmers replaced by tractors then; bank tellers replaced by smartphones now).

Then as now, newly ascendant world powers threaten to overtake our leads in education and scientific research.

Then as now, a generation of young people faces the prospect of systemic unemployment and shaky economic futures.

What’s also true is that young Americans are just as ready to serve their country in 2012 as they were in 1944. And now more than ever, America must invest to give its young people the skills they need to lead us into the future.

The basics of a National Service Corps haven’t changed much since the G.I. Bill, or since I first wrote about the idea as an aide working in Congress in 1969. If you give service to your country, then your country will help you go to college. Young people who choose to participate could choose to serve in the military, or they could do civilian projects in education, community service and infrastructure building, similar to the work done now by Peace Corps and AmeriCorps volunteers.

Americorps, in fact, was created by the Clinton administration and expanded dramatically under Bush 43. Given the fact that it is a federal program, it is of course complicated: It is part of the Corporation for National and Community Service, which also oversees related programs that you probably haven’t heard of, like the Senior Corps and Learn and Serve America. AmeriCorps itself has three divisions, which incorporate things like the Vista program, which is the domestic version of the Peace Corps, and has been around since 1965. Although experience can widely vary, most members of AmeriCorps earn a stipend of about $5,000 a year which can be used to offset existing student loans, certain health benefits and living expenses while they’re enrolled in the program. While the program has cachet and is good as far as it goes, $5,000 a year for college in the U.S. doesn’t go very far.

[Related Article: The Other Student Loan Slow Jam: Is It Time for a National Service Corps?]

The time has come for the re-creation of AmeriCorps, and the rethinking of the government role in borrowing for education. Specifically, the country needs to address three major problems:

1. While it’s certainly true that the 21st-century demands education beyond high school level, the notion that everyone should get some kind of a liberal arts education, however much it appeals to our nobler instincts, is ultimately counterproductive. Thus new or revamped programs need to create incentives so that people who should be getting skills-based vocational training do not instead study English.
2. Part of the reason for the inflation of tuition is the easy availability of borrowed money, just as a flood of mortgage money certainly contributed to the housing bubble. The existing skein of federally-backed loans and grants under Title IV of the Higher Education Act must be streamlined, and real standards for both borrowers and eligible institutions must be developed. There have been some steps in this direction recently, at least in terms of new regulations applying to for-profit schools, but they do not go far enough.
3. We need to reorganize all of the efforts combined within the Corporation for National and Community Service, so that the culture of borrowing tuition money is replaced with the idea of working for it. Obviously, there is no practicable way of allowing every student to work for the government in order to pay for tuition, but the creation of a National Service Corps will have a meaningful impact on the problem, in connection with the other reforms outlined above.

There are many questions that need answering. Should the program pay for college entirely? Or, should there be a cap of, say, $15,000, above which students can find loans if they choose to attend a more expensive college?

Should all volunteers join the National Service Corps at age 18, right after high school? Or should they be allowed to choose whether to participate during college or even after college, depending on their financial and educational needs?

Should all National Service Corps volunteers serve two years? Or should civilian volunteers serve for three years while military volunteers—who put their lives on the line—serve only two?

Answering these questions and probably even discussing this idea will be a challenge. To be large enough to solve the problems of looming college debt and structural unemployment, a National Service Corps could cost billions of dollars a year. In the current political environment, arguing for any new or expanded program, especially one as large and important as this one, might be viewed as a risk few politicians are in the mood to take.

We must not allow what amounts to political cowardice to stop us. We cannot accept the United States as a waning world power, simply because we are too myopic to invest in our own future. We cannot accept generations of young people drowning in a sea of debt and underemployment. We cannot accept politicians who distract us with silly—but cool—gimmicks, however well intentioned. It’s time to act.

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