Debt • Finances & Money

David Bach on Student Loans [Debt Free for Life]

I know book reviews can be extremely boring, so I’m glad David Bach’s PR people asked me to just review one chapter from his newest book “Debt Free For Life: The Finish Rich Plan for Financial Freedom“. I was asked to review Chapter 10,The Student Loan Diet: Nine Great Ways to Crush Your Student Debt and Sleep Well at Night, and as a former undergraduate and graduate student, and a former borrower of student loans, this chapter hit home.

For me, back in my high school days, I didn’t really bother with figuring out how I was going to pay for college. I let my mom take care of filling out the loan applications for herself and me (as she did for my sister), while I worked on some scholarship applications and keeping my grades up. I didn’t dwell on how I was going to pay for the debt, or even how much debt I was accruing. It only hit me when I graduated college and saw letters telling me my $20,000 debt payback would be starting soon!

Target Audience

I think most of the high school population (most, not all) probably could care less to read this book. The book should really be read by parents and then by students. While it’s targeted at both parents and students, I think that responsible adults would do well to first read the book, or at least the student loan chapter, and then direct their child to read Chapter 10. Don’t try to summarize it into a lecture because your kid’s eyes are going to glaze over. The good thing is that the book is very easy to read and the chapters are short enough to keep your attention just long enough to transfer the knowledge. I think I read the chapter in 20 minutes before bed.

Topics and Highlights

Student Loans are easy to get, but hard to get out of

Student loans are unlike most other debt types (mortgage, auto loan, credit card debt) in that you have to meet very strict rules (such as permanent disability or death) to be able to erase some or all of your debt. With other debts, you can usually achieve debt forgiveness with bankruptcy, but you can’t get rid of your student loans this way. Your wages, and even social security payments, can be garnished (taken from you directly from your paycheck like a tax) to help pay back your student loans without needing your consent. One way or another, you’re going to have to pay back these loans, so make sure you know what you’re getting into!

Know your loan options

Basically, there are government vs private loans. You should avoid private loans as much as possible because with government loans, you will have the options of deferral, consolidation and changing your repayment schedule. With private loans, you’re stuck with the repayment terms you agreed to when you took out the loan.

It is a good idea to speak to an admissions representative at your university before applying for any loans, as he or she will walk you through the process and answer any questions that you might have. You may have to set up an appointment, depending on how much information you are seeking. In some cases, your university might provide financial aid directly, making your life much easier. If you are forced to seek Federal Financial Assistance, you will have to fill out a Free Application for Federal Student Aid form. This form will determine how much assistance you are eligible to receive from the government.

With government loans, you have the choice of a 10-year plan or 20-year plan (and even some others. I had a 15 year repayment with a graduated payoff schedule after I consolidated my loans). You can even have repayment schedules based on your income!

As for deferral, you may recall that my own student loans were automatically deferred (meaning I didn’t need to make payments AND interest didn’t accrue because of the type of loan I had) when I went to graduate school for at least 6 credits each semester. When a new semester rolled around, the loans were updated depending on whether I had the minimum number of credits or not (I only took 3 credits during summers). I never had to submit any paperwork to do this, and it allowed me to pay down the loans much more quickly because I didn’t have an interest component to the payments. You can’t do that with a private loan!

Loan Forgiveness Programs

As I mentioned, there are some pretty strict rules to getting rid of some or all of your student loan debt, but none of them are easy. Of course, there is permanent disability (i.e. you can never earn any income again) and death, which aren’t attractive options for any of us (and if they are, you need to seek psychological help!). The other option is a loan forgiveness program, which aren’t always stable. For instance, federal employees can work off their student loans, as can many teachers and state employees. However, when budgets are tight, these programs are usually the first to go to cut costs, and you may be 9 years into a 10 year program when it happens. Just think, you worked for 10 years as a teacher partially to get your $120,000 student loan forgiven only to find yourself screwed right at the end of the tunnel.

Interest Deduction and Shopping Around

I won’t take too much thunder from the book, so I’ll let you read the chapter for yourself to learn some of the other “secrets” to student loan borrowing. However, I did want to touch upon a few other topics before wrapping up my review.

First, student loan interest. You can deduct your student loan interest paid for the year, even if you aren’t itemizing your tax return (unlike what you need to do to deduct mortgage interest). However, please don’t keep your student loans just so you can “have something to deduct” (you know who you are if you’re reading this!). Choosing to pay a bunch of interest just to save a fraction on your tax return is probably a dumb thing to do, right? The best option is to just pay it off as fast as you can and save all that money in the long run.

Second, shop around. Don’t settle on government or private loans as your only option for paying for college! I was rather lazy, but I was still able to get about $4000 in scholarships for college. It only took a small dent out of of our total costs (mine and parents’ combined), but that was $4000 PLUS interest that I didn’t have to pay back, just for a couple hours’ worth of work. Also, look into getting a job DURING college (like I did) to pay for books, rent, etc. so you don’t need to take out extra loans to pay for dining, lodging and other living expenses. And check out cheaper college options. You’ll learn in the long run that the college you attended has less and less impact on your job options, unless you want to be a high-power executive or lawyer perhaps (and then it’s a political game of one-upsmanship). Even then, if you prove yourself with your college work and activities, you can go pretty far!

Lastly, parents shouldn’t dig into their retirement savings to finance their kid’s education! I know that my parents are hurting for retirement because they took out lots of money to finance both my sister and I through college (mostly housing, but some tuition too). I know that taking over twice as much in loans which the other debts I stupidly accrued during college would have been very painful, but I would also have liked to see my parents be able to relax a bit more at this point of their careers.

Summary

I didn’t read the entire “Debt Free For Life” book because I only had time to review one chapter, but if their other chapters are as informative and easy/quick to read as the Student Loan chapter, I would recommend the book. It’s cheap ($10 or less on Amazon, free if your library has it already) and most people can probably read it in just a couple days before bed or on the bus/train. You may think you already know these principles, but I can assure you that everyone would find new and vital knowledge inside.