If you really want to understand all of your alternatives to student loan conslidation, you just might want to read a bit further. Chances are, you’ve been looking for an alternative to go ahead and consolidate the student loan you’ve been staring in the face for the past – well – long time.

Be careful

Remember the root of the word consolidation: con. I’m not going to pretend and say that I can foresee every situation. But I just might have an idea of what you’re thinking when you go looking around for an alternative to paying the student loan you took out so long ago.

Why did you take out the loan in the first place? Were you really out of money? Or did you just need some “extra” cash? The lending institutions wanted you to take out that student loan, and now they want you to consolidate that student loan. They want you to think there is no alternative.

Well, there is.

Simply pay off the loan. Bite the bullet and pay off the loan. On top of student loans you probably have credit card debt, car debt, and a mortgage to boot. You are up to your ears in debt. So your logical alternative to paying the debt, is to conslidate the loan into one easy, albeit large, loan.

You are simply treating the symptom. Your problem is not your loan. Your problem is your spending. And until you get your spending under control, you’ll continue looking for that student loan consolidation opportunity.

Or have I misunderstood? Were you searching for an alternative to consolidating your student loan? If so, then I apologize for assuming the worst of you. I praise your courage to avoid the consolidation opportunities out there. Go ahead and take a look at some of them. They want your money. They want to get you on their “special” program. They make me laugh.

The alternative you’re looking for? You don’t need a consolidation program. You don’t need any more debt. You don’t need to make more money. You need a budget.

People are always looking to make a return on investment improvement. Don’t you love hearing about a person’s raving success in the stock market? (Yet they fail to mention all of the losing stocks they also picked). If you’ve ever been bored enough to be watching late-night television, you most likely saw an infomercial about how you can make it big “flipping” properties, or leveraging (using debt) yourself to the hilt to make huge returns on your investment.

Well, I’m here to say that I also have come up with a way to make a guaranteed 18% return on your investment! Read that again if you’d like. I guarantee that you can make an 18% return on your investment. And it won’t cost you a dime. You won’t even have to buy my extremely expensive tape set for $49.95 (normally $149.95 – but if you call within the next twenty minutes you save $100!). That’s right. I’m going to give this information to you absolutely free. Here we go.

Imagine you’re an average American. That means you carry about $8,000 on your credit card. If you’re still average, then you also pay an interest rate of about 18%. That means in one year you pay $1,440 to Visa, Discover, or whoever else might be your taskmaster.

Suppose your wealthy grandmother gives you $8,000 tax free. What should you do? What would most people do? Let’s take a look at two different alternatives. Suppose you have the opportunity to invest that $8,000 into a mutual fund consisting of the stocks that make up the S&P 500. Historically (cautiously including the bubble…) you might get 11%. Let’s make the gross assumption that this fund is expected to also return 11% this year. So you take the plunge and invest the $8,000. In one year you’ll have made $880.

Because you invested your $8,000 windfall into a mutual fund instead of paying off your credit cards you effectively made a -7% return. You always need to evaluate choices with money based on the next best alternative. And in this case, you lost $560.

You must also note that the 11% return offered by the mutual fund is not a guaranteed return on investment. Naturally, there is a chance that the mutual fund could lose money during the year, or return some paltry amount. These risks are not present when you use the windfall to pay off the $8,000 credit card balance. Let me make that point again. To avoid an interest payment of 18% by zeroing the debt is the same as getting an 18% return on money you invest.

When would paying off your 18% credit card balance not be financially prudent? There is one scenario: If you can find a risk-free, guaranteed investment for your $8,000 that would yield a return on investment greater than 18% per year then it would be wise for you to invest your money in that vehicle and continue paying your taskmaster. The odds of finding such an investment? Virtually zero.

The only guaranteed return on investment I know of is to pay your debts off early or settle for federal rates. If your mortgage rate is 7% and you decide to pay the principal down then you are making a guaranteed return on investment of 7%. If your credit card balance is subject to an 18% balance and you pay it off then you have made a guaranteed 18% return.

I think I’ve beat that dead horse enough.

If you have enough money in your checking account to cover one month’s expenses, and you are budgeting your money effectively from month to month, then you need to be capitalizing on the returns you can make by paying your consumer debts (automobiles, boats, 4-wheelers, credit cards) as soon as possible. Once you have these debts paid off it’s time to finish off your emergency fund with another 2-5 months’ expenses. Put the emergency fund money in a very liquid, stable place. (I highly recommend ING DIRECT). After you’ve completed that step, begin working on having interest work for you in the other direction. Begin investing for the long run. A rich man has interest working for him, not against him.

Not too long ago, Americans’ greatest asset was the equity in their homes. However, banks have targeted the home equity loan aggressively in the last several years. This has caused a dangerous shift in the net worth statements of Americans. What was once an asset is now a liability.

The offer might be extremely enticing: You have nine credit cards, all with outstanding (the credit card companies sure think so) balances. You have to pay nine separate times each month. And the interest rates on these cards are pretty high to boot. The bank comes along and offers you a home equity loan that will pay all of the outstanding debt you have on your credit cards.

Relief…

Now you just make one simple payment per month instead of nine – and the interest on this home equity loan is so much lower. All of the numbers make sense. But have you made a wise financial choice? Probably not.

Picture this. You still have nine credit cards. All of them have zero balances and it feels good. Your consumer side starts to whisper: “You’ve got some leeway, a buffer, a cushion for those extra things you need!” You are not immune to such temptations! Do not underestimate the power of the dark side (advertising) to use mind tricks against you. With a simple wave of their hand your wants have now become your needs.

And the credit card balances begin to climb.

On top of these new and enticing zero balances, your home is now at risk. You have taken on secured debt. But the only people that feel secure are the banks. You fell prey to the illusion of security and have failed to do something extremely critical to your financial security:

Change your behavior.

If you choose to consolidate loans you have probably made a wise choice by the numbers. If you use a zero-percent-for-six-months credit card to which you can now transfer all nine balances then you have probably made a wise choice by the numbers.

But you haven’t changed your behavior.

You are treating the symptom – not the problem.

Scariest of all, now that you have your credit cards consolidated into one card, or a home equity loan, you still have those available lines of credit. And you haven’t learned to live without credit. You haven’t learned to live within your means. You haven’t learned to manage your money. This move of consolidation has brought you to a better place financially for the time being. But if your behavior does not change now, you will end up in a far worse situation than you had even before consolidating. I am not against consolidation (examined on a case by case basis) if you have already changed your behavior. If you can show me that you have one month’s expenses saved, are in control of your money and are just bursting at the seams to absolutely destroy your debt, then I do hereby qualify you as someone who may consider consolidation. The numbers make sense and your behavior has changed.

If you have not changed your behavior then consolidation is the absolute worst thing you can do to get out of your present situation. It will only suck you back in even deeper.

Finance is not about numbers nearly as much as it is about behavior. Make the change.

May the force be with you.

You might have read about our quest to find a rocker in the Garage Sale Lady article – this is a prequel to that.

My wife I and were at R.C. Wiley’s looking for a rocker a few weeks ago. We didn’t really find what we wanted, so we began to make our way out of the store. As we were leaving I couldn’t help but overhear a snippet of the conversation between a salesman and a customer. He had a little clipboard out and appeared to be running some numbers. I heard him say, “If you make it a 7-year deal, your monthly payment for the couch would only be $26.

I ran the numbers when I got home. I didn’t hear how much the sticker price for the couch was, so I’ve assumed an interest rate of 5% – which I think is downright generous. That lady was going to spend $1,802.80 on a couch – over a seven year period. She was haggling with the man over the monthly payment – not over the sticker price of the couch. For every year he was tacking on to that financing plan – she was paying more for that couch.

I’ve been paying more attention to the advertising done by credit card commercials lately. Just the other day I heard on the TV that if I wanted to support the U.S. Olympic team then I should get my Visa Olympic Card. “The only card accepted at these summer games.” And I used to think I was somewhat patriotic.

Credit is getting absolutely out of control. I don’t believe in borrowing money for anything but a home. And even then, I plan on putting down a hefty down payment as soon as my wife and I decide we’re no longer renters. You can read about my stance on mortgages in this article.

Millionaires do not use consumer credit. Read about that in Dr. Thomas Stanley’s book “The Millionaire Next Door”. I firmly believe that is part of the reason they are wealthy. “Oh, the rich are greedy, they don’t get taxed enough” blah blah blah. The overwhelming majority of them never received any type of inheritance money. They started from economic ground zero – where my wife and I currently hang out.

I’m off topic. Back to credit.

Never borrow money to purchase something that depreciates in value. Yes, Cars depreciate in value. So do boats. As far as I know, so do groceries.

“But I pay off my balance every month with my credit card. I get nifty prizes, airline discounts, and cash back!”

The vast majority of those prizes are never redeemed. You have to spend money to get the prizes. This is what I think happens when you have rewards attached to your credit card (or debit card for that matter – Wells Fargo wants me to join the program for $12 a year). Let’s say you get $200 off of your next airline ticket – or better yet – let’s say you get it for free. You get a roundtrip ticket for free…right. I contest that you subconsciously factor these rewards into your purchases. Because you know you are getting airline tickets or one or two percent cash back you “over-purchase”. You justify purchasing things you wouldn’t otherwise because of those rewards that are sitting there just waiting to be earned. You can argue with me about this – but I’ll tell you this: If it weren’t profitable for the credit card companies, they’d stop. If you aren’t actively budgeting, I wouldn’t touch it.

I challenge you to go against the grain, swim upstream, stand out from the crowd. Destroy your credit cards! Let me know when you have. I’m keeping score.

Once I’ve gotten to know someone for a while, I’ll usually ask the question, “Do you budget?” The response is always interesting. That was how I got into one particular conversation.

My friend went on to tell me that they used to. But they couldn’t have any fun. When you’re young married students (and I am one), it’s true that things can get a bit tight. And my friend was telling me that they would want to go out and do something, but all of their friends would always say they didn’t want to spend the money. So they’d end up just over at someone’s house chatting – then going home.

Apparently there was a lot of stress about money. Things were tight and they were always worried about the car breaking down, or running out of money for groceries. Their solution to take away the stress of very little income? Take out some student loans. He began to explain that since they had taken out their loans (approaching $30,000, and he still has four semesters of school left) they were no longer stressed about money. If the car broke down, they didn’t want to pay for repairs, but they knew they had the money.

I just listened. No stress? $30,000 in debt and still going and they don’t have any stress? I couldn’t believe my ears. This is typical Student Loan Syndrome (SLS).

SLS is rampant on college campuses. You can usually find SLS where you see someone living outside of their means. A lot of times, especially with young married students, they tend to want to take on the lifestyle of their parents. The result is usually a lot of “necessary” purchases that really can’t be afforded by the young couple.

SLS also comes along when the couple is in “economic anticipation”. They know they will have a huge jump in income once the main breadwinner graduates and lands his first big job. So to take out a few loans now is no big deal. The interest rate is unbelievably low, and their will be so much more money coming in, they think they’ll be able to pay off the loan in no time.

How does one cure SLS? Building up a small reserve of one month’s expenses is the first step. This helps the student avoid even the temptation to charge an unexpected expense. Next, the student must get on a budget and stick to it. Some might call me extreme, but if you’re really in need of money as a student, then take a semester off of school and get some. Students are notorious for saying they don’t have any money to spare – as they text message their friend on the latest new cell phone.

To take out a loan because you’re “avoiding stress” is treating the symptom, not the problem. If you want to get to the heart of your money matters then you need to follow the Four Rules of Cash Flow Management. These treat problems, not symptoms.

If you do have student loans – pay them off! If you don’t – avoid them! While many wise people say that you are investing in your education and thus, taking out loans is okay, I just can’t help but think of all those students who have done it debt free. It takes hard work, perseverance, and sacrifice, but it can be done. Get your degree debt free.

Abraham Lincoln wrote this letter to his stepbrother, John D. Johnston, who had written Lincoln that he was “broke” and “hard-pressed” on the family farm in Coles County, Illionois, and needed a loan. Lincoln’s offer of a matching grant, as we call it today, was a recognition that “this habit of uselesly wasting time, is the whole difficulty,” and that getting into the habit of working was far more important to Johnston than getting a loan.

[Dec. 24, 1848] Dear Johnston: Your request for eighty dolars, I do not think it best to comply with now. At the various times when I have helped you a little, you have said to me, “We can get along very well now,” but in a very short time I find you in the same difficulty again. Now this can only happen by some defect in your conduct. What that defect is, I think I know. You are not lazy, and still you are an idler. I doubt whether since I saw you, you have done a good whole day’s work, in any one day. You do not very much dislike to work, and still you do not work much, merely because it does not seem to you that you could get much for it. This habit of uselessly wasting time, is the whole difficulty; it is vastly important to you, and still more so to your children, that you should break this habit. It is more important to them, because they have long to live, and can keep out of an idle habit before they are in it, easier than they can get out after they are in. You are now in need of some ready money; and what I propose is, that you shall go to work, “tooth and nail,” for somebody who will give you money for it. Let Father and your boys take charge of your things at home – prepare for a crop, and make the crop, and you go to work for the best money wages, or in discharge of any debt you owe, that you can get.

And to secure you a fair reward for your labor, I now promise that for every dollar you will, between this and the first of May, get for your own labor wither in money or in your own indebtedness, I will then give you one other dollar. By this, if you hire yourself at ten dollars a month, from me you will get ten more, making twenty dollars a month for your work. In this, I do not mean you shall off to St. Louis, or the lead mines, or the gold mines, in California, but I mean for you to go at it for the best wages you can get close to home – in Coles County. Now if you will do this, you will soon be out of debt, and what is better, you will have a habit that will keep you from getting in debt again. But if I should now clear you out, next year you will be just as deep in as ever. You say you would almost give your place in Heaven for $70 or $80. Then you value your place in Heaven very cheaply, for I am sure that you can with the offer I make you get the seventy or eighty dollars for four or five months’ work. You say if I furnish you with the money you will deed me the land, and if you don’t pay the money back, you will deliver possession – Nonsense! If you can’t live with the land, how will you then live without it? You have always been kind to me, and I do not now mean to be unkind to you. On the contrary, if you will follow my advice, you will find it worth more than eight times eighty dollars to you.

Affectionately, Your Brother
A. Lincoln

This was taken from The Book of Virtues – A Treasury of Great Moral Stories. Edited, With Commentary, by William J. Bennett. A Touchstone Book. Published by William & Schuster.