Student takes on more loan debt to get out of debt

Mortar board on top of cash - student loan debtStill in student loan debt and wondering how you'll ever pay it all off? One person in this position is pursuing a counter-intuitive approach to get out of debt. Benjamin Huddle, a 31-year-old analyst for the U.S. Department of Transportation, graduated with a bachelor's degree in economics from Virginia Tech five years ago; unfortunately, the degree also put him in debt – to the tune of $50,000 in student loans.

Though Huddle brings in an annual salary of $75,000, he has yet to see a substantial reduction in his student loan debt (accrued interest isn't helping either). "The cost of living in the D.C. Metro area is extremely high and even earning a decent salary is not enough to pay the bills," he said. Surprisingly, Huddle plans to get rid of his student loans by accumulating more debt.

According to a recent article in USA Today, the monthly student loan payment is turning into "quite a scary number" for many college grads who are already facing a hard time finding a job. The article advises students on methods for holding down their debt, carefully selecting their degree, and becoming more realistic about borrowing.

graduate student Benjamin HuddleRecently, Huddle was accepted to the master's program in applied economics at John Hopkins University. He believes that by obtaining a master's degree he'll better his chances of getting a promotion, which would boost his salary and allow him to repay the prolonged debt. "If I ever want to buy a house and pay off my car, I need to get promoted and get rid of my student loans first," Huddle said.

Learning the hard way, Huddle has his plan figured out. For him, borrowing more funds to finish his master's degree -- which will enhance his professional analytic skills -- means getting promoted to project manager. "D.C. is very competitive in terms of higher education levels. I'm at a point of my career where I need a master's degree in order to get promoted," he explained. According to Huddle, the starting annual salary of a project manager at his office is about $105,000, a 40% increase from what he currently makes.

Huddle plans on taking at least an additional $15,000 in student loans to complete his master's degree within the next two years. "The cost of my program is $30,000. I will try to pay as I go, but I'm expecting to finance a large portion of my tuition, at least half of it," Huddle said. That would put him into a total of $65,000 in student loan debt. "If I get promoted, I could pay for my master's degree in one year and I could knock off the rest of my loans in another two to three years, just with the extra income ($30,000 annual increase in salary)," he said.

When he begins making the big bucks, Huddle plans on putting forth a fixed percentage (15%) of his annual salary as a project manager ($105,000) toward his loan payments – that's about $1,300 per month or $15,600 a year.

"In about six years, I should be debt free," he said. Huddle's master's degree will not only expedite the repayment process by more than 10 years while reducing his total accrued interest drastically, but it will also increase his disposable income by 25%. "The reason I went back to school is to increase my income and improve myself at the same time. It's a business investment. I have to get a big job to pay the big bills," he said.

Huddle didn't begin to pay off his loans immediately after leaving college in 2005, when he was barely making enough to pay for D.C.'s high cost of living; instead, he started making loan payments three years ago.

"Rent is expensive, gas is expensive, even food is expensive nowadays. When I graduated, I couldn't afford making even the minimum required payments," Huddle said.

After college, he deferred his student loan payments for two years, until a raise at work brought him some extra cash. Huddle has been making the minimum monthly paying of about $400, yet, it all goes toward accrued interest. "So far I have paid off only $300 of my principal student loan amount," he said. If he continues to pay $400 a month at the current interest rate of 5.5%, he would be stuck with student loans until he is about 50 years old.

For Huddle, going back to school was an individual decision based on a lot of research. "I didn't just jump into it, I thought about it first," he said. He chose to major in something "marketable," a degree that is more of a "money maker," not just any degree. "You need to look at it as an investment in yourself, rather than consumption. Or you will end up with a lot of debt and no return," he said.

Huddle's plan to pay off his student loans sounds promising, yet, there is a risk associated with the core premise of his decision -- that his new degree will lead to a promotion. Chris Frank, who holds a Certified Public Accountant (CPA) license and a master of business administration (MBA) degree from George Mason University, was recently promoted to a project manager at the same office where Huddle works.

"You need to weigh the cost of the program with the potential opportunity of what you can gain when you're done," Frank said. Still, Frank believes that it is difficult to quantify how much his MBA helped him get promoted.

Frank Danielski has also been promoted to a project manager and he is also a CPA with a master's degree in public policy. "In my case, my master's degree didn't really help me get promoted, but it is an 'insurance policy' if I decide to leave the office," Danielski stated. Bottom line, having a master's degree will increase your chances for a promotion, he said.

Before you start borrowing, stop by your college career office and do some research to determine estimated salaries in your chosen career areas. You might reconsider your major, or take out a smaller loan to avoid getting stuck with high student loan payments for the next 20 years.

If you have already borrowed but struggle to make monthly payments, perhaps you could consider what Huddle did -- go get your "marketable" degree to open doors to higher paying jobs that could help you get rid of the debt. And always remember to assess the risk of accumulating more debt compared to the potential benefits.
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