Escape the crush of student loans

The second step: Get real

In addition to the $25,000 on two multipurpose credit cards, Gina has half a dozen department-store credit cards, with balances ranging from a few hundred dollars to $1,000. Making just the minimum payments on all the cards sets her back roughly $1,000 a month, about $500 more a month than she had estimated.

"I just can't afford to pay that much more on the student loans when I'm paying this much on my credit cards," Gina says.

Where did all that debt come from? A chunk of it came from living off credit cards when she ran out of money for school. However, the department-store debt is the result of "impulse purchases," Gina admits.

"I get in these moods sometimes, and I just need to buy something," she says. "I imagine myself in some dress, or I see something really cute on the rack and I just have to get it."

Then there's the stuff she thinks she needs, such as a $100 massage once a month.

The third step: Sacrifice

If Gina cut her discretionary spending in half, she'd have more than $500 a month available to pay off her debts. She was initially quick to say that she'd give up eating out and that she'd cut back on the clothing.

But the specifics stumped her. Even after filling out a budget worksheet, she's not sure how much she spends, and she's pretty sure she doesn't want to know.

"I know I'm out of control," she says. "I know I need to be held accountable at some point. But I keep making excuses about why it doesn't have to be just yet."

Asked whether she'd give up buying new clothes for six months, she responds with horrified silence and then says "no."

Compounding the problem, this compulsive spender is paid just once a month. That makes her feel so flush at the beginning of the month that she goes into a retail frenzy.

"I see money in my account, and I feel like I've got to spend it," Gina says. "I'm all happy, thinking I've got $1,000, and so I go out to dinner. I buy some clothes. And then it's going, going, going, and I get to the middle of the month and think that I'd better slow down."

The result: Out of debt in 10 years

The solution for Gina is to take money out of her account to pay off debt before she has a chance to apply her see-it-and-spend-it routine.

She has an online bank account and has committed to setting up automatic payments on the first of the month that will pay the minimum balances on all her credit cards, plus $100 extra to each. That will cut her discretionary income to $600 a month yet still allow her to pay off all her store credit cards within six months, just in time to afford the new, higher payments on her student loans.

This short-term pain, if Gina is diligent, will save her hundreds of thousands of dollars and leave her debt-free in 10 years. The alternative is literally a lifetime of student loan and credit card debt.

Updated May 5, 2009

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