Q&A: Co-signing for a student loan backfires

Dear Liz: My wife and I both had excellent credit scores. Now mine are in the dump. I co-signed for a friend’s daughter’s school loan 10 years ago. I know now this was a bad mistake. I guaranteed $25,000. Now two things have happened: The daughter quit paying the loan and the friendship took a bad turn.

This is seriously hurting my credit. We have already been told when trying to refinance our mortgage that we’ll need to fix the school loan, which is showing more than 90 days behind. The outstanding balance is $20,000. I can pay the loan off. Making payments just adds interest to the problem. Are there any other options to repair my credit that don’t rely on the daughter’s ability to keep the loan current?

Answer: If you can pay the loan off, then do. You are legally responsible for this debt, and the longer it goes unpaid the worse the damage to your credit scores.

If this were a federal student loan, you would have the option of rehabilitation, which can erase some of the negative marks on your credit reports after you make a series of on-time payments. Because it’s a private loan — I know this because federal student loans don’t have co-signers — you probably don’t have a rehabilitation option (although it certainly doesn’t hurt to ask).

Once the loan is paid off, you can proceed with the refinancing but you probably will find that lenders want to base the loan on your battered scores, rather than your wife’s better ones. That means you might not qualify, or you might have to pay a much higher rate. If she can qualify for the refinance on her own, that’s one option. Otherwise, you might have to wait for your credit to heal before you refinance.

Q&A: Questions for a financial advisor

Dear Liz: I have some investments at a financial investment firm. My advisor said that because I am 62, I can transfer money from my 401(k) at my job into my account with his firm. He says he can do better with the amount I currently have in the 401(k). Of course I will continue to work and put in money into my 401(k). Does this sound like bad advice? The amount I would be trying to transfer would be around $62,000.

Answer: By doing better, does he mean doing such a spectacular job of investing that he rivals the legendary Warren Buffett? Because he might have to do just that to compensate for your giving up years of tax-deferred compounding.

Because you’re over 591/2, you can access your 401(k) balance without penalty, but you still must pay income taxes on any withdrawals. Investments in a regular account would be subject to income and capital gains taxes going forward.

It’s possible he wants you to roll the money over into an individual retirement account instead, which would spare you the tax bill and allow the money to continue growing tax-deferred. But unless you have a truly awful, high-cost plan, it’s hard to see how he can promise better results.

The Labor Department just approved a rule that requires advisors to adopt a fiduciary standard when providing advice about retirement funds. “Fiduciary” means the advisor is required to put clients’ interests ahead of his or her own. You might ask him if this advice aligns with the standards and if he’s willing to put that promise in writing. If not, you could be forgiven for suspecting that he’s more motivated by what he can earn via commissions or other fees than by doing what’s right by you.

Q&A: Social Security family maximum

Dear Liz: My husband is disabled from a stroke and is on Social Security disability. I am 65 and nearing retirement. I keep seeing Social Security rules about “family maximums.” Does this mean that I won’t get my full retirement amount if, between his SSDI and my retirement, we exceed the family maximum? Or will my retirement amount be what I actually earned?

Answer: You’ll get what you earned. The family limit refers to the maximum benefits that can be paid out based on one worker’s earning record. They kick in when multiple family members claim benefits, such as spousal and child benefits in addition to the worker’s retirement benefit. The rules are stricter for disabled family benefits than for retirement family benefits, but that doesn’t affect you since you’ll be claiming a check based on your own work record.

Friday’s need-to-know money news

Wills-in-TexasToday’s top story: Ranking the cheapest cars to insure. Also in the news: Why you need to have a will, the financial perks of downsizing, and how much money you need to save monthly to reach your retirement goal.

Ranking the Cheapest Cars to Insure
Being a smart shopper.

Prince Had No Will, Reports Say — But You Should
Don’t let the government inherit your estate.

The Financial Perks of Downsizing
Going small can mean a bigger bank balance.

This Retirement Calculator Tells You How Much to Save Monthly to Reach Your Goal
How close are you?

Thursday’s need-to-know money news

estate planningToday’s top story: How $250 can keep families off welfare. Also in the news:A new tool to manage your student loans, what Prince can teach you about personal finance, and how to declutter after tax season.

$250 Can Keep Families Off Welfare, Study Finds
Even a small savings can have a big impact.

White House Releases New Tool to Help You Manage Your Student Loans
Finding the best repayment options.

What Prince Can Teach You About Personal Finance
A legend in music, not so great at estate planning.

With taxes done, now it’s time to shovel papers, declutter
Fire up the shredder.

Wednesday’s need-to-know money news

budgetToday’s top story: How to earn more interest on your money. Also in the news: When and how to appeal a financial aid award, what you need to know about estate planning, and how keeping your finances simple can ensure you staying on top of them.

4 Ways to Earn More Interest on Your Money
Making your money work for you.

When and How to Appeal a Financial Aid Award
Asking for more.

Do I need a will? What to know about estate planning
YES.

Keep Your Finances Simple to Ensure You Stay On Top of Them
Don’t overcomplicate things.

The Huge, Hidden Costs of Owning a Home

refinancingFirst-time homebuyer Teresa Hair had owned her house less than two months when water started bubbling up through the guest bedroom floor.

“The whole floor was just covered,” says Hair, a 34-year-old attorney who lives in St. Petersburg, Florida. “I pulled up all the laminate flooring and there was an inch of water.”

Finding and repairing the broken pipe — it was in a wall shared with the kitchen, behind the dishwasher — cost $1,000. Replacing the flooring may cost considerably more. But the expenses aren’t a crisis, Hair says, because she resisted the urge to buy as much home as lenders said she could afford. She also made sure the purchase, including closing costs, didn’t drain her savings.

“I still had a little bit of money saved up, so I wasn’t strapped,” Hair says. “You have to know when you buy a house that you’re going to need something in addition to what you need to close.”

In my latest for NerdWallet, how the hidden costs of homeownership can equal if not exceed the mortgage payments you send to the bank.

Tuesday’s need-to-know money news

money-vacation-saveToday’s top story: How leaving a 401(k) behind after a job change could cost you. Also in the news: A debt avalanche, the five best store credit cards, and money-saving tips for your next family vacation.

Leaving 401(k) Behind After Job Change Could Be Costly
You CAN take it with you.

What Is a Debt Avalanche?
Yesterday’s debt snowball just got a lot bigger.

The 5 best store credit cards
Who has the best perks?

3 money-saving tips for your next family trip
Leaving more money for souvenirs!

Q&A: Adding daughter as co-owner of mother’s home could trigger costs

Dear Liz: My father passed away last year, and my mother wants to add my name to her house so there is no probate. Do I need to change the title or the deed or both? Are there any negatives to doing so? Also, we already have a durable power of attorney between us. Does that offer me any benefits as far as real estate? What does it offer me in general?

Answer: A deed is the legal document that transfers the title or ownership of a property. Please don’t alter the home’s documents until you consult an estate-planning attorney. Your mother’s desire to avoid the costs of probate could inadvertently trigger much larger costs.

Adding you as a co-owner could mean giving up a big tax benefit, for example. If your mother bequeaths the house to you when she dies, you won’t owe any tax on the gain in the house’s value during her lifetime. If she adds you to the title, she’s gifting you half the house. In that case, you potentially could owe tax on some of that gain even after she dies. If she wants to preserve tax benefits while avoiding the court process known as probate, she may need a living trust.

There could be other complications if you should die or be sued, which is why it’s important to get good advice before proceeding.

As for the durable power of attorney: It isn’t designed to give you benefits. Powers of attorney allow you to make decisions for your mother if she becomes incapacitated. Those decisions need to be in her best interest, not yours.

Monday’s need-to-know money news

debt-snowballToday’s top story: What is a debt snowball? Also in the news: A 1-week financial fast, why personal finance classes should be taught in college, and how your wallet is becoming the next tech platform.

What Is a Debt Snowball?
A creative way of tackling your debt.

Big money goal? Try a 1-week financial fast
A self-kickstarter.

Why Personal Finance Classes Should Be Taught in College
Real world preparations.

Why your wallet is becoming the next platform
Tech companies can’t wait to claim space in your wallet.