June 18, 2012 By

Don’t put college savings into custodial accounts

Dear Liz: I opened Uniform Transfers to Minors Act savings accounts for my two boys (now 7 and 10) when they were newborns. I chose not to go with the 529 college savings accounts because I didn’t like the restriction that the money had to be used for education. It has always been my intention to use these funds for college, but if they choose not to go to college, then it could be used to help them purchase their first homes, for example.

I’ve been squirreling away a couple hundred dollars each month in each account, but I read a few of your previous pieces and think maybe the UTMA accounts were not the best vehicle for this. Could they one day just demand the money and do with it whatever they want?

Answer: The short answer is yes. In most states, the money will become theirs at age 21 to spend however they want, although a few states let them have it at 18.

The other big disadvantage to custodial accounts such as UTMA and UGMA (Uniform Gifts to Minors Act) accounts is that they’re counted as the child’s asset in financial aid calculations. That can substantially reduce the amount of aid they get.

But even more important than the financial details is your attitude. You need to give up this notion that not going to college is a reasonable option for your kids. In the 21st century, some kind of post-secondary education is all but a necessity for a person to remain in the middle class, labor economists tell us. Your sons don’t have to study at a four-year school, but they are likely to need at least some vocational training beyond high school.

If you want to reduce the effect of these accounts on any future financial aid packages, you have a couple of options. One is to spend the money before they get to college, although that’s probably not the route you’ll want to take, given how much money you’ve already saved. If the accounts were smaller, you might just use them to buy a computer, pay for summer camp or cover the cost of tutoring. Such expenditures are allowed as long as the money is spent for the benefit of the child and doesn’t pay for expenses that are your obligation as a parent (food, shelter, clothing, medical care).

Another option is to liquidate the accounts and invest the cash in 529 plans. This would dramatically reduce the money’s effect on financial aid calculations, since it would be considered your asset rather than your child’s. The money could be withdrawn tax free to pay for qualified higher education expenses. If it’s not used for higher education, the contribution portion of the withdrawal won’t be taxed as income, but any earnings will be, plus there will be a 10% federal tax penalty on those earnings.

If you decide to transfer the money, the 529 account should be titled the same way as your UTMA accounts, said Mark Kantrowitz, publisher of the college planning website FinAid. Ownership of the account shifts to the child when he reaches the age the UTMA account would have terminated. That gives him control of the money if it’s not spent on education, but he would have had that anyway. You can read more about the details at http://www.finaid.org/savings/ugma.phtml.

Filed Under: College, College Savings, Q&A Tagged With: , , , , , , ,
June 18, 2012 By

“Authorized user” info may not be enough

Dear Liz: You recently answered a question about a young man who was turned down for a car loan because he graduated from college debt free and had no credit history. This is the same scenario my daughter encountered this past year.

Despite having a solid job for three years at a good salary, plenty of money in the bank (more than $10,000) and no expenses to speak of, she was turned down repeatedly for credit cards because of “no credit history.” She had been an “authorized user” of our cards for several years. (We have excellent credit scores.) She was told that she needed to be a responsible party on the cards for them to be counted in her application.

I would tell parents to have their child obtain a credit card through the bank or credit union that has her college checking account. That’s what we did with our youngest, who is just completing college and now has a credit history.

Answer: You bring up an excellent point. Although authorized user information can enhance someone’s credit scores, lenders usually have additional criteria they want applicants to meet, such as minimum income levels, job stability and a certain “thickness” to their credit files (which might include other types of credit accounts besides authorized-user accounts).

New credit regulations make it somewhat more difficult than it used to be to qualify for a credit card while in college, but it still can be easier to get a card while in school than afterward.

Filed Under: Credit Cards, Credit Scoring, Q&A Tagged With: , , , , , ,
June 13, 2012 By

How to get free summer travel

My daughter hasn’t seen her cousins in the Northwest for awhile, so I just finished booking us a late-summer trip to see them. The net cost so far? Less than $30.

Here’s how I did it:

Amtrak roomette. We both love train travel, and the points I earn using my Starwood American Express card transfer directly to my Amtrak Guest Rewards program. Fifteen thousand points buys us a roomette, or double-bunk room, and all our meals for the 30-hour trip. Paying cash would have cost $411. (NerdWallet has a review of the Starwood card here.) I did have to buy a few extra points from Amtrak to make the purchase, since I recently depleted our Starwood points to book a hotel room for five nights in Hawaii. The good news is that Amtrak is offering a 30% bonus when you buy points, so I got 1,300 points for $27.50.

Hotel rooms. I’m a Hilton HHonors member, so I checked online for affordable hotels in Portland. Fortunately, the Hilton chain includes options from inexpensive (Hampton Inn, a great value) to astronomical (Waldorf-Astoria). I could have used 30,000 points to get us a free room, but that wouldn’t have been a great exchange rate, since rooms with two queen beds were available for less than $100 a night at the Doubletree. Here’s the beauty part: I’ll get 15 points per dollar spent for this stay, but it won’t actually cost me anything. That’s because the room is charged to our Capital One Venture card, which reimburses us for travel. We earn two points for every dollar we spend with the card, and we can use those points to offset the cost of travel. We book any flight, hotel or rental car we want, click on a button at the Capital One website to request a travel credit, and the rebate quickly appears on our account. Easy peasy. (CreditCardForum.com has a review of the Capital One Venture cards here.)

Flight home. We didn’t have a lot of flexibility on our return date, and I wanted to fly Alaska Airlines, where I’m (usually) an elite flier. I had enough Alaska miles to do a miles-and-cash deal—20,000 miles and $190 got us our flights home. And once again, Capital One will reimburse us for the cost of the flight.

I’ll still be shelling out for meals and museum admissions; Dear Daughter will pay for her own souvenirs and treats from her allowance and savings. All in all though, it promises to be a pretty cheap getaway.

Travel rewards programs don’t make sense for everyone. If you don’t pay off your credit card balances in full every month, for example, you should look for cards with low interest rates and skip the rewards versions, which tend to have higher rates. But if you spend a fair amount and travel a fair amount, as we do, you can wrest quite a bit of value out of your rewards programs.

 

 

Filed Under: Liz's Blog
June 11, 2012 By

How young ‘uns can build credit scores

Dear Liz: Our son was recently turned down for a car loan even though my wife and I were willing to co-sign and we have excellent credit scores. The reason for the denial was “no credit history.” Because we had paid some college expenses and he had basketball athletic scholarships, our son graduated from college debt free.

My wife and I have always tried to live within our means. Other than a mortgage and the occasional car loan that we almost always paid off early, we have had no other debt. We encouraged our children to live the same way.

Did we give them bad advice? What advice can we give our daughter so she does not wind up in the same circumstances? Through a combination of work, academic merit scholarships and our savings, she is on track to graduate in 2013 without any student loans. Should she take one out in her name just so she can pay it back and have a credit history?

Answer: Your children don’t need to take on debt to build their credit histories. A couple of credit cards, used lightly but regularly and paid off in full every month, will do the job.

You may be able to give their credit histories a jump-start by adding them as authorized users to your credit cards, if you have any. Find out first whether the credit card issuer is willing to export your good history with the card to the children’s credit reports, because not all issuers will do this transfer. You may have heard that some credit-scoring formulas ignore authorized user information, but the formula used by most lenders, the FICO, still would incorporate this data in calculating your children’s scores.

Another option is for your kids to apply for secured credit cards. They would make a deposit to the issuing bank and get a credit line in the same amount. A secured card that reports to all three credit bureaus can help build credit scores over time. A number of websites highlight secured-card offers, including CreditCards.com, CardRatings.com and NerdWallet.

Tell the kids to charge no more than 30% of their credit limits (10% or less is even better), and certainly no more than they can afford to pay off in full each month.

If your daughter wants to build up her scores faster, she might want to consider a small installment loan. Having both installment and revolving accounts can lead to higher scores. Installment loans include auto loans, mortgages, personal loans and, yes, student loans. If she does decide to apply for a small student loan, make sure she fills out the Free Application for Federal Student Aid and takes out federal student loans only. Federal student loans have fixed interest rates, flexible repayment terms and plenty of consumer protections. Private student loans have none of those attributes.

Filed Under: Credit Scoring, Q&A Tagged With: , , , , , , ,
June 11, 2012 By

How spousal benefits work

Dear Liz: My wife has never worked outside the home and therefore has no Social Security credits. My understanding is that as a nonworking spouse, she is entitled to 50% of my benefit, assuming she is 66 years old and I have started receiving benefits. Is that correct?

Answer: You’ve got the right general idea. But spousal benefits are available to working spouses as well, your wife has the right to start benefits earlier (at a discounted rate) and you don’t have to actually receive checks for her to get this benefit.

Your wife is eligible for a spousal benefit based on your “primary insurance amount.” That’s the amount you would receive at your normal retirement age, no matter whether you’ve actually attained that age or started benefits. Normal retirement age is currently 66, but it will rise to 67 for people born after 1959. If she waits until her own full retirement age to start benefits, then she can qualify for a benefit equal to half your primary insurance amount. If she starts earlier, the benefit is permanently reduced.

If your wife had worked and qualified for her own retirement benefit, the Social Security Administration would give her whichever benefit paid the most — her own, or a portion of yours.

Because you’re still married, your wife wouldn’t be able to start spousal benefits until you’ve claimed your own benefit. However, if you’ve reached your full retirement age, you have the option to “file and suspend.” That means you’d file for benefits but immediately suspend your claim. That way, your benefit could continue to grow while she could begin receiving her payments.

If you were divorced but had been married at least 10 years, she could begin her benefits without waiting for you to file for your own. That exception was put into place so people wouldn’t have to seek their exes’ cooperation to get benefits.

Filed Under: Q&A, Retirement Tagged With: , ,
May 29, 2012 By

How to make headway on student loans

Dear Liz:I owe $75,000 in student loans. It took me seven years to graduate from college due to a car accident that happened during my second year. I am now 30 and doing all I can, working 12 to 14 hours a day, but I’m not making any headway. Most if not all of my loans have gone to collections. I get the phone calls, sometimes up to 30 a day. I need some advice on how to handle all of this. It is so overwhelming. Is it possible to consolidate all of this? Make one monthly payment to one entity?

Answer: You can consolidate your federal student debt into one loan and stretch out the repayment term, which could make the debt easier to pay. You may also qualify for the income-based repayment option. Most borrowers in the income-based plan have payments that are less than 10% of their gross incomes, said Mark Kantrowitz, editor of FinAid.org and author of “Secrets to Winning a Scholarship.” After 25 years of payments, you would qualify for forgiveness of any remaining balance. The payment period is shortened to 10 years if you’re in a public service job.

Private student debt isn’t nearly as flexible. You typically can’t consolidate private student loans, and lenders offer fewer repayment options — and no forgiveness.

If you have both types of debt, you may be able to make some progress on repayment by consolidating your federal loans and paying the minimum possible on those so that you can throw every available dollar at your private loans.

If you have only private debt, you’ll need to negotiate directly with your lenders to see what options are available for more affordable repayment plans. It’s important to do this as soon as possible, since if your delinquency drags on for nine months your loans will be considered in default. That can have serious consequences for your credit history and your finances.

The National Consumer Law Center’s Student Loan Borrower Assistance Project has a lot of information and resources for student borrowers, including information about loan rehabilitation and negotiating with lenders. You can also talk to the Default Resolution Group at the U.S. Department of Education by calling (800) 621-3115.

Filed Under: College, Q&A, Student Loans Tagged With: , , , , ,
May 29, 2012 By

Daily money managers can help pay the bills

Dear Liz: I read with interest your answers about older people who need a trusted gatekeeper to keep others from taking financial advantage. I want to let you know there’s great help out there for seniors: the American Assn. of Daily Money Managers. We daily money managers provide assistance to people who have difficulty managing their personal bill-paying responsibilities and associated personal paperwork. This service offers a cost-effective way for clients to get assistance with organizing, bill paying, balancing checkbooks and reviewing statements from a trusted source. A daily money manager does not replace the services of other professionals — such as CPAs, banks, financial planners and attorneys — but assists clients with daily affairs and helps maintain records and information that is essential for these professionals. People can find more information at the association’s website, http://www.aadmm.com.

Answer: Thanks for pointing out this resource. Many older Americans have trouble with household money management. They may forget to pay bills or keep track of their account balances, leading to bounced checks. Organizing their paperwork and collecting information for tax returns can become an ordeal. Some people have trusted family members who have the time to take over. For others, daily money managers can be the answer.

Daily money managers are distinct from conservators or guardians, however. They aren’t supervised by the courts, so potential clients need to take care in hiring one. In addition to the AADMM’s website, people may be able to get referrals from financial professionals such as a lawyer, financial planner or accountant. The daily money manager should be insured and willing to work with those professionals.

Daily money managers aren’t limited to helping only seniors. They also can help busy executives, travelers and people with attention deficit disorders who have trouble keeping up with daily financial details.

Filed Under: Elder Care, Q&A Tagged With: , , , ,
May 21, 2012 By

Helping an indigent parent navigate “the system”

Dear Liz: Our mother just turned 64, and our father is divorcing her. She hasn’t worked in years because of significant physical and mental health issues. My sister and I have been trying to figure out how she’s going to survive on $750 a month, which is the equivalent of half his Social Security. She has always had serious issues with money management, which is why there are no retirement savings or a house. We are now about to embark on the maze of social service benefits that an older woman below the poverty line can receive, partly so we can decide whether she’s better off staying put where she is in Arkansas, moving to my sister’s in Texas, moving to be near me in Maryland, or moving to her childhood home of Chicago, where most of her friends are. For a lot of complicated reasons (mostly related to the mental health issues), we are trying to avoid having her live with either of us full time, and she expresses no desire to do so. So we have to figure out the ins and outs of Medicaid, food stamps, subsidized senior housing and anything else in four different states and then try to explain it to her. If you have any hints about helping an indigent and somewhat incapacitated mother access services, we would love to hear them. We feel a little overwhelmed at the moment and aren’t even sure whom to call in each place.

Answer: It’s understandable that you feel overwhelmed. You have a huge task in front of you.

You can start with the Eldercare Locator, a free service offered by the U.S. Administration on Aging that can connect you to services for older adults and their families. You’ll find it at http://www.eldercare.gov, or you can call (800) 677-1116.

Another resource you might want to consider is a geriatric care manager. These are professionals who help family members care for elderly relatives. The care manager can evaluate your mom, review her options and make recommendations. Their services aren’t cheap, but they can be especially helpful in managing a long-distance situation. You can find referrals at the National Assn. of Geriatric Care Managers’ site, http://www.caregiver.org. And speaking of distance: It might be easier to help your mom if she lives closer to one of you, or to a trustworthy friend who can check in on her and let you know how things are going.

You also should check with an Arkansas family law attorney, since your mother may be eligible for some kind of spousal support and possibly a property division that could help her financially.

Finally, if your father dies before your mother, she still will be eligible for survivor benefits that could bump her Social Security check up to 100% of what your father was receiving. Many people don’t realize that ex-spouses can qualify for survivors’ benefits as long as the marriage lasted 10 years and the person applying for benefits didn’t remarry until after age 60.

Filed Under: Elder Care, Q&A Tagged With: , , , , ,
May 21, 2012 By

Don’t count on plastic to cover big expenses

Dear Liz: I’m 27 and have no consumer debt, a decent salary and a boatload of student loans. I use my credit cards for most of my expenses to earn rewards points and generally pay off my cards each month. I also take advantage of the 0% introductory rate offered by many credit card companies. This grace period gives me a security blanket so that I can spread large expenses such as insurance or car repairs over several months without derailing my saving plans. Can I apply for these offers without wrecking my excellent scores?

Answer: Occasionally applying for a new card won’t affect your scores much. Typically such applications ding your scores by five points or less.

You should be budgeting and saving for large expenses, however, rather than leaning on your cards. (Car repairs, in particular, aren’t really “emergency” costs — if you have a car, you know they’re coming, and calculators like Edmunds.com’s “True Cost to Own” feature can give you a good idea of what they’re likely to be.) Those 0% offers often come with balance transfer fees or other charges that make the deals a lot less attractive than they seem at first glance.

Also, you should be in the habit of always paying your cards in full — always. “Generally” isn’t good enough, since you could easily be enticed into spending beyond your means, especially as you chase rewards points. Rewards cards are a good deal only if you don’t carry a balance. Otherwise, you can pay frighteningly high interest rates that offset any benefit you may earn.

Filed Under: Credit Cards, Q&A Tagged With: , , , , , , , ,
May 17, 2012 By

5 things I’m glad we bought in Italy, and three I wish we hadn’t

One of the reasons we travel is to learn, and our latest trip to Italy taught us a lot. We learned about the country’s culture, cuisine and history. We also learned how quickly the euros can fly out of your wallet if you’re not careful (and sometimes even when you are). Here are some of the best purchases we made, along with a few I regret. Let’s start with the expenditures, big and small, that made it a better trip:

A Vivaldi concert in Venice. We heard the opera is pretty wonderful, but we weren’t sure our nine year old was quite up it—and the total ticket cost of over $300 was daunting. We looked for an alternative cultural event, and found it with Intrepreti Venezi, an outstanding string orchestra that gives concerts at Chiesa San Vidal (the lovely San Vidal church). The musicians were amazing, and where better to hear Vivaldi than in his home town? Tickets for the three of us were 75 euros (about $100), and well worth it.

“Paint your own” masks. Venice has a long tradition of mask-making and –wearing. I thought the “paint your own” places were kind of gimmicky, but it turns out they’re a great way for a kid to connect with Venetian history and culture. All three of us had a blast picking out blank masks (each shape has a different meaning and history) and painting up a storm. The masks aren’t cheap—30 to 40 euros each, including an hour of painting time—but they were a great activity for a family and a wonderful souvenir. (A tip: when they’re dry, have the shop wrap them for shipping even if you’re going to bring them home in a suitcase, as we did. They arrived safe and sound.)

A family museum pass. Lines to get into Florence’s most famous museum can be hours long, even in the off season. You can skip the line with reservations if you plan ahead, which we didn’t. So we “bought” our way in by buying a “Friends of the Uffizi” family pass. For 100 euros (about $130), this pass gets two adults and two children into not only the Uffizi but about two dozen other local museums, including the Academy (home of Michaelangelo’s David sculpture) and the Pitti Palace. The pass quickly pays for itself in entrance fees alone, but skipping the awful lines? That’s priceless. You need to bring your passports to an office near entrance #2 of the Uffizi and fill out a short application

A “Get Art Smart” book in Florence. This spiral-bound sticker book for kids turned the Uffizi museum into a scavenger hunt. Each page showed a small portion of a painting one of the galleries. Once our daughter located the painting, she could put the corresponding picture on that page. The book asked her a few questions about its composition that highlighted interesting developments in Florentine art and culture. Actually, this book for kids did a far better job of explaining the transition from Gothic to Renaissance art than any of the placards or other information available to adults. We found the book for less than 5 euros at a small bookstore near the Uffizi’s entrance, but I’m guessing you can find it at other museums in Florence, as well.

Gelato. Even mediocre gelato is pretty darned good, but for the most amazing varieties we learned to look for places slightly off the beaten path that had a line out the door.

What we should have skipped:

The water taxi from the airport. Venice is best approached by water, our guidebook told us. What it didn’t tell us was that the tiny windows in the water taxi wouldn’t allow us to see much…or that the schedule was a bit, shall we say, casual on Sunday nights. Our taxi took off almost an hour after it was scheduled to depart, so we missed the sunset and instead arrived in the dark. Next time, we’ll take the clean, comfortable bus into Venice and then the water taxi from the bus stop. We would have saved about 10 euros, and gotten to our destination a lot faster.

Audioguides at the Doge’s Palace. Audioguides really enhanced our experiences at other museums, both abroad and in the U.S. The best ones provide context for the exhibits and help you understand the time period in which they were created. The audioguides at the Doge didn’t do that—instead they droned on about which doge commissioned which artist to do what. By the third segment, we’d stopped listening, so that was $15 euros down the drain.

The rental car in Florence. On our last day, Hubby wanted to take a drive in the Tuscan countryside, which sounded lovely. Unfortunately, we hadn’t made a car rental reservation and it was a Sunday. Our hotel concierge made the arrangements for us, but the car cost us over $200 for the day—oh, yeah, and the GPS hadn’t been updated to reflect recent changes in the direction of Florence’s many, many one-way streets. The unit repeatedly instructed us to turn the wrong way onto said one-way streets. Getting out of town was nightmarish, to say the least. Getting back was worse, if anything—we could see our hotel, just blocks away, but we couldn’t get there. We finally hailed a cab to lead us home. We learned a few lessons. One: If you’re going to get a rental car, book it from home—it will be a heck of a lot cheaper. Two: Book it from the airport, which will be far from medieval cities’ byzantine streets.

 

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