Ask Liz Weston

Get smart with your money

Q&A

Q&A: Student loan forgiveness

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Dear Liz: I have $105,000 in medical school loans with an interest rate of 2.875%. I have another consolidated federal loan at 6%. I’m making $180,000 in the private sector and like my job.

Should I consolidate everything, try to get a public sector job, and apply for loan forgiveness after 10 years while paying as little as possible? Or should I accelerate my loan payments?
I would be able to pay almost the full amount after 10 years. I’m also trying to save for a house in a high-cost area. I have about $110,000 in savings and stocks.

Answer: Why would you upend your life to qualify for help you don’t need?

Loan forgiveness and federal income-based repayment programs are intended for those struggling to pay their education debt. These programs are available only for federal student loans, by the way.

The low interest rate on your medical school loans indicates that those are private student loans, which wouldn’t qualify for the relief programs or for a federal consolidation loan, for that matter.

So the question really is whether you should pay your loans off over time or try to retire them as quickly as possible.

A slower repayment schedule could allow you to buy a home sooner and save more for retirement, which are both worthy goals. Faster repayment could lower the overall cost of the debt and leave you less vulnerable to rate hikes, since the interest rates on private student loans are typically variable.

There’s no single right answer, but it’s a good question to discuss with a fee-only financial planner who can assess your entire financial situation and explain your options.

Q&A: Credit scores and new accounts

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Dear Liz: My spouse signed up for a store credit card to receive a discount on a large purchase. As she has no strong interest in maintaining a line of credit there, is there a simple way of discontinuing this account without affecting our credit scores, given that we may apply for a mortgage in the near future?

If not, is it critical we maintain some frequency of use on this account?

Answer: First, let’s correct a popular misconception that marriage somehow combines your credit records. Assuming she applied for the card in her name alone, this account won’t show up on your credit report or affect your scores.

Should you apply for a mortgage together, however, her scores could affect the interest rate and terms you get. Opening and closing accounts can ding scores, so it’s best to avoid both when you’re in the market for a major loan.

Issuers vary in their policies on closing inactive accounts, so it’s hard to predict how much activity would prevent the card from being shut down. Typically, though, a small charge every two to three months is enough to keep an account open.

Q&A: Social Security spousal benefits

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Dear Liz: I started my Social Security benefits at 66 and am now 70. I was married for 23 years and have not remarried.

When I ask about spousal benefits, I am told that my own monthly benefit is too high to get benefits based on my ex’s work record. My monthly benefit is only $1,509, my 401(k) has tanked, and I am surviving on less and less available part-time work.

I was told further that I can apply once my ex passes away and then it won’t matter how high my income is. Could that be correct? What is the exact cut-off amount to get spousal benefits?

Answer: Many people misunderstand the way spousal benefits work, and they think that they can get an additional check on top of their own retirement benefit. That’s not quite how it works.

Essentially, Social Security compares the amount of your retirement benefit with what you would get as a spouse or divorced spouse and gives you the larger of the two. Spousal benefits are up to half of what your spouse or ex receives.

If your ex’s benefit is $2,000 a month, for example, your spousal benefit could be $1,000, which is less than you’re getting now. If your ex dies, however, you can apply for a survivor benefit that equals what he or she received — in this example, $2,000 a month.

Q&A: Debt collection

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Dear Liz: I am trying to help my daughter deal with enormous student loans.

She is a doctor and very busy and simply cannot deal with the stress of almost $350,000 of education debt. I want to help her refinance, but to get the best rate I would like to help her improve her credit score (even if it is already 712).

She had three small debts turned over to a collection agency after a visit to an emergency room a couple of years ago. We plan to pay them off. Do I have to ask the collection agency to erase them or contact the original creditor?

Answer: You mention that your daughter has a 712 score, but she actually has many credit scores that change all the time. Small medical collections can have an outsize impact on those scores — or they can have no effect at all. It depends on what credit scoring formula the lender happens to use.

The latest version of the leading credit score, FICO 9, ignores paid collections and treats unpaid medical debt less harshly than other types of collection accounts. The most commonly used version, though, is FICO 8, which ignores only those collections under $100 and doesn’t differentiate medical from other collections.

Some lenders still use older versions of the formula that punish people for even small collections.

FICO also has a rival, the VantageScore. The latest and most-used version of that formula, VantageScore 3.0, also ignores paid collections.

You can contact the lenders you may use to refinance the debt to find out which scores they use, and which versions. That could help you decide how hard to push to get these collections erased.

If paid collections aren’t counted, you can just pay them off and be done with it. (You’ll of course want to keep the paperwork showing the debts have been paid and have your daughter check her credit reports to make sure the accounts reflect a zero balance.)

If the accounts could hurt her even if they’re paid, you have a couple of options.

One is to ask the hospital to take back the accounts, since medical bills are often placed with collection agencies on consignment rather than being sold to them outright. Then you can pay the hospital, and the collections should disappear. (Although, again, your daughter will need to follow up to make sure.)

Another option is to try to negotiate a “pay for deletion” — which means the collection agency promises to stop reporting the account in return for payment. You’ll want this agreement, if you can win it, to be in advance and in writing.

Q&A: IRS direct pay

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Dear Liz: Regarding the reader whose tax payment never made it to the IRS: I agree that electronic payments are the best and safest, but you might want to emphasize that the payments should be done directly through the IRS website.

I made the mistake of scheduling a couple of payments through my online banking, and a month later I received a notification from the IRS that I was in arrears, although the bank statement indicated that the payment has been debited.

It took several months of correspondence before the IRS acknowledged that the money was received. Luckily, the penalties and interest were only about $20, so I didn’t have to go through the additional hassle and filling out forms to reclaim it. The IRS website is very easy to use, and I haven’t experienced any problems since.

Answer: The IRS’ Electronic Tax Payment System, which was designed primarily for businesses, has been around for nearly two decades, but the agency only recently added a “Direct Pay” option expressly for individuals to make estimated tax payments and pay bills.

These methods and others, including electronic funds withdrawal when you e-file your return, are explained at http://www.irs.gov/payments.

Q&A: Electronic Federal Tax Payment System

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Dear Liz: I’m often required to make estimated quarterly payments and was always concerned I would miss one of them.

A few years ago, I came across the Electronic Federal Tax Payment System (EFTPS) that is offered by the U.S. Treasury. The beauty of the system is that once it is set up, there is nothing more for me to do. I set up all the payments I need to make and the system takes care of it.

I just have to set it up each year at the time I file my tax return. I have been using the system for several years and have had no issues whatsoever with it.

Answer: Thanks for sharing your experience with EFTPS. While that system allows you to schedule payments up to 365 days in advance, the Direct Pay option for individuals allows scheduling only up to 30 days in advance.