March 25, 2019 By

Q&A: Ask yourself these questions before using savings to pay off student debt

Dear Liz: I’m wondering whether I should use part of my emergency fund to pay off student loans. I currently have $15,000 in an emergency fund to cover three to six months of my living expenses and owe $18,000 in federal student loans. I’ve been feeling the itch to pay off a chunk of my student loans to reduce the years (and interest) I have to keep paying. I’d like to use $5,000 to $6,000 of my emergency fund to put toward the loan. For context, I’m already contributing 15% to my 401(k) and have no other debt.

Answer: First of all, well done. The fact that you have any emergency fund puts you ahead of the game, plus it’s great that you’re also saving for your retirement and avoiding credit card debt.

There are a few things to consider before using savings to pay down your loan. “Prepaying” a student loan is different from paying down credit cards. Reducing credit card debt typically frees up additional credit that you could use in an emergency. Paying down credit card debt also can help your credit scores by reducing your “credit utilization,” or the amount of your available revolving credit that you’re using. Extra money sent to a student loan lender, by contrast, can’t be clawed back if you should need it and doesn’t help your scores as much.

Federal student loan debt has other advantages. Interest rates tend to be low, and up to $2,500 of interest can be subtracted from your income even if you don’t itemize. That is a valuable “above the line” adjustment that can help you qualify for other tax breaks.

You shouldn’t hang on to debt just because of the tax savings, of course, since the value of the tax break usually is much less than the interest you pay. But most people have better things to do with their money than pay down low-rate, tax-deductible debt, especially if they have other types of debt, haven’t maxed out their retirement savings and don’t have an adequate emergency fund.

Which brings us back to your situation. You’ve checked all those other boxes. If your job situation is reasonably stable, then using a chunk of your savings to pay down debt can make sense — particularly if you have access to credit or other funds, such as help from friends or family, as a backup while you rebuild those savings.

Filed Under: Q&A, Saving Money, Student Loans Tagged With: , ,
March 18, 2019 By

Q&A: Why co-signing a loan, especially a student loan, can be a costly move

Dear Liz: I co-signed a student loan to help a 31-year-old woman complete her schooling to become a nurse. I know this was something I should not have done, but I just could not refuse her. I did not realize that because no payments had to be made until after the student’s graduation, the loan amount would double. I am looking into a life insurance policy on the student to protect my interest.

Is there any advice you can provide me other than paying off the loan? I know the student can complete a form to take me off this loan, but she will not qualify on her own.

Answer: She may not be able to take you off the loan now, but hopefully she can within a few years of graduation. Most private lenders will allow a co-signer to be removed from a student loan after a certain number of on-time monthly payments, typically 12 to 48. If she has good credit and a decent income, she also may be able to refinance this loan with another lender to get you off the note.

In the meantime, you’ll want to protect your credit, because a single missed payment can damage your credit scores. Contact the lender to find out what notice, if any, you’ll get if she falls behind on payments. Discuss with her the importance of making payments on time, every time, and ask her to contact you immediately if there’s any chance that won’t happen.

Just as many people don’t realize that they’re putting their good credit in the other person’s hands when they co-sign a loan, many also don’t realize what can happen if they take a lender up on its offer to defer payments until graduation.

The loan amount swelled because of something known as capitalization. Because payments aren’t being made, the unpaid interest is being added to the loan amount and dramatically increasing what the two of you owe.

If the loan were a subsidized federal loan, the government would pay the interest while the student was in school. With unsubsidized federal loans and private student loans like the one you signed, it’s smart to start making payments immediately to avoid capitalization and having to pay interest on interest.

Filed Under: Q&A, Student Loans Tagged With: , ,
January 21, 2019 By

Q&A: Is it smarter to save for retirement or pay off debt first?

Dear Liz: I graduated from college in May and began a full-time job in October making $36,000. I also do freelance work and receive anywhere from $500 to $1,000 a month from that. I live at home, so I don’t have to pay for rent or groceries, which really helps. Currently, I have just over $18,800 in student loans at an average interest rate of 4.45%. I have also opened a Roth IRA.

My plan currently is to contribute $500 a month to my IRA in order to max it out, and pay $700 a month to my student loans in order to get them out of the way quickly. Or is it better to skip the Roth and put that extra $500 toward my student loans? That way, I would be debt free when I move out of my parents’ house next year. The stock market has done nothing but fall since I opened my account, and I am reading that it could do the same this year as well. But I have also read that it’s good to just keep consistently contributing to an IRA when your debt isn’t high-interest to reap the rewards of compounded returns.

Answer: It’s generally a good idea to start the habit of saving for retirement early and not stop. What the market is doing now doesn’t really matter. It’s what the market does over the next four or five decades that you should care about, and history shows that stocks outperform every other investment class over time.

The $6,000 you contribute this year could grow to about $100,000 by the time you’re in your 60s, if you manage an average annual return of around 7%. (The stock market’s long-term average is closer to 8%.) And Roth IRAs are a pretty great way to invest, because withdrawals are tax-free in retirement.

That said, your other option isn’t a bad idea either. You are not proposing to put off retirement savings for years while you pay off relatively low-rate debt, which clearly would be a bad idea. Instead, what you’re losing is the opportunity to fund a Roth for one year. That’s an opportunity you can’t get back — but you could fully fund the Roth next year, and perhaps use some of your freelance money to fund a SEP IRA or solo 401(k) as well.

Either way, you should be fine.

Filed Under: Q&A, Retirement, Student Loans Tagged With: , , ,
October 23, 2017 By

Q&A: Should grandma sue over the student loan she co-signed?

Dear Liz: You recently answered a letter from a grandmother who co-signed a student loan for a granddaughter who isn’t paying the debt. Although you did not suggest it, a very viable option would be for the grandmother to contact an attorney and sue her daughter and her granddaughter for the debt owed.

It doesn’t appear that they care for the grandmother anyway, so why feel bad about holding their feet to the fire? The grandmother may not have a legal leg to stand on with the daughter, but surely the granddaughter received the benefit of the loan and should ante up.

Answer: Suing a family member is a pretty drastic step that many people are reluctant to consider. If the grandmother is in fact “judgment proof” — if creditors who sue her wouldn’t be allowed to garnish her income or seize her property — then the lender might start focusing its collection actions on the granddaughter. The grandmother wouldn’t have to go to the expense of suing the young woman or trying to collect on a judgment.

Either way, the bankruptcy attorney I suggested she consult to help determine if she’s judgment proof also would be able to advise her about filing such a lawsuit.

To reiterate, student loans typically can’t be discharged in bankruptcy, but bankruptcy attorneys understand the credit laws of their states and can help people assess how vulnerable they are to lawsuits and other collection actions.

Filed Under: Q&A, Student Loans Tagged With: , , ,
October 9, 2017 By

Q&A: How student loans can follow you to the grave

Dear Liz: Several years ago, my daughter called in tears asking if I could help because my granddaughter, who was halfway through her first year of college, would have to drop out if she didn’t immediately finish paying her tuition. I agreed to co-sign a loan, thinking after she got through that semester, they could see how things went.

Well, unbeknownst to me, she took out a loan that also covered the next semester. She dropped out of school in her second year. Now several years later, I’m being hounded by the lender because neither my granddaughter or daughter seem to think they should have to do anything about this. I sometimes get up to four calls a day, seven days a week. I have returned calls but gotten nowhere.

Meanwhile, my granddaughter recently got a brand-new car and posts pictures of herself enjoying partying with friends. I tried to get her to talk to me about it, thinking if she, along with her mom and myself, could each manage to pay a little each month we could work on getting this taken care of, but I got no response from either of them.

My daughter and son-in-law still go on cruises and do other traveling, drive newer expensive vehicles and will no longer talk to me.

I am 73 and struggling to live month-to-month on Social Security, which is my only income. I used to have an 800 credit score that has now gone down into the 600s because of this.

Now I am afraid they will start taking this out of my Social Security check. This loan is about 72% of my total annual income! My doctor has upped one of my medications as I have trouble sleeping worrying about this.

What am I to do? The only way I can see out of this would be my death, and then I’m afraid it would even follow me to my grave.

Answer: If you co-signed the loan, then it was likely made by a private lender that won’t be able to take your Social Security check. Federal student loans are a different story. The U.S. Supreme Court has ruled that up to 15% of borrowers’ Social Security benefits can be taken to repay those.

Federal student loans also have no statute of limitations, which means the government can indeed pursue you to the grave. Private student loans, however, do limit how long lenders have to sue you over the debt. The time limit varies by state and is typically three to 10 years, but the limit may be extended in some areas if you make a payment on the debt or even acknowledge that it’s yours.

You should make an appointment to talk to a bankruptcy attorney. Student loans typically can’t be erased in bankruptcy, but an attorney familiar with the credit laws in your state can advise you about how vulnerable you might be to lawsuits and other collection actions.

If Social Security is your only income and you don’t have other assets a creditor can take, you may be “judgment proof.” That means a lender can sue you, but won’t be able to collect anything.

If that’s the case, the attorney may be able to communicate the situation to the lender so that it can redirect its energies to collecting from your irresponsible granddaughter.

Filed Under: Q&A, Student Loans Tagged With: , ,
September 11, 2017 By

Q&A: Tax implications of parents paying off a child’s loans?

Dear Liz: My wife and I co-signed for student loans for our daughter. My daughter made payments on these loans since she graduated from college four years ago. My wife and I just paid off the loan balance, which was $22,000. Is our payment considered a gift to our daughter?

Answer: Yes, but your gift is within the annual exemption limit, so you won’t have to file a gift tax return. You and your wife can each give your daughter $14,000, or a total $28,000, without having to file a return. Gift taxes aren’t owed until the amounts someone gives away above those annual limits exceeds $5.49 million.

Filed Under: Q&A, Student Loans, Taxes Tagged With: , ,
August 28, 2017 By

Q&A: What to consider before giving money for law or medical school

Dear Liz: Our daughter is in medical school using scholarships and student loans. We are now in a position to help her out, but worry that financial help might work against her sources of aid. Would it be better to pay some on her outstanding loans, give her money, pay some of her living expenses or put the money into a savings account to give her when she graduates to use towards paying down her debt? The amount we could give her would not be enough to pay for everything each semester, just something to ease her burden. We don’t want to jeopardize her ability to receive aid.

Answer: While nearly all graduate students qualify as independent — which means that parent financial information isn’t required to get aid — some medical and law schools do consider parental assets and income in their calculations.

Your daughter should call her school’s financial aid office anonymously to ask about its policy regarding parental aid, said Lynn O’Shaughnessy, a college financing expert at TheCollegeSolution.com. If your help would hurt, you can use the savings account route but you needn’t wait until she graduates to give her the money. Once she files financial aid forms for her last year, she should be able to accept your largesse without consequence.

Filed Under: College Savings, Q&A, Student Loans Tagged With: , , ,
August 21, 2017 By

Q&A: Watch out for shady companies promising to help you repay student loans

Dear Liz: I’m 32 and have a little over $100,000 in student debt from undergraduate and graduate school. I’m trying to get my professional life on track, and I can’t figure out how to pay the loans off. Everything I see online seems shady. What are the questions I need to be asking myself? What are the things I should be searching for on the Internet to help me get control of my financial situation?

Answer: “Shady” is exactly the right word to describe many of the companies promising student loan debt relief. They’re making false promises and charging troubled borrowers fat fees for government help that’s available for free. Many of these outfits get disciplined in one state, only to pop up in another.

If you’re struggling to pay federal student loans, you have several options for making the payments more manageable. You can research income-based repayment programs at StudentLoans.gov. Private student loans don’t have the same consumer protections or numerous repayment options, but you can contact your lenders directly to see what they offer.

The amount of debt you have is large but not insurmountable, especially if it qualified you for a well-paying job.

You don’t have to rush to pay off the federal student loans because those offer low, fixed rates, but you may want to prioritize paying off variable-rate private loans.

Also, don’t let your concern about your debt prevent you from saving for retirement. That, too, will be expensive, and the longer you wait to contribute to a retirement fund, the harder it will be to catch up.

Filed Under: Q&A, Scams, Student Loans Tagged With: , , ,
July 24, 2017 By

Q&A: When student debt payoff becomes complicated by identity theft

Dear Liz: I went back to school in 2002 to get my teaching credential. I took out several student loans and set up a repayment plan upon graduating with automatic deduction out of my checking account. Several years ago, the IRS started garnishing my bank account stating that there was a lien but I never received any other type of indication what was going on.

After contacting the IRS, we found that someone took out a fraudulent student loan using my former married name. I also got my credit reports, which showed the loan. I was able to get the signed loan documents from the U.S. Department of Education but now the department does not respond to my certified letters or phone calls.

I’m at a loss at what to do at this point. I filed a police report and notified the credit reporting agencies. I’m out almost $10,000. Is there any other advice you could give me?

Answer: First, follow up with the credit bureaus to make sure the fraudulent loan has been removed from your credit reports. Consider setting up credit freezes at all three bureaus to reduce the chances of being victimized again. The Identity Theft Resource Center at www.idtheftcenter.org has more information to help you protect yourself.

Getting the actual loan dismissed and your money back is a more difficult task. You may be able to have the loan erased under what’s known as a false certification discharge, but qualifying for that isn’t easy, said Jay Fleischman, a Los Angeles attorney who specializes in student loan problems.

It’s not enough to have a police report. You’d need to identify and file a lawsuit against the thief. If you can get a court judgment against that person, you would provide the Education Department with that as well as proof of your identity and possibly signature samples from the approximate date of the loan.

Even if you did everything necessary to prove eligibility for discharge, the department could still deny it if you received any benefits from the loan — if it paid any costs of your education instead of someone else’s, Fleishman said.

At this point, you may need to hire an attorney familiar with identity theft issues. You can get referrals from the National Assn. of Consumer Advocates at www.naca.net.

Filed Under: Identity Theft, Q&A, Student Loans Tagged With: , ,
June 19, 2017 By

Q&A: When a student loan co-signer dies

Dear Liz: I have a friend who recently died after co-signing a student loan for her son. She was making the payments. Does that loan go to her son now to repay?

Answer: Possibly. Another possibility is that her estate is on the hook.

It all depends on the loan agreement, which varies from private lender to private lender. (We know this is a private loan because federal student loans, which have many more consumer protections, do not require co-signers.)

In many cases, nothing happens if the other borrower takes over the payments and continues to make them on time. Some lenders, however, have a contract clause that makes the balance of the loan due immediately. In the past, lenders also could consider a death to be an “automatic default” that could seriously damage the living borrower’s credit. Fortunately, the Consumer Financial Protection Bureau pushed lenders to change their policies on new and existing loans so that co-signer deaths no longer trigger such defaults.

If you’re close to this young man, you should urge him to check the contract and to contact the lender.

Filed Under: Q&A, Student Loans Tagged With: , ,