Ask Liz Weston

Get smart with your money

student loan debt

Career change in midlife requires caution

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Dear Liz: I went through divorce three years ago (after 20 years being together). I’m now 41 and broken financially and emotionally. I’m wondering if I should sell my small place and move in with my mother or stay broke and tough it out so I can keep my own place. I work part time, which was fine when I was married. Should I return to college and start a new “second half of life career”? I love my job and I’m torn.

What do you recommend? I can’t survive on my income alone and pay my bills. It’s never ending and I’m stressed beyond measure!

Answer: Recovering from a big setback such as a divorce is tough. But continuing to struggle in a situation that doesn’t work makes little sense. You need enough income to cover your bills and save for the future.

If you sell your place and move in with your mother temporarily, you could continue working part time in the job you love while getting a degree that would qualify you for a better, full-time job. You’ll need to make this investment carefully, since you’ll have only a couple of decades for the money you spend (or borrow) to pay off. A two-year degree might make more sense than a four-year course of study, for example.

You’ll want to pick a well-paying job in an industry that’s growing, and you should limit the amount of student loan you take on to no more than you expect to make your first year out of school. The Bureau of Labor Statistics has a list of the fastest-growing jobs, and their median salaries, at http://www.bls.gov/ooh/fastest-growing.htm. Your local community college probably also has a career services center where you could talk to counselors about your options.

It’s National 529 Day!

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College studentWho doesn’t love obscure commemorative/promotional days? But this one is worthwhile since it brings attention to the state-run college savings plans that can help you pay for your children’s future education.

Here are the most important facts you need to know about college savings:

If you can save for college, you probably should. The higher your income, the more the financial aid formulas will expect you to have saved for college–even if you haven’t actually saved a dime. Even people who consider themselves middle class are often shocked by how much schools expect them to contribute toward the cost of education. (By the way, it’s the parents’ assets and income that determine financial aid, so if you don’t help your kid with college costs, he or she could be really screwed–no money for school and perhaps no hope of need-based financial aid.)

More savings=less debt. Most financial aid is in the form of loans these days, so your saving now will reduce your kid’s debt later. (A CFP once told me to substitute the words “massive debt” when I see “financial aid.” So when you say, “I want my child to get the most financial aid possible,” I hear: “I want my child to get the most massive debt possible.”

529 plans get favorable treatment in financial aid formulas. These accounts are presumed owned by the parent, so less you’re expected to spend less than 6% of the total each year–compared to 35% of student-owned assets.

Learn more by reading “The best and worst 529 plans” and this primer on Motley Fool.

Use windfall to boost retirement savings

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Dear Liz: What would you suggest that someone do with $20,000 if the someone is closer to 40 than 30, single, with $100,000 of student loan debt and a $250,000 mortgage? My salary is around $100,000 a year. I have an emergency fund equal to six months of expenses and I make an annual IRA contribution since my employer doesn’t offer a 401(k) plan. Should I accelerate my student loan payments, since the interest isn’t tax deductible for me because my income is too high? Or should I invest instead? If I invest, should I put it all in a total market stock index fund or is that too risky?

Answer: Even if you’re making the maximum annual IRA contribution of $5,500 (people 50 and older can contribute an additional $1,000), you’re probably not saving enough for retirement. You can check the numbers using a retirement calculator (AARP offers a good one at its website, http://www.aarp.org). If indeed you’re coming up short, then consider opening a taxable brokerage account and earmarking it for retirement. You can use a chunk of your $20,000 windfall to get started, but also set up regular ongoing contributions.

The bulk of your retirement money should be invested in stocks, since that’s the only asset class that consistently outperforms inflation over time. If you try to play it too safe and avoid stocks, your purchasing power is likely to decline over the years instead of growing. A total market index fund with low expenses is a good bet for delivering diversification at low cost. But leaven your portfolio with bonds and cash as well, since these assets can cushion market downturns. All the returns that stocks give you in good markets won’t be much help if you panic and sell in a bad market. People who try to time the market that way often miss the subsequent rally, so they wind up selling low and buying high — not a winning way to invest.

If you don’t want to try to figure out an asset allocation, look for a low-cost target date fund. If you plan to retire in about 25 years, you’d want to look for a “Retirement 2040” fund.

Once you get your retirement savings on track, then you can start paying down that student loan debt. Target private loans first, if you have any, since they’re less flexible and have fewer consumer protections than federal student loan debt.

Student loans can pay off with nursing degree

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Dear Liz: I am about to begin graduate school to get my master’s degree in nursing to eventually become an advanced registered nurse practitioner. I have Googled scholarships, grants, fellowships, and am coming up empty-handed. I am fearfully looking at student loans to finance my degree (it would be about $34,000). I am appalled at the rates on federal student loans, and private school loans or just personal private loans are even worse. Are there any other options that I haven’t discovered? I don’t have any school debt to date, so this is all very daunting.

Answer: Let’s start with the good news: Your education should pay off. Advanced registered nurse practitioners earn a median of $86,625, according to the salary tracking site Payscale. That compares with a median of $55,311 for a registered nurse. There are no guarantees in education, any more than there are in life, but you should be able to recoup the cost of your education fairly quickly.

To find scholarships, you need to know where to look. One place to start is the Fastweb database, which tracks scholarships, grants and other financial aid programs. Fastweb lists the National Student Nurses Assn., the American Assn. of Colleges of Nursing and a variety of smaller programs, many of which are school-specific, publisher Mark Kantrowitz said. If you’re willing to serve in a high-need area, you also can check out HRSA Nurse Corps Scholarship (at http://www.hrsa.gov/loanscholarships/scholarships/nursing/). The ROTC also offers scholarships.

“Many employers of nurses provide signing bonuses or loan repayment assistance programs to help new nurses repay their student loans, since nurses remain in demand,” Kantrowitz noted.

You’re smart to be cautious about education debt, since too many people have overdosed on student loans. However, student loans in moderation can help you get ahead financially if you’re borrowing for the right education.

Since there’s strong demand in your field and excellent pay, you shouldn’t shy away from federal student loans, which offer fixed interest rates and a number of consumer protections, including forbearance and deferral in the event you become unemployed. You would be borrowing far less than you’re likely to make the first year after you graduate, so your payments shouldn’t be burdensome. If you decide to pursue a career in public health or work for a nonprofit, you could qualify for federal student loan forgiveness after 10 years.

Graduating without student loans is tough

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Education savingsA few months ago I gave a verbal spanking to a woman who equated college loans with handouts. She wondered why people didn’t just delay college for a year and earn enough money to pay for their entire education, as she did back in the day.

I pointed out that there weren’t many jobs available to newly-minted high school graduates that paid $60,000, which is about the minimum you’d need to pay for a four-year degree today.

Apparently my reader isn’t the only one having trouble keeping up with the times. A recent New York Times story quoted Virginia Foxx, a Congresswoman from North Carolina who heads a House subcommittee on higher education and work force training, saying she was bewildered why people went into debt instead of working their way through school the way she did.

Here’s what Times writer Ron Lieber pointed out:

But students nowadays who try to work their way through college without parental support or loans face a financial challenge of a different order than the one that Ms. Foxx, 69, confronted as a University of North Carolina undergraduate more than 40 years ago. Today, a bachelor’s degree from Appalachian State, the largest university in her district, can easily cost $80,000 for a state resident, including tuition, room, board and other costs. Back in her day, the total was about $550 a year. Even with inflation, that would translate to just over $4,000 for each year it takes to earn a degree.

A plucky, lucky few manage to get through college with no loans or parental support. But many of those who try wind up dropping out, unable to balance the work hours required with the demands of school.

If you’re one of those who may be stuck trying to pay your own way, Zac Bissonnette’s book “Debt Free U” can provide helpful guidance. If you’re a parent or a policymaker, however, you should check your views about the viability of kids’ working their way through college with today’s realities.

Settling co-signed student loan debt

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Dear Liz: My daughter co-signed a student loan for a friend who failed to pay the debt. Now my daughter cannot refinance her home because this loan appears on her otherwise very good credit reports. She has been getting calls from a collection agency.

I called the agency to discuss what it would cost to get her released from all liability regarding this loan, and they gave me an offer of $13,000 to satisfy the debt, which is now $35,000. I countered with $9,000, since the original loan was just $15,000, but they refused. My daughter is unhappy about paying anything, since her ex-friend is a gainfully employed attorney. Is it good business to pay what the collection agency is asking, or should I continue to negotiate?

Answer: That sounds like a pretty good offer, said financial aid expert Mark Kantrowitz, publisher of the FinAid and Fastweb websites.

“Lenders almost never settle for less than the outstanding principal balance of a defaulted student loan, so that may be the best she can get,” Kantrowitz said. “It may be the case that they are offering her a low settlement amount to release her from her obligation and then will go after her former friend for the remaining debt. When there are two borrowers on the hook, one borrower reaching a settlement does not cancel the debt. It merely releases that borrower from her obligation.”

Your daughter should have the settlement offer reviewed by an attorney, Kantrowitz said. The attorney should verify that the collection agency has the authority to settle the debt, and any agreement should list all of the loans involved.

“I’ve seen cases where a borrower thought she was getting a settlement of all the loans,” Kantrowitz said, “but the settlement was just for some of the loans.”

Ideally, the settlement agreement would require the lender to stop reporting the default and delinquencies to the credit bureaus, which would remove the stain from her credit reports. Not all lenders will agree to such a condition, Kantrowitz said, but removal would be better for her credit than simply having the debt reported as “satisfied.”

Also, the agreement should require that the lender provide a “paid in full” statement to your daughter as proof her debt has been settled, Kantrowitz said.

“She should keep this statement forever,” Kantrowitz said, “as defaulted loans have a tendency to resurrect themselves from time to time, [such as when] a bank reloads their database from old backup tapes [or] someone reviewing old records discovers the original promissory note.”

An attorney also could advise your daughter about taking further steps, such as suing the former friend for repayment or reporting the issue to the state bar, which has standards of professional conduct that may be violated by an unpaid debt.