Welcome to Ask the Bills, where every two weeks Helaine Olen answers readers’ questions about their most nagging personal finance and financial etiquette dilemmas. Seeking advice on a money issue? Email email@example.com.
I’m a first-year student at a Canadian university studying for a business degree. I’m very lucky that my parents saved up enough money to cover my first year’s tuition. But to get through the remaining three years I’ll need to take out a student loan to cover living expenses. Recently, my mom floated the idea of paying with the line of credit my parents have on their house. She argues that they would get better terms than I would on a student loan and that if something goes wrong, they have the resources to pay for it. This makes me nervous. Although we’re a fairly solid middle-class family, the house is their primary source of retirement security. I’m worried if I don’t get a good job straight out of college I could put their retirement at risk. Do you think it’s safer to take out a student loan? We’re talking about $30,000 over three years, and I would work full-time during the summer and part-time during the school year. I qualify for a fairly low interest rate and have the option of paying only interest for one year after I graduate.
Yes, American readers, they have student loans in Canada too! And while their system is different, it often presents borrowers with the same difficult choices.
In this case, both a private, bank-offered student loan and tapping into your parents’ home-equity line have the potential to put their retirement at risk. Banks aren’t in the business of offering college students money without a credit-worthy co-signer, even if that student is a clearly responsible, upstanding person studying a practical subject like business. That co-signer will almost certainly be your mom or dad. If you can’t pay the money back, the bank will almost certainly look to your co-signer to make good on the loan.
So should your parents use their home to finance your education? Absolutely not, says Scott Hannah, the president and CEO of Canada’s Credit Counseling Society. He says you need to start by visiting to your college’s financial aid office to make sure you’re taking full advantage government-offered student loans. Those are in your name alone and can’t impact your parents’ future finances. If you need more money after that, turn to a bank-offered student line of credit. Yes, your parents will need to co-sign, but it’ll be in your name, which will give you a sense of ownership over the debt. You’ll be paying the bill directly, not sending money to your parents every month.
There’s something else to consider too. It’s no fun to owe $30,000, whether it’s to the government or a bank. So I need to ask: Is this school worth it? Is there one you could attend where your living expenses would be lower? Could you could cut your living expenses by, say, living at home? I say all this not to discourage you—you might decide the loans are your best option—but to stress that these actions have long-term consequences. The more money you owe, the more constrained your life will be after graduation. You might need to forgo that less-than-lucrative but alluring professional opportunity, for example, in favor of a better-paying one that does less for you over time. And the money you owe will cut into how much you can afford to save. These are all things you should think about before borrowing any money. And, yes, I think it’s unconscionable that both the United States and Canada place these sorts of financial burdens on young people trying to get ahead. That’s a subject, alas, that isn’t going anywhere.
When my husband and I were starting out, we lived fairly hand to mouth, and I defaulted on my student loans. In the past five years, things have come together. I’ve been using the website Credit Karma to get a handle on things and managed to track down all my outstanding bills except for the student loans. I can see them but can’t figure out who to contact about setting up some sort of payment plan. I have one for $11,000 and one for $16,000, and both are listed as “Open Collection/Charge-Off.” If it matters, I’m in my mid-40s, and the loans are from the mid-1990s. What’s the best way for me to tackle this debt?
Congratulations! If you ever wanted to explore a career as a private detective, this is your chance. As you guessed, tracking down and paying off these loans isn’t a simple process. You can begin by calling up the financial institutions that issued them originally—although, after all this time, your loans may have been sold off, maybe more than once. What to do? If these are federal loans, they’re almost certainly listed in the National Student Loan Data System. If they’re privately issued ones and you don’t recall the original lender and they aren’t in the database, first get a copy of your credit report from a credit-reporting bureau like TransUnion or Equifax, which may state who currently owns the loans. But it’s possible they won’t, especially since these debts are almost two decades old. Then, once you find them, you need to figure out what repayment programs you’re eligible for. If a collection agency owns your debt, it might be open to negotiating a settlement. Is your head starting to spin? It should be. A counselor at a nonprofit organization like the National Foundation for Credit Counseling can assist you in navigating this process. This is complicated, demoralizing stuff, and you definitely don’t have to tackle it alone.
I’m in my early 30s. Because of job moves, I have retirement savings in 1) a federal Thrift Savings Plan; 2) a 401(k) account with my former employer; and 3) a 401(k) account with my current employer. I’ve also started an individual retirement account, though it’s managed, and I think I want to get into an unmanaged fund. I also put $100 a month into an investment account run through the bank. Should I consolidate my employer-based retirement funds? Can I do it without significant tax implications? And would I be better off in an unmanaged fund, like an index fund, and if so, can you recommend a few?
There’s no reason to consolidate your 401(k)s into one IRA, a process known as a rollover. The federal government’s retirement offering—that’s the Thrift Savings Plan—is considered one of the best 401(k) plans available, offering savers the lowest money-management fees out there. I would never tell anyone to take money out of it in order to invest it in a retirement account elsewhere. So if someone, perhaps a financial adviser you sought guidance from, is suggesting you roll all of this money into one account, know that he might well be recommending this because he can make money from your new investment, either by selling you on a mutual fund he collects a commission for placing you in or by receiving an overall management fee. Don’t fall for it. Leave the money in place. That advice goes for the other 401(k) as well. It’s likely being managed better in the now-former workplace retirement plan then it would be in an IRA. The White House Council of Economic Advisers estimates that what they call “conflicted advice” costs investors 1 percentage point in gains annually.
If you’re asking if you should roll your workplace retirement accounts into your current 401(k), the answer changes a bit. You still shouldn’t move the federal account. But you might want to consider consolidating the other two under your current workplace plan for simplicity’s sake. The trick is to have the original 401(k) sponsor transfer the money to your current 401(k). If it’s done that way, you won’t incur a tax penalty. Do not take any money out of a retirement account at any point in the process.
As for your other money, if you feel the need to invest in retirement savings outside of your workplace 401(k), a passively managed index fund is indeed the way to go. Time and time again, researchers have discovered that few active fund managers are able to meet or surpass the performance of the index they are supposedly set up to beat. My suggestion: Vanguard 500 Index Fund. Its investment fee is a relatively low 0.17 percent.