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 firstname.lastname@example.org.
About 12 years ago, my son wanted to attend an out-of-state school with a high tuition. I foolishly took out a parent Plus loan to cover his school and expenses, since we couldn’t afford it on our income. This was on top of a federal loan I was paying for my own education. At some point, we consolidated the two loans to get a lower interest rate. Long story short: My husband died, my son had job problems, I am only able to work part time due to health problems, and the loans have been in forbearance for several years. Because they are parent Plus loans, they are not eligible for income-based repayment, and the payments keep going up. If I started paying on them now, the payments would take up half my monthly income, which is impossible. My son is planning to pay his portion, but he’s come up against major home repairs and can’t make payments now. I know at some point I’ll run out of options to delay payments and the loan will come due. At that point, I will be looking at retirement and will not have a lot of income available. I have some savings, no debt besides this large loan, and would be in good financial shape but for it. I’m getting panicky about the repayment and have tried to work something out with the lender, but to no avail. I know my son can begin paying in a couple of years as long as he has a job, but his company is going through some problems now and he doesn’t know from day to day whether he will be employed. If I default, will they garnish my Social Security or the equity in my home? What do I do?
No one begins attending college thinking that a decade out they’ll be working an uncertain job, like your son. And few, like you, think their spouse will die and they’ll suffer from ill health, taking such a financial hit that it’s all but impossible to pay back student loans. We’re asking people to make decisions that can only certainly work out if they can predict the future. That’s why politicians like Bernie Sanders argue for free public college tuition and why Hillary Clinton is advocating for plans to permit student-loan borrowers to refinance their debt at current, lower rates. Why, after all, make people’s financial lives more burdensome when all they wanted to do was better their lives and the lives of their children? But this is our system, at least for now. You need to figure out how to best protect yourself within it.
So what to do? “That’s a tough situation, no question about it,” says Barry Coleman, senior director for student loan counseling at the National Foundation for Credit Counseling. “A challenging one,” adds Nick Demeester, manager of student loan services at GreenPath Financial Wellness. No disagreement there!
Nevertheless, both Coleman and Demeester beg you not to default. Your home equity would likely be safe but not your future Social Security check, not to mention any salary you earn in the meantime. Those could be garnished—and the Social Security payment would take the hit at a time when you’re no longer working and need the money. Moreover, it’s possible you aren’t totally bereft of options. Parent Plus loans are eligible for something called Income Contingent Repayment. It’s not as generous as Income Based Repayment, but it’s certainly better than going into default. Your eligibility likely depends on the details of the consolidation. You could also look into refinancing the loans with a peer-to-peer lender like SoFi. They generally offer lower interest rates if you’re a good credit risk. That might bring your bill down to a more manageable level as well.
But there’s one other thing. Mom, I’m sure you did a fine job—your son is a college graduate and is holding down a job in our forever-recovering but not recovered economy. But home repairs? As someone who has owned more than one home, I can tell you the expenses are indeed never-ending. But many are also quite discretionary. Yes, a busted water boiler needs to be replaced. A paint job can likely wait. You get where I’m going here. If your son is doing well enough to buy a home, he’s doing well enough to help his mom pay for his own college education. I know it’s not easy for a parent to ask a child for financial help, but I don’t see that you have a choice. In fact, if he’s as upstanding as you believe, he’ll likely be horrified to discover his education put you in so much immediate financial jeopardy and desperately want to help out. Give him the opportunity to do that.
I’m almost through the wealth-destroying process that is divorce. My ex and I spent all of our joint savings and more on the divorce, and I now have $5,000 on a credit card. I’ve been paying more than the minimum to get the balance to a manageable level before the 12-month interest-free period ends in three months. I’m also contributing 10 percent of my salary to my retirement plan. My salary is about half my income, with the other half coming from my ex’s support payments. (He makes a lot more money than I do.) I am truly fortunate in a number of ways; between us we make enough to support two middle-class households for our children (ages 8 and 12) in an area with an extremely high cost of living. Here’s what I’m struggling with. I’ve heard that a household should have enough in savings to cover at least three months in expenses. In our area, my minimal monthly expenses for rent, utilities, car payments, student loans, credit card minimums, gas, and food come to $6,000–$18,000 for three months. I’m currently putting $350 a month aside, but it’s going to take three years for me to save up $18,000 at that rate. And this doesn’t take into account the final disentangling of expenses, like cellphones and insurance, that will occur in the next few months. Nor does it account for unanticipated expenses, like medical bills or car repair, or quality-of-life things like Christmas presents or family vacations. And, of course, the support payments won’t last forever. So what do I do with the $350 a month I have available? It makes me really nervous to be carrying a balance on my credit card and not saving enough for retirement and college.
Divorce, no matter how emotionally necessary, is one of the most financially destructive events you can experience. Numerous studies show that legally ending a long-term relationship does permanent economic damage, regardless of sex. That said, the monetary impact of divorce is almost always worse for women than men. Like you, many earn less than their former spouses, which leaves many in a vulnerable economic position when it comes time to split up and start life anew.
So keeping all that in mind, when I reached out to Lili Vasileff, a Greenwich, Connecticut, certified financial planner specializing in divorce, she thought you were doing quite well, all things considered. In her view, you don’t need to panic if you are able to save 10 percent of your own pay for retirement. That’s not to say you don’t have hard financial work ahead of you. Your new reality is not your old reality, and it won’t be, short of a massive salary increase or some other event that alters your finances for the better. As Vasileff puts it, “She’s doing all the right things, but there’s not enough money to accomplish it all.” At some point, you will need to make trade-offs. If you believe you need a bigger emergency savings cushion, you might need to cut retirement savings. Vasileff suggests you begin thinking now about how you will handle such things as when your support payments end and the fact that children often get more expensive as time goes on, not less.
Right now the situation calls for patience—something you’ve no doubt shown much of in the past few years. Now you need to show a bit more. For now, I would continue to put the $350 a month aside. See how your finances shake out as you finish delinking joint expenses like the cellphone bill and you continue the process of separating your financial life from your former spouse. As for the $5,000 in debt, look into a new zero-interest credit card and do another balance transfer if needed.
I realize this is hard advice to hear. You want to get on with your life, and part of that is deciding what to do with $350 a month. It’ll take a while to get a better handle on what your post-divorce financial world is going to be like—at which point, you can always write me again. For now, put the money aside in a place where you have it in case of emergency—and, yes, that emergency might be a post-divorce weekend at a spa or retreat. You’ll deserve it. Sometimes our needs are more than financial.
Almost 10 years ago I placed $10,000 in mutual funds for future investment. After seeing it fall to less than half its original value during the economic crisis, it’s now worth $15,000. My husband and I are about to buy a home that needs significant work, including a new roof, a new kitchen, and the replacement of all knob-and-tube wiring. We have a six-month emergency fund, a decent amount of retirement savings for our age, less than $10,000 in student-loan debt at very low interest rates, and great credit. I’m wondering if it would be wise to cash out of the mutual funds to pay for a majority of the work that needs to be done on the house. The other option is to get a home improvement loan and keep the cash in mutual funds. I am very happy with my profit on them. I think it’s also important to note that we are getting the house for a great price. If we were to take a loan for $30,000 and add it to the purchase price of the home, our total would still be less than the home’s assessed value.
Oh, I wish all questions were this easy to answer. This is so easy that I wondered if I was missing something. So I called Tom Fredrickson, a certified financial planner based in Brooklyn, New York, and asked for his thoughts. We both agree: Apply for the loan. “You are taking on debt to make an improvement, you aren’t taking it on to go to Iceland,” Fredrickson says. Selling off mutual funds comes with tax consequences like, for instance, capital gains on the profit. You’ll also lose the benefit of compounding, of letting the investment grow over time. On the other hand, a home improvement loan is tax deductible, as long as you use it to make changes to the home that increase its worth as an asset. Does a new kitchen add value? Absolutely! What if you simply put up wallpaper in it? Er, no. Moreover, interest rates are low right now, so if you are going to borrow, this is the time to do it. And congratulations on the new digs!