In honor of a very happy holiday season, we’re celebrating with our HerMoney family with five special Mailbag-focused episodes! Our listeners submit THE BEST questions all year long (to firstname.lastname@example.org), and we wanted to get as many as possible answered before 2020 rolls around.
In this episode, Jean and Kathryn dive into your questions around college, education, and student loans. Listen in as Jean advises a woman who co-signed for her daughter’s student loans and is now struggling to repay the debt because her daughter hasn’t taken responsibility for the loan.
We also hear from a woman who is getting a divorce, and her husband has told her he won’t be contributing to their two children’s college funds once they turn 18. She’s looking for a way to ensure her money grows as quickly as it can, and is debating an ESA (Education Savings Account) for her son who is in college.
Jean also guides a listener on how the 529 accounts she has for her nieces might impact their ability to get financial aid, and what to do with those accounts before they head to college. Lastly, Jean tackles a question about the best ways to refinance $180,000 in student loans while still being eligible for income-based repayment plans.
From everyone on the HerMoney team, thank you so much for listening to us in 2019. We can’t wait to spend more quality time together in the New Year!
Jean Chatzky: (00:06)
HerMoney is sponsored by Fidelity Investments. We want you to feel confident about investing so that you can make your money work just as hard as you do. Learn the ropes without the jargon at fidelity.com/demandmore. HerMoney comes to you through PRX. Hey everybody, it’s Jean Chatzky. Thanks so much for joining us today for a special mailbag only episode of HerMoney. Kathryn Tuggle and I have been going through our inbox tackling all of your questions. We’re having a good time, aren’t we?
Kathryn Tuggle: (00:46)
Absolutely. I love this.
Jean Chatzky: (00:48)
I do too and I’m especially excited about the fact that today we are going to dive into some of the questions that our listeners have submitted around college and student loans. Today we know there are 45 million student loan borrowers out there and they owe a collective $1.5 trillion. That is just huge. The average amount owed by recent college grads with debt is close to $30,000. That is a huge, huge burden, but the best way to face these debts to face these fears head on is with some knowledge and so we are going to dig in and and see if we can help.
Kathryn Tuggle: (01:35)
I think this keeps so many parents up at night because they know that if they can help their children avoid debt, they want to do that.
Jean Chatzky: (01:43)
Yeah, no question. No question. I mean, I can’t tell you the last time I gave a talk and did not get the question, where do I put college in terms of saving for my own retirement. For a long time, I answered that question by the book, which is that you’ve got to prioritize your own retirement, that you’ve got to put retirement first because there is no financial aid for retirement and there is financial aid for college. But as I got older and as my own kids got older and got closer to college, I started answering that question more like a parent than a financial expert because what I realized was that as a parent, you’re going to do something for your kid, right? You’re not going to put yourself first. Even if all the experts in the world say you should put yourself first. And so this is one of those scenarios where we just have to find some middle ground and try to get all of the tax advantages we can by putting some money away for ourselves and simultaneously, even if we have to take some money away from retirement, putting something away for college for our kids. It’s one reason I love the Roth IRA because you can put money into a Roth IRA now and decide later whether you’re gonna use it for college or retirement ’cause you can use it for both.
Kathryn Tuggle: (03:16)
Jean Chatzky: (03:17)
So let’s dig in.
Kathryn Tuggle: (03:19)
Absolutely. Our first note comes to us from Annie. She writes Hi Jean and team. Thank you so much for the work that you do. I’m an avid follower of Jean on Facebook, the podcast and the weekly emails. A brief introduction for me. I’m 63 years old, a widow, an empty nester with a two adult children. I work in the healthcare field and I’m a member of the sandwich generation. I reside in a rental property in Ann Arbor, Michigan. In 2008 I borrowed $12,000 for my daughter’s education from Sallie Mae, currently Navient, which makes me the co-signer of her loan. She earned her bachelor’s from Eastern Michigan University. I was hoping that she would start paying it off as soon as she graduated, but she ended up going to the University of Michigan for a graduate degree and took out a second student loan. A few months ago I found out I owe $60,000 to Navient with mounting interest rates that I have to pay. My daughter did not accept any responsibility for this loan. Please, I need expert advice on how to negotiate and deal with this nightmare. I can agree to pay off slowly the principle of the loan, which is $12,000. I work two jobs and a side gig and I’m playing catch up with my finances to be able to build up my savings.
Jean Chatzky: (04:26)
I’m so sorry. Okay. So I don’t think there is any way to sugarcoat this. So, when you co-sign for a loan, you are as responsible for repaying that loan as the initial borrower and if the initial borrower falls down on the job, even in cases where you don’t know that they have fallen down on the job, you are then responsible for this debt and it hits you and it hits your credit and it’s just awful. I mean, I am just so furious with your daughter for A. Not taking responsibility and starting to pay this loan, but B. For not letting you know that she wasn’t paying this loan because if she had let you know when it first came due, then you could have started paying on it and then you wouldn’t be in this bind and you are in a bind. I know that you’re looking for a way to negotiate your way out of it. I do not suspect that you’re going to find one. What I would do is get in touch with the lender and see if there’s any way possible for them to put you into a payment plan that you can afford even if it lasts a really, really long time. And make sure that that payment plan covers the interest. If your credit has not been completely shot, you may look at refinancing that loan and seeing if you can bring the interest rate down to a point where you are able to make the payments. While you’re doing this, I would also get in touch with a not for profit credit counselor. You can reach out to not for profit credit counselors through the National Foundation for Consumer Credit, the NFCC, they have a website, you’ll find debtadvice.org and a credit counselor can look at your situation and tell you whether they can help you in any way or whether you may be a candidate for bankruptcy, which I know is not a word that you probably want to hear in the least. Student loans, unfortunately, are one of those debts that are really, really, really hard to get rid of in bankruptcy. Most people don’t even try to get rid of them in bankruptcy. It’s not impossible. There’s a test, it’s called the Bruner Test and basically in order to pass the Burner Test, you have to be able to show that you can’t maintain based on your current income and an expenses, a minimal standard of living if you’re forced to repay these loans. You may pass that test. The second thing on the list to pass this test is that there may be additional circumstances at play and that those are likely to persist for a significant portion of the repayment time. You may pass that portion of the test. The third part of the test is that you’ve made good faith efforts to repay these loans and since you didn’t know about these loans or at least know that they had gotten so big, I don’t know if you’ll pass that part of the test, but I do think it’s worth looking into. I think the first step, maybe even before you call Sally Mae, is to call a credit counselor and see what advice they have. And I would also really have a heart to heart with your daughter and see if there is any financial help that she can put toward paying these loans because she has really put you in a bind and you can tell her that I said so.
Kathryn Tuggle: (08:35)
I agree. Where does one find a reputable credit counselor?
Jean Chatzky: (08:40)
That’s why you go through the NFCC. I mean the NFCC has accredited credit counselors. They have credit counselors who have passed muster. I used to sit on the board of the NFCC and so I’m comfortable with that recommendation.
Kathryn Tuggle: (08:55)
Jean Chatzky: (08:57)
Amazeballs. I’m going to out you because it’s just so funny. We were noticing that Kathryn does say great a lot when we’re done with a question. And so Charles printed out a list for her of all the synonyms for great and amazeballs happens to be on the list.
Kathryn Tuggle: (09:15)
Magnificent. Sensational. Out of this world. Dazzling. Stellar. First-class. Awesome. Top-notch.
Jean Chatzky: (09:24)
Save some for later.
Kathryn Tuggle: (09:25)
Okay I’m going to save them for later and roll them out when you least expect it.
Jean Chatzky: (09:28)
Okay sounds good.
Kathryn Tuggle: (09:30)
Our next note is from Tracy. She writes Hi Jean. I’m currently going through a divorce and my soon to be ex has decided that once the kids turn 18, he’ll no longer support them in any way. Thankfully I have control over their college funds but need to make sure they do as well as possible and are secure. I have a daughter that is a sophomore in high school and a son that is a sophomore in college. Each child has a South Carolina 529 that is in the age-based portfolio and an ESA where I choose the funds.
Jean Chatzky: (09:56)
An ESA is an education savings account. Just FYI.
Kathryn Tuggle: (09:59)
My question is about the ESA for my son who’s in college. Because of his age, I can’t add money to the ESA. I have approximately 70% of that money in a bond fund and 30% into mutual funds. Since he’s in college, should all of his ESA money be in the bond fund? As of today, the bond fund is outperforming the mutual funds, but I’ve also read that bond funds can decrease significantly if the interest rates increase. I’ll likely use all of the money in this account for his tuition by the time he graduates. If not, I can transfer what remains to his younger sister. Thank you for your time. I love your podcast.
Jean Chatzky: (10:34)
Thanks so much for the letter. This is a really good one because of what’s been going on in the bond market and because of the fact that some of us don’t remember in these age-based portfolios that as our kids age, we do need to make sure we’re taking less risk with the money so that by the time we have to make those college tuition payments, it’s not subject to the volatility of the markets. Generally, my feeling has been, and this is how I ran the portfolios for my own children, that you should invest aggressively while they’re in elementary school, moderately while they’re in middle school and conservatively while they’re in high school. And the mix that you’ve picked in this education savings account with 70% in bonds and 30% in two stock mutual funds is very conservative. It is no doubt a conservative mix. However, the bond market in 2019 has had a roaring year. It’s had such a good year because interest rates have been going down and when interest rates go down, bond prices go up and there is no guaranteeing that as interest rates stabilize, because we’re not expecting them to go up in the coming year, these bond funds won’t lose some of their value. He is so close to college and you have done so well, I’d actually move the money into a cash portfolio at this point and I would move both components into a cash portfolio at this point. And I say that not being a market timer but just being a mother who looked at the bull markets of the past decade as they relate to her own kids’ college funds and made some similar decisions along the way. I think you ask yourself, what happens if this portfolio were to take a 10% dip at this point? What would that do to my ability to pay for college? What if it took a 20% dip? And if the answer is, I am in so much better shape, if it just stays where it is, then I think that’s what you do. Let me just take a second Kathryn, to remind everybody that HerMoney is proudly sponsored by Fidelity Investments. Fidelity is all about helping you demand more from your money and one way they’re doing that is by paying you more on your cash. Now at Fidelity, when you open a new retail brokerage or retirement account, your cash automatically goes into a money market fund where it can work harder for you. Just to note, you’ll get this benefit automatically and your cash goes into a money market fund unless you choose another cash option. For more information and the current rate, go to fidelity.com/cashvalue. You could lose money by investing in a money market fund. An investment in a money market fund is not insured or guaranteed by the federal deposit insurance corporation or any other government agency. Before investing, always read a money market funds perspective for policies specific to that fund. Fidelity Brokerage Bervices LLC 754269.5.0. And we are back with our mailbag special where we’re tackling your questions around paying for college around student loans. Kathryn, what’s up next?
Kathryn Tuggle: (14:08)
Our next note is from Molene. She writes, I love your show and I have three separate but related 529 questions. Number one, I’ve contributed to 529 plans for my nieces, which I own and I wonder how they will impact their ability to get a financial aid package. The first will enter college in four years.
Jean Chatzky: (14:26)
Let’s actually take these one by one because I’m afraid that if we go through all of them that our listeners will have forgotten number one by the time we get to number three.
Kathryn Tuggle: (14:36)
Jean Chatzky: (14:36)
All right, so will this impact their ability to get a financial aid package? Quite possibly. It won’t impact it in year one but as soon as the funds from that 529 that you own are drawn down for college, the colleges know that the 529 exists and therefore for sophomore, junior and senior year, it can impact their ability to get financial aid. And so I would suggest that sooner rather than later, you transfer the ownership of these 529s to your niece’s parents, to your brother and sister-in-law or sister and brother-in-law or however you happen to be related to them. And I know this because I did it. I had 529 so that I opened for my nieces and I transferred them to my brother several years back because I was concerned and sought out advice from Mark Kantrowitz who is the country’s leading 529 college savings expert. And this is what he told me to do. So answer to number one is yes, it can and transfer the ownership.
Kathryn Tuggle: (15:52)
Fantastic. The second question is my mom has also contributed to 529s that she owns for each of the girls and is doing regular monthly contributions. Since she’s retired and only getting income from Social Security and minimum retirement distributions, I told her she’s better off fully funding now, whatever she intends to put in to maximize the earnings that will be available to the girls. Do you agree?
Jean Chatzky: (16:16)
I do not agree. If your mother is right now only getting income from Social Security and her mandatory retirement distributions, I worry about taking too much money out of your mother’s discretionary pool of money. What you don’t want is to rob your mom of assets that she might need to take care of herself because then you and your siblings will have to step in and take care of her. So I’d rather see her be careful with her funds. Now the exception is if she has plenty of money, then sure your strategy makes sense. But unless you know that she has more than enough to last as long as she lives, I would not go that route.
Kathryn Tuggle: (17:09)
Last but not least, she says, finally we are in the enviable position of potentially being able to super-fund our own kids’ 529 plans and hope to do that in 2020 since our mortgage was a 15-year taking the last year and our credit is excellent, the rate is low. I’m more inclined to do the 529 than to put money towards an early mortgage payoff. Wondering if you’d approach this the same way.
Jean Chatzky: (17:31)
Absolutely. Absolutely. Mortgage money is really cheap these days. College inflation is out of control and you give your money in the 529s a lot of time to grow, so yeah, I would absolutely agree with you on that. Thank you. Those were three good questions.
Kathryn Tuggle: (17:48)
Jean Chatzky: (17:49)
Kathryn Tuggle: (17:50)
Our last question comes to us from a member of our private HerMoney Facebook group.
Jean Chatzky: (17:54)
And if people are listening and they’re not in our private, HerMoney Facebook group, it’s an ongoing extension of this conversation. It just happens on Facebook every single day with thousands of members of the HerMoney community and it’s just, it’s a wonderfully supportive group of women, so if you’re interested in joining us, just search HerMoney on Facebook. You’ll find the group and you just asked to get in and we let you in. You have to answer three questions, but it takes about a nanosecond.
Kathryn Tuggle: (18:21)
Yes, we’d love to have you. The judgement free zone extends to our Facebook group, too.
Jean Chatzky: (18:27)
Kathryn Tuggle: (18:28)
The question is I’m looking for student loan refinancing advice. I have over $180,000 in student loans with two separate loans, both federal and I’m currently using the income based repayment plan adjustments for my monthly payments. Every time I see material on refinancing privately, typically it’s for loans with a much lower balance. Also, I’m hesitant to go from federal to private loans and lose the options offered with federal loans like income based repayment. I would love to refinance and get lower interest rates, but I always feel like my balance is out of the range private companies are willing to entertain. Another factor is that I just started my own business and went full time this summer so my income is not nearly as predictable. Should I look seriously right now at refinancing? Should I focus on making a significant dent in paying it down for the next year or two, especially as I build my business and lower my balance before trying to refinance? Thanks so much for your help.
Jean Chatzky: (19:20)
I wouldn’t look seriously right now at refinancing and the reason I wouldn’t look at it is because of that not predictable income. Income based repayment is actually going to help you right now. If you find yourself earning less, you’ll be able to actually lower your payments, which should take a certain degree of stress off you as you try to work to a place where your income is larger and more predictable. If you refi in the private market, you are not going to get any leeway like that. You’re going to have one payment and it’s going to be your payment for the next 10 or 20 years or however it is you structure it, even if the interest rate is less. If there is a certain amount that you believe you’ll be able to pay off no problem you may want to look at refinancing some of your loans. I mean generally when you’ve got $180,000 in student loans, you may want to look at refinancing one of the loans and not the other one of the loans, but you’re right that you lose these income based repayment provisions. You lose the ability to defer. You lose the ability to go into forbearance if that’s something that you ever need to do. And so although I think for people who know that their income earning abilities are going to be pretty solid and pretty stable, I am a fan of using these cheaper loans to repay the more expensive borrowed money. I just don’t think you’re quite there yet, so give yourself a little bit of time and then go ahead and look at it.
Kathryn Tuggle: (21:06)
That’s wonderful feedback.
Jean Chatzky: (21:07)
Thanks so much and thank you for all the great questions. I got to say, I mean, I really love interviewing people on the podcast, but I feel like we’re just talking to our listeners, so this is fun.
Kathryn Tuggle: (21:17)
Same. I love it.
Jean Chatzky: (21:19)
Thank you so much for joining Catherine and me today on HerMoney. Thanks for telling us what’s on your mind. I hope that we’ve helped to answer at least some of your questions today and that you’ll keep the letters coming. If you like what you hear, please subscribe to our show at Apple Podcasts. Leave us a review. We’d love hearing what you think. We also want to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Track Tribe and our show comes to you through PRX. Thanks so much for listening. We’ll talk soon.