Color of Money Live (July 3, 2014)

Jul 03, 2014

Washington Post nationally syndicated personal finance columnist Michelle Singletary answered questions in an online discussion.

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I'm back from vacation and ready to answer your money questions. Also joining me today is Reyna Gobel, author of "CliffNotes: Graduation Debt: How to Manage Student Loans and Live Your Life."

So send your student loan questions her way.

Let's get started.

She may have been "dead broke" when she left the White House but she had to know that she and ill would get a bazillion dollars for their memoirs and 6 figures for speaking engagements. I like her and would votefor her in 2016, but this is pretty disinguous.

Might as well start off with a hot topic.

I agree that Hilary Clinton should have not said she was "dead broke" especially in a sentence about multiple houses. But in her defense, you can go broke having been rich even with multiple houses. See it all the time. Still given all that they have at the time she said that wasn't a good move. Hard to feel sorry for her or her family when people have no homes.

My husband and I have a scarily large amount of student loan debt. Don't bother yelling at us, we both realize it was stupid. Now that we have it, we want to pay it off as fast as possible. Our emergency fund right now is about 2 months of his salary (which is more than 2 months of bare-bones living expenses). His job is secure insofar as any job is. I'm looking for a job. We have no kids. Should we start paying down the debt ASAP or should we make our emergency fund a little bigger first? Thanks!

You are good to go on the emergency fund for now. So stop and focus any extra money you have on getting rid of that student loan debt. 

But you know I wouldn't yell at you. Wouldn't even call you stupid. Just misinformed. Now that you know better, do better.

Dear Michelle, I don't think anyone denies that it's virtually impossible to live on a minimum wage. However, there's another side to the story. My wife and I own a small tea room/garden supply shop/florist. I work there full time and she teaches 2nd grade and helps out when she can. We both have second jobs as supermarket cashiers, where she works full time i the summer while continuing to help out at the shop. Even so we are barely treading water. Also the brutal schedule is destroying our marriage. We would love to pay higher wages, provide health insurance and other benefits to our employees, but that's just not possible. This also ties into another of your recent themes. We moved here from Canada to look after my wife's aging parents. I love them and want them to live a long time, but life would be so much easier if we could move them to Canada, which we can't. My mother lives in a modest but adequate 1 BR apartment in an assisted living facility in Edmonton for which she pays $734 a month (meals and some other services are extra), It's like a self-contained village and even has a Catholic chapel where she can attend daily Mass. Canada is also much more friendly towards small businesses.

I hear you and feel your struggle. But there are companies that could change things and pay people better. Don't think any of us expect small operations likes yours to do what big corporations should do. 

I'm lucky enough to be a federal employee, and I know our pensions and other post-retirement benefits are hard to match in the private sector. I cannot understand how any rational person who is married to someone with Bill Clinton's pension and FEHB benefits can describe themselves as "dead broke." I guess a 1 percenter can, but really, how tone deaf can you get?

I hear you. But people with steady income can be broke if their expenses exceed their income. I know A LOT of federal workers with good jobs and/or pensions who are broke because they spend more than they take in. We hear about it all the time -- people who made millions going broke. 

I think her mistake was not realizing how that may sound now that she's got millions.

Michelle My husband and I (late 30's) are in major need of debt consolidation. We've completely learned the lesson and have stopped (and cut up) any credit cards. We have 1 card that is kept at home for emergency purposes only and only carries a 2k limit. That being said we have about 40k in cc debt and have a home mortgage. I've been tossing around the idea of a home equity loan or a line of credit. This would only be used for debt consolidation. What are the pro's/con's of each? We've already talked with creditors about lowering the APR. I also picked up a 2nd job but it's part time (already work full time) so it's VERY lowley chipping away. I want to get rid of this monkey on my back.

Don't borrow to pay off borrowed money.

Besides you will be shifting unsecured debt to secured debt. Not good.

The problem isn't that you need debt consolidation. The answer is that you need to be patient. Didn't take you overnight to get into this debt and won't be overnight to get out. 

I want you to feel the low pain of paying it off because hopefully that memory will stick with you. 

Stay on course chipping away and that monkey will be off your back. 

Can you tell me about the new expanded program for people in default?

Yes. I'm very excited about this change. Borrowers who had a default can now make monthly payments that are as little as $5 per month and get out of default with 9 payments in 10 months. The change is standard for all federal student loan gaurantee agencies, so everyone has to adhere to the same guidelines. The exact payment is similar to the income-based repayment plan for non defaulted borrowers.

I work on a service contract for the Federal Government and my current employer doesn't qualify to rebid for the contract. The requirements call for it to go to a small business and we aren't small any more. We have been told that the RFP for the project states that any successor contractor will need to offer positions to all the predecessor's employees before they can bring in their own employees. Everything seems to indicate that we will be offered positions to continue doing the job we have been doing. We just don't know who will be our employer, how much they are going to pay us or what benefits we will get as employees. Seems that the options are to begin looking now or wait and see what happens. What is the best way to deal with this type of uncertainty?

I would start looking and hope that things work out with the new contractor. So really do both -- look and hope.

Once you know for sure, if you've got some other job leads, you can make the decision then whether you need to move. 

Or if you can't find another job, adjust to different income, benefits, etc. 

I've seen the a lot lately. Contractors who take over a job downsize pay and benefits and people have to take it because they can't find other employment.

So while you wait, begin to look at your budget and cut where you can, pull back where you can, etc. just in case the worse happens.

I used to be really annoyed when wealthy family members made comments like this ("How am I going to afford to keep my 4 horses?!?"). Now I try to be sympathetic, it can be scary when your income/standard of living changes, no matter your income bracket. Everyone's financial concerns are serious for them.

Exactly!

Besides people often live UP to their income and then find it hard to live DOWN when their income declines.

It's all relative.

Your poster neglected to mention that Canada has national health coverage. And Canada has minimum wages, set by each province. It appears that the lowest is $9.95 (Canadian money, of course), which is more than our minimum wage.

Good points.

I know its easy to bash someone who is clearly pulling in a lot of money for calling themselves broke, but it really does highlight something important - You never know how someone else is doing. Yes, they may make a lot of money, a lot more than you ever dream of, but they will also have a lot more expenses than you could ever imagine. I think Hilary was associating broke with her status at that time, and it's not uncommon for someone leaving the white house to be in a bad situation. I was broke in my last year of college, but I had a degree that was widely sought after at that time and within a year was in a comfortable place. It didn't make that year of living lean go away.

You are so right. But people living well also have to be sensitive that there are a lot of folks in the US that aren't doing well and in fact can't even afford food. 

I try to remember that when I complain about not being able to "afford" something. So many of us are blessed.

I am not unsympathetic to the writer's concerns about his shop and his in-laws, but at some point you have to accept that what are doing just isn't working. There are some enterprises where it makes sense to struggle in the short run for the long run payoff. But it is hard to believe that a tea room/florist is one of them. And clearly the situation with his in-laws isn't sustainable either. At his wife has a decent job as a teacher, and probably has health insurance and other benefits. Seems like they should start with that base and go to a different plan for his employment.

Thanks for sharing.

 

Hi, Michelle. My mother and I hired a lawyer to handle my late father's estate. It's not very complicated but we want to be sure we do it right. She charges $285 per hour, down from her usual $300 because my mother is a senior. While this seems high to us -- $12,000 for a 40 hour week? -- it seems to be the going rate. However, she is a sole practitioner with no office staff. This means that we are paying $285 per hour not just for her legal expertise but also for her typing, copying and other support services. Is this how it's usually done? I don't know how to raise it but I'm curious.

I've had to hire a few lawyers over the last several years and that hourly rate is not crazy. You are paying for their knowledge and administrative work. My advice, be prepared with you talk or meet with her. Don't chit chat. Keep the conversations short. Email when you can. And keep track of the hours you dock. 

Reyna was having some technical difficulties but she's ok now and will be getting to your questions. Thanks for your patience.

Michelle: All I hear is beware and do your homework. But I need more. Just because C-List actors do ads for them, doesn't make them the plague. We're about to pay off our mortgage, the heirs are all set, and we need the cash to go to Florida for three months a year for the next 10-12 years upon retirement. What could go wrong? Who do we need to check with besides the company selling the product? Thanks

With a reverse mortgage you are required to get help from a HUD approved nonprofit housing group. That should help you explore the pros and cons. Just be aware this type of loan can be very, very expensive. But if you can handle that it appears in your situation it might work. 

My husband has little to no faith left in the stock market after the ups and downs of the past 5 years and now wants to buy gold, a la William Devane for Rosland Capital on TV. I don't suppose this is worthwhile. . .thanks.

You are right to be very, very concerned. Investing in gold is as risky if not more than investing in the stock market the a diversified portfolio. Have your husband read this

http://www.bankrate.com/finance/investing/pros-cons-investing-gold-1.aspx

Is there any relief for parents? How should consolidation or renegotiation be handled? Any words of wisdom?

It depends on whether you have federal or private student loans. For private loans, repayment plan options are up to the lender. For federal student loans, parents can consolidate their loans and choose an extended plan through direct loans. However, if you qualify for public service loan forgiveness, you'll want to choose the income-contingent repayment plan. If you have your own loans, too, you may want to keep those separate as non parent federal student loans have more options. Federally, parents loans have options to take breaks from making payments, too. 

If I still have a grace period, should I nonetheless start paying on my loans? Or should I use the six months to save?

Save the same amount you would for the payment plan you plan on choosing. Then you'll have an emergency fund and reassurance you're choosing a payment plan you can afford.

There is lots of talk about college not being worth the money -- or debt. What's the most people should borrow for college?

It really depends on the degree, the school, and the career path. But my general recommendations are no more than $40,000 for an undergraduate degree, minimal parent debt, and a focus on career exploration the whole time. Parents have a hard time demanding students do something for their contribution. But it's vital to a students success to meet with career services and do shadow days and or internships every semester. Don't choose their major, but do give them guidelines.

Of course, many of you know my position on this. NO DEBT

But if you feel you have to keep it as low as possible. Go local if you can so the student can commute. Try community college for the first 2 years and finish up at 4 year school.

I see way too many people carrying student loan debt into their 30s, 40s, 50s and yes even their 60s and 70s,

What suggestions do (either of) you have for bringing up financial topics (i.e. student loan debt, past credit history) in a serious dating relationship? Should these discussions be reserved for seasons of engagement? And further, what are the "red flag" warning signs of financial instability in a significant other?

Having debt isn't a deal breaker, but not having a plan for repayment is. Have an honest discuss and make sure if you have debt you can explain how you got it and how you're going to pay it off. 

Totally agree.

My rule, first date too soon. Honeymoon too late.

If you are talking about getting married have the money talk. But not just about debt but your values in general about money. Are you a spender and the other person a saver? If so how would you handle the differences. There are a lot of community financial literacy programs. Sign up for one as a couple. Trust me, a lot of issues will come up and that's the time to talk about it when you can still exit if your values are not the same. 

So the new program does not cover private student loans?

Nope. But DO contact your private student loan lender about potential options for payments. 

A "business" needs to turn a profit. If your business isn't generating enough cash to cover your expenses -- including a reasonable wage to the people who help you -- and still leave you with money leftover, you don't have a business. You have an expensive and time-consuming hobby.

You are so on point!

 

The gold sold on TV often has significant markups (i.e. 30%) over the spot price of gold so you'd have to see significant increases in the gold price before you make $0.01 in profits. Please do the math before purchasing gold from a TV ad.

Right!

But even pass buying from some ad, which I wouldn't. The idea that you should put all your investing dollars in gold is a bad, bad idea.

I consolidated my loans nearly 10 years ago, which lowered my payment significantly, but increased the length of my loan to 30 years (now 20 after 10 years of payments). I'm sure I don't qualify for any of the new student loan payment options, but would like to pay them off sooner! Should I just make an extra payment here and there to reduce principle? I will say a huge thank you to Michelle though: after a windfall tax return (never to happen again), I paid off the student loans I couldn't consolidate, which was the smallest balance/highest interest rate. I've been using that payment to build my emergency savings which will revert back to student loan repayments once I hit my goal!

Michelle is awesome. Once you hit your emergency savings paying off your student loan debt may be a good plan. The only plan that may help you is if you qualify for public service loan forgiveness. There are several ways to make a dent in your student loan painlessly, too. Use upromise for for online shopping, etc. and you can accrue free money you can use to chip away at your student loans.  Adding as little as $5 to $10 per month can deduct months off your repayment time. It doesn't have to be adding hundreds.

Hi! I graduated from law school in 2007 with $75 K in student loan debt. I've been very aggressively paying that off and am down to $19 K. I was saving enough for retirement to get my company's 401(K) match, but I recently switched jobs and no longer get a match. I have about $50,000 saved for retirement, am 32 and single. So, do I set aside any money for retirement or pay off the debt first? It's at 3.5% interest and I think I should be able to knock it out in 2 years if I don't set aside retirement money. Paying off debt has been kind of my single-minded focus, but I want to do the intelligent thing.

You have a 3.5% interest rate. Plus, you can potentially get part of that back via the student loan interest tax deduction. Save in an emergency fund first. Still save for retirement. Add extra if you'd like to repay your student loans faster. Your goal is to have a good financial life, which involves multiple factors, not just your student loans. 

So . . .

Love Reyna. Good advice.

Me, I would stop saving for retirement and knock that debt out in the 2 years, especially since you are so young and decades away from retiring. Then all the money you were putting toward the debt catch up with retirement savings.

For me there is something about not have that debt monkey on your back. Sure you should live but oh how sweet it is to be debt-free. Gives you so many more options.

I'm so proud of you for making such a HUGE dent already. Now finish the lap strong. Throw all your money at that monkey and get him off your back!

I'd like to say that I'm very sorry for your family's loss of your mother, and I want to thank you for sharing that story. It's prompted me to start getting things in order, and I plan on using your column to bring it up with my parents this weekend.

Thank you so much. It's been a very rough time but I've been so encouraged by people who have been able to learn from my pain.

 

What issues or concerns, if any, do you anticipate in 2017 when the first round of student loan borrowers (who are eligible) apply for the public service student loan forgiveness that went into effect on 2007?

My biggest concern has always been that borrowers fill out the application, which wasn't available initially, so they know they are eligible and meet all the conditions. My biggest fear involves public service employees thinking they crossed their ts and dotted their eyes but didn't. If you think you'll qualify, contact your servicer now to make sure you're on the right path. 

Caveat. I am an attorney but don't practice that area of law. For your moms sake do not skimp. You are paying the attorney for expertise and knowledge of an area of law that has arcane rules, as well as federal and state statutes. Agree w Michelle re not chitchatting but that is a really good rate, and fair.

Thank you for weighing in. I may not want to pay for an attorney but I was sure glad I did in the cases I was involved in.

Hi Reyna - can you explain the new program the POTUS & Elizabeth Warren have been touting? Like many Americans (who have colledge degrees), I've had my student loan now for about 20 years.... largely because I had to defer payments after graduating because I wasn't making enough the first 5 - 7 years out of school to pay them and pay my living expenses. I was hoping the program would provide relief for someone like me - who has never defaulted - but no such luck I guess.

First, the Elizabeth Warren bill didn't pass so it's a non issue. But there tons of programs that exist right now that can help you. For instance, public service loan forgiveness is much more far reaching than expected. 25% of borrowers qualify. If you have inclining you might, fill out the application. You may also qualify for income-related options or consolidation. Tons of options exist now. Contact your servicer and feel free to ask me follow ups on twitter. 

My husband and I have been married for 2.5 years and have a baby, but still haven't managed to join forces financially. We're both on board with substantial savings accounts and emergency funds, college accounts for our daughter, and maxing out retirement options. But...after 15-20 years of independent financials, we just don't know how to start the "joining" process. We really don't squabble over money, but we know we need a holistic picture going forward. We also REALLY need to start making plans for our daughter, just in case anything happens to both of us. Any recommendations for where and how to start?

You might benefit from seeing a fee-only financial planner who can merge your two financial worlds. Sounds like you are doing a lot of things right anyway and a joint plan going forward would put icing on the cake.

I would urge the commenter to contact their state's bar association or a senior services agency and try to find a lawyer who is willing to probate an estate for a set fee, rather than by hourly charges. They do exist, but you have to really look for them and the estate should be fairly simple.

Thanks for the info. Good idea. 

Hi Ms. Gobel! I have approximately $40K in federal law student loans and have worked for Legal Aid and now the federal government after graduation. I currently pay off more than the monthly amount to pay it down faster. However, in light of the change (last year I think) that federal loans can be forgiven beginning in 2017 after working in the public sector for 10 years, should I continue to pay extra or just wait to have it all forgiven in 2017? Thanks!

This change went into effect several years ago. Stop making extra payments. Apply for public service loan forgiveness and make sure your loans are consolidated properly and you're using the right plan. Just understand with $40,000 in debt, you may not get any forgiven depending on your income. However, I would check with human resources if there are additional programs you may be eligible for. 

Unless you know the size and complexity of the estate being handled how can anyone know the cost. My parent died in another state--not in Maryland--with an estate of under $175k. The cost was $4500 for everything. I could have handled the probate if I had wanted to but the lawyer handled everything as a power of attorney. I did not have to make one trip back home--the costs of travel and motels, etc. were balanced out by the lawyer's fee. For the record the lawyer won't be keying the paperwork from scratch but he/she will use a template so the preparation costs won't be large. However, do be prepared to proof/check the work as I found typos that needed to be corrected.

Appreciate all the tips about the lawyer question. 

A lawyer who bills $285/hour is not making $12,000/week. First, it totals $11,400 but she is likely not doing billable work for 40 hours each week - a lot of what lawyers do is not billable, and not every dollar that is billed is actually collected. Additionally, overhead comes off the top - rent, utilities, office equipment, malpractice insurance, etc. If the LW thinks the rate is too high, then she should talk to several lawyers and compare (not only rates but experience and expertise) before selecting someone.

Again, good points. Thanks.

Is refinancing government student loans ever an option? And is it then only through private lender or back through government servicer?

You generally can consolidate or reconsolidate through Direct Loans. But your interest rate may or not be lowered depending on when your loans were originated. If your loans already have fixed interest rates, the rate won't change. 

I would comment that unless there is a medical reason for needing to be in a warm-weather climate for 3 months a year, this is a want and not a need. It would be nice to be able to leave cold-weather areas for Florida for the winter, if the money isn't there it's not in the cards. What about selling the house, buying an apartment (less upkeep, lower costs to maintain), and then using the proceeds to finance your annual trips to Florida.

With a question like the one I got, yes, I would need more info. I just addressed whether a reverse mortgage is worth it.

For some it can me, especially people who are house rich and cash poor. 

And yes, wanting to be a snow bird may be a want or a need. 

The bottom line in these type of situation is to look at all options, add up the costs and then make a decision.

I don't know where to look for the public service forgiveness application that has been mentioned several times.

The link is on the resources page on my website: graduationdebt.org

I love your chats Michelle! My husband and I are house hunting and we are having a lot of anxiety over home prices now, even though these prices are within our budget. We are debt free, taking our down payment from savings only (leaving 1 year living expenses) and budgeting for a mortgage that would be 30% of take home pay (after maxing out our 401K contributions). I know the numbers make sense, but do you have any advice on how move past the anxiety/uncertainty that comes with home buying?

Sounds like you have to just trust that you have done your homework and the numbers work. They look like they work to me. I too can be affair of making such a big decision. But when you have done all that you are supposed to do financially, you have to trust yourself. 

Make the decision and don't second guess yourself.

If a borrowers wages are being garnished, can it be adjusted or changed to an income based payment amount that would then be garnished? Are there any more talks regarding better loan rehab options to get back into good standing once garnishment starts?

The new default rules can affect wage garnishment, too. Talk to your gaurantee agency about the loans that defaulted.

But if you haven't been making regular interest payments, pay the interest before the grace period runs out! Otherwise it will get capitalized and you'll wind up paying more long-term.

Good point! As long as emergency savings is at a comfortable level. My biggest concern is always that grads are thinking about their overall financial picture.

You may have answered this before, but I'm carrying a lot of debt on a credit card and I have an old 401k from a prior job. I've been thinking about cashing it in and paying the penalty and taxes and using the funds to pay off the card. Your thoughts?

Don't do it.

Buckle down and pay off the credit cards with whatever you can pull out of your budget, cutting expenses, getting a second job, etc. 

I like it when people have to suffer to pay off the debt because it also serves as a great reminder to never go back to that again.

So sorry we have to go. I really appreciate your participation -- questions, comments, and tips. If I didn't get to your question I'm sorry but keep an eye out for my column or eletter. I often take the leftover questions and answer them nonetheless. 

Thanks to Reyna for joining me today.

I hope you all have a safe and frugal July 4th!

In This Chat
Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Thursday and Sunday. Her award-winning column is also carried in more than 120 newspapers. In her spare time, Singletary is the director of a ministry she founded at her church, in which women and men volunteer to mentor others who are having financial challenges.

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Color of Money Q&A Archive
Reyna Gobel
Reyna Gobel is a journalist and the author of "CliffsNotes: Graduation Debt: How to Manage Student Loans and Live Your Life"
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