Ask Jean: Student Loans, Social Security, Retirement - Jean Chatzky - Making money make sense
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Ask Jean: Student Loans, Social Security, Retirement

mailbagmondayHi Jean, I’ve watched your financial advice chats and read them in news/magazines for years and really appreciate your views! Couple questions:

1.  “Federal vs. Private” – I’m confused because no advisor ever cites examples…I have consolidated the Parent Plus loans I took out to fund the expected family contribution for my son’s college education with the U.S. Department of Education – is that “federal” or “private?”  The interest rate is 7.9% so it’s not as low as my son’s consolidated with the Department of Education of his subsidized/unsubsidized loans (which is more like 4%).

2.  I’m gainfully employed as is my wife, about $150k annual adjusted gross income. I’m paying the parent PLUS consolidated loan back at graduated level, $593/month for 2 years, then $640/month, then $700, etc.; graduating as my income increases (I hope).  I don’t carry any credit card debt, my car loan is paid by my company, and my mortgage is $825/month for 15 years at 4.5% for 12 more years. I have maybe 20% equity in the house…credit score over 750…401(k) + pension is 10% of gross with match of
up to first 6%… Am I managing my money correctly or is there something I can do to improve my cash flow/debt burden?

3.  I am 49, my wife is 60.  She has no savings (relying on me). I have 200K in 401(k)/pension…no other investments besides home…maybe 3 months worth of emergency savings. She works as an independent contractor in gas industry and while the money is very good, it can be sporadic. She
thinks she wants to retire at 62 and take Social Security…but I don’t see how she can do that because I have to work at least another 12 years and since we file jointly, her Social Security will be eaten up by taxes, right? Any suggestions?

Frank, let’s start with your first question. Your Parent Plus loan is a federal loan provided by the U.S. Department of Education for parents, to help them put their children through college. What you hear me, and other advisors, refer to as “private” loans are loans funded by banks and other lending institutions (prior to 2010, private entities were allowed to originate federal loans, making this all the more confusing. These days, if you go to a private lender like Sallie Mae, you’re getting a private loan and a private loan only). PLUS loans carry a higher interest rate – 7.9%, as you mentioned – than other federal loans borrowed by the student, like direct subsidized and unsubsidized. They’re a second choice, after your student has maximized his own federal borrowing ability.

Moving on to numbers two and three, I’d say you’re absolutely on the right track. If you run into any additional income, you can put it toward making extra payments on that PLUS loan, since it carries a higher interest rate than your mortgage. And to that I’d add that if your son has any extra income, he might help you out. Saving 10% of your income for retirement is good, but you could stand to have more socked away (if you haven’t already, run the numbers to get an estimate of what you need. I like the Ballpark E$timate).  I’d like to see you be able to put at least some of the money you’re putting toward those PLUS loans into retirement instead, because I hate for people to sacrifice their retirement for their children’s college.

Finally, about retirement. Your wife may have to work a bit longer. Taking Social Security at age 62 is a bad idea for those who can help it because for every year you delay taking it until age 70, your benefit increases by about 8%. That means she’ll be getting a lower benefit than she’s entitled to, and she’ll be stuck with that lower benefit from here on out. On top of that, you’re correct: If you file a joint return, and you have a combined income of between $32,000 and $44,000, you may have to pay income taxes on up to 50% of benefits. If you earn more than $44,000 a year, you may have to pay taxes on up to 85% of benefits.  So taking Social Security at 62, while you’re still working, would be a double whammy on her benefits. And don’t think you can get out of it by filing separately – that triggers taxes as well.

 

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