Assuming a child's loans
Even the most scrupulous savers can feel squeezed when confronted with simultaneous financial demands from elderly parents and college-age children or grandchildren. As college tuition costs soar, older Americans are loading up on student loan debt in order to put a younger generation through school. As of the first quarter of last year, 2.2 million student loan borrowers were age 60 or older, more than triple the number seven years earlier, according to the Federal Reserve Bank of New York. That makes the 60-and-older crowd the fastest-growing age group among student loan borrowers. What's more, 9.5% of older borrowers are more than 90 days delinquent on the loans.
Much of the trouble starts when older people co-sign student loans for children or grandchildren. More than 90% of private student loans now require co-signers, says financial aid expert Mark Kantrowitz. "A co-signer is a co-borrower, equally obligated to repay the debt. And if the borrower is delinquent, it affects your credit history, too," Kantrowitz says.
What's more, the volume of federal PLUS loans to parents has skyrocketed in recent years -- and some parents are tapping retirement accounts to pay them down. Paul Kuon, 59, a hospital lab worker in Lafayette, La., paid his oldest daughter's tuition out of his pocket. Now that his youngest son is in college, "education costs have ballooned beyond belief," he says, and he's covering the cost with cash, scholarships and about $18,000 in parent PLUS loans.
With the interest rate on the PLUS loans topping 7%, Kuon is eager to pay down the debt -- and he's planning to draw money from a traditional IRA to do it. The tax due on the IRA withdrawal will be another headache. In retrospect, he says, he wishes he'd had more liquid savings, "and we never would have gone with the PLUS loans."
With no cap on the PLUS loan amount, it's easy for borrowers to get in over their heads. When older borrowers default on federal student loans, the government can garnish up to 15% of their Social Security benefits.
Rather than signing their name to a loan, parents and grandparents can help with college costs by contributing to a 529 college-savings plan, helping to make tuition payments directly to the college or helping the student pay down his loans after graduation. If you must take out loans, borrow no more than you can afford to repay in ten years or by your retirement date, whichever comes first, Kantrowitz suggests.
If you're falling behind on federal student loan payments, visit the U.S. Department of Education's student aid site for information on repayment plans. Options may include repaying the loan over an extended period or a plan that bases payment amounts on your income.
Use extreme caution when considering "debt settlement" services. These programs typically tell debtors to stop paying their bills and instead send payments directly to the debt settlement company or a separate account while the company tries to persuade creditors to settle for less than the amount owed. This can mean that consumers default on their debts, rack up late fees and wreck their credit scores.
Some lenders won't work with debt settlement firms, and many consumers enrolled in the programs end up filing for bankruptcy anyway, according to the consumer group Center for Responsible Lending. Plus, consumers who settle non-mortgage debt for less than the amount owed will typically get an income-tax bill for the amount of debt forgiven.
Instead, contact a nonprofit credit counseling agency, avoiding any services that charge big upfront fees. Find an agency in your area at www.aiccca.org or www.nfcc.org, the Web site of the National Foundation for Credit Counseling. Counselors will help consumers review their budget and develop a spending plan. These agencies can also help establish a schedule for repaying debts through "debt management plans," which typically involve a sharp reduction or waiver of interest charges and penalties.
Seniors should carefully explore their options before raiding retirement accounts to pay off debts. William Brewer, former president of the National Association of Consumer Bankruptcy Attorneys, says he recently met with a 55-year-old man who had been unemployed and struggled with $75,000 of credit card debt. The man had contacted the creditors himself, persuaded them to settle for $25,000 and took money from his IRA to pay the bill. He then received a tax bill on the $50,000 worth of forgiven debt, another tax bill on the $25,000 withdrawal from his IRA and a 10% early-withdrawal penalty. If the debt had been discharged in bankruptcy, Brewer says, the IRA would have been protected from creditors and the extinguished debt would not have been considered taxable income.
Even those in good financial health should consider working longer to ward off financial strain. Maintain a solid emergency fund to cover two to three years' worth of living expenses. Use tools such as the National Council on Aging's Web site BenefitsCheckup.org to be sure you're getting all the benefits that you're entitled to. And at the first sign of trouble, ask for help -- loudly. "No one should be worried about making a credit card payment versus paying for medicine," says Leslie Linfield, executive director at the Institute for Financial Literacy. "You've contributed to the system your whole life. It's OK to ask for assistance."
More from Kiplinger's Personal Finance magazine:
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You know the biggest problem is that years ago our parents has way better insurance. Being around 55 I have seen so much change.
When my husband and I worked we both had insurance and what his didn't pay mine did and vice versa. Monthly payments did not cost
and arm and a leg. Then that was stopped. No more co insurance so now you paid all your deductibles and 20%. Then my company decided
to shut its doors after 25 years of service. 30 day notice and closed. We got nothing! A kick out the door. Now I am working a part time job no insurance. Now my husband still has his but guess what. Cancer. Yep now we are 5000.00 in doctor bills and surgeries. So I ask you how
can you save when the benefits that we used to enjoy just keeps getting worse and worse. And they wonder why we can't make it. We did everything right. Put our kids through college, paid our bills on time and to no ones fault if your health goes your screwed. I don't think
Obama care will help that right folks? If fact because of that I can't even find a company that will hire full time. Thank goodness my husband can carry me. I sure couldn't afford insurance on my part time job.
Never liked the reverse mortgage line of thinking..and those commercials for them are such a shame 'best thing I ever did' phooey. In addition, think about it, if you are carrying debt while working and can't manage to pay it off, what makes you think it will get any easier carrying debt when you are retired?
Reverse Mortgages are a scam, the ONLY way to get equity out of your home without incurring debt is to sell your house and buy a cheaper house.
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