Smart Money: Fiscal responsibility hampers student-loan eligibility

Dear Bruce: My daughter will be going into her senior year of high school in the fall. We don’t have a lot of money saved but can afford the state colleges. Should we be trying to pay down credit-card debt of $4,000 at 3.99 percent interest and a home-equity line of credit of $2,000 at 7.5 percent, or should we try to save as much as we can in the next year? I already pay a little over minimum. We also have a mortgage and just got a car loan for four years at 5.45 percent. – L.T. in Connecticut

Dear L.T.: It’s a strange world out there for college financing. The more responsible you are, the less eligible you are for it. Your credit-card debt is only 4 percent, so I wouldn’t pay that down just yet. Pay down the line of credit at 7.5 percent as much as you can. The four-year car loan might not have been the best idea, given the fact that you want to send your kid to college, but what is done is done.

The interesting thing is that debt works in your favor in applying for college loans and grants. If you have savings, it works against you. It’s a screwball system. I would be trying to save as much as I could, but that’s not going to make you ineligible. I salute you for recognizing that going to a state college is the better way to go in your circumstance. You might suggest she go to a community college in your area for the first two years, which is less expensive than going to the four-year school. As long as her grades are good, she’ll be able to transfer. She’ll get the same degree but at a far lower cost.

Prenatal college planning

Dear Bruce: I would like to start saving education money for my unborn grandchild. I have about $500 to start and would like to continue to make biweekly contributions, at least $100. I have heard of a Roth individual retirement account, but I am not exactly sure what that is. Could you tell me the best avenue for my savings? – M.J., via e-mail

Dear M.J.: You are really getting started early, investing money for the kid when he’s not even out of the womb. You mentioned the Roth, now called the Coverdell Education Savings Account, which is not a bad way to go, given that the money is spent on education. It’s 18 years’ worth of savings, and there is no tax consequence. You also should look into some of the 529 plans.

There is a bunch out there, but they are not all created equal. Still, 529s have a lot to recommend, but be certain to name yourself or the parent as the custodian. Never put money in a kid’s name.

Retirement planning vs. education

Dear Bruce: I’m 42, and my husband is 46. Our youngest will graduate high school next year, and he wants to find a way to go to college. I need to know where we stand. We have no retirement, but we have several thousand dollars saved because we knew my husband’s job of 18 years would be ending, as the film-processing industry is going the way of the dinosaur. We are $20,000 in debt (mostly a car loan). We have a 10-year-old home on five acres, and owe $50,000 on the mortgage. We have not had it appraised, but I would estimate its worth at $200,000. Our house payment is affordable no matter what income level my husband’s next job will be. A few weeks ago, a person asked you whether he should buy a house or rent and invest the difference. It got me to thinking: Would it be foolish to sell our house and use the profit to invest for retirement? – B.H., via e-mail

Dear B.H.: I like your style when you say your youngster will find a way to go to college. The idea that parents have to pay for college when they can’t afford to is nonsense. You say you have a few thousand dollars saved – that’s the good news – but since you owe more than $20,000, you are really in a large hole. Your mortgage is modest, and it is clear you can afford it. Leave the mortgage in place and don’t even consider refinancing. I see no reason to sell, particularly since the market is soft and you have to live somewhere. A house is more than a financial investment; it’s a way of life.

You also mentioned your husband’s job will be going away, and that’s understandable. It happened to people making buggy whips, too. What are you doing to prepare for that, and what is he doing to scope out a new occupation? It may be a little more difficult at his “advanced” age. He also might want to consider some type of self-employment. That has a lot to recommend it.

Life after college

Dear Bruce: I’m a 21-year-old student currently finishing my last semester in college. I was fortunate to have earned scholarships in high school that covered all my college expenses, and I have no credit-card debt. While in school, I’ve worked consistently over the past four years, managing to save more than $10,000, currently in a certificate of deposit earning 4.5 percent. Following college, I plan to take a four-month break while still working part time, and then I plan to find full-time employment. Although I’m earning decent interest, what advice can you offer about finding an alternative means of investment that produces a greater return? – M.J., via e-mail

Dear M.J.: You say you are fortunate to have earned scholarships. That’s not good fortune; it’s a matter of hard work and application, and you deserve much credit for the accomplishment. While most kids are going deeply into debt, you have earned and saved money, which is remarkable. I have absolutely no problem when someone like you wants to take a break for three or four months, traveling, having a great time and then settling into a new life. As to the investment, since you have done it this way, I’d keep the money in the CD: 4.5 percent is a respectable rate in today’s world.

Upon your return to “real life,” concentrate on finding a career path, recognizing it will probably change two or three times. You might take a few moments every day to look at the financial section of a newspaper and read business magazines. This way, over time, your education with regard to investments will grow without your knowing it. Once again, you have acted like a responsible young person. I suspect your parents are very proud.

Protecting new husband from debt

Dear Bruce: I recently remarried after being a single mom for 12 years. My kids are 20 and 17 years old. The oldest is finishing her second year in college. I make $65,000 a year, and we have taken out loans for her studies, receiving some Stafford subsidized and unsubsidized loans. My new husband does not want me to take on more debt because he is debt-free. I want to make sure my children get educated. We now have a combined income of $300,000 a year. I don’t want my new husband to pay for their education. What are my options for the best loans for my children? Am I missing some opportunity for them to obtain monies? If I pay cash for their tuition, do we have tax benefits? If not, what is the best thing for me to do for the kids? I do have my other home in my name only, in case I need to sell for their security. – D.K., via e-mail

Dear D.K.: You guys don’t have any financial problems, only some disagreement as to how your funds should be handled. Why not follow the traditional path of the husband supporting the family? That would mean you would have his income of $235,000 to support the family and, with your $65,000, you should be able to put your children through school comfortably. I still believe the kids ought to take out some loans. This education is for them, so why make it totally painless? But that’s up to you. I’m also wondering if you guys have a prenuptial agreement. If not, you might consider a post-nup, since there are obvious differences of opinion as to how money should be spent and what debts should be entered into.

Bruce Williams is a national radio talk-show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.[[In-content Ad]]