Dear Liz: I'm 58 and got married for the first time almost two years ago. I discovered my wife has several incredibly large outstanding student loans, including a parent Plus loan for her son's education that she thought was in deferment and that has nearly doubled to well over $100,000. In addition, my wife has her own student loans, which total over $40,000 and have rates from 3% to nearly 7%. Needless to say, I was shocked and dismayed to discover this debt and wish she had shared it with me earlier.
We have looked into consolidating the loans into the U.S. Department of Education's student debt relief program, which creates a monthly payment program based on income and forgives the remaining balance after 25 years. I'm uncomfortable with this plan. The long duration of monthly payments would be a big struggle and, after 25 years, we would have paid nearly $40,000 over the current principal even with the outstanding balance being forgiven.
I'm contemplating liquidating all my non-retirement accounts and half of our savings to pay off the larger parent PLUS loan.This would leave us with very little liquid reserve but still some substantial retirement accounts. Our combined income is around $75,000. We would then consolidate my wife's lower-rate debt and try to take a personal loan out to pay off the higher rate loans if we can secure a lower rate. Do you have any other suggestions as to my options?
Answer: Your situation is a perfect example of why couples should review each other's credit reports before marriage. At the very least, you could have figured out a plan to deal with the debt at least two years earlier and saved the interest that's accrued since then.
As you probably know, your wife is stuck with this debt. The government can pursue her to her grave because there's no statute of limitations on federal student loan debt collections. The government also can take part of her Social Security retirement or disability checks, something collectors of other kinds of debt can't do. Even bankruptcy isn't a viable option for most borrowers because student loan debt is extremely hard to get erased.
It's understandable that you don't want to be making student loan payments into your 80s, but paying the loans off much faster probably isn't a reasonable option, given your income. So liquidating other assets to pay off the parent loan may be the best option. The wisdom of this approach, however, depends on how well you've saved for retirement, your job security and how much of an emergency fund would remain. If you lost your job after paying off the parent loan, you couldn't get that money back to pay your expenses. By contrast, you could have your payment lowered under the Department of Education's plan if you lost a source of income.
Consolidating your wife's debt inside the federal student loan program would allow her to retain some important consumer protections that aren't available with other debt, such as the ability to defer payments for up to three years if she faces an economic setback. If you do refinance your wife's debt with private lenders to lower the rate, consider doing so with a private student loan rather than a personal loan if you want to retain the ability to write off the interest.
This is a complex decision with a lot of moving parts, so you'd be smart to discuss your plan with a fee-only financial planner before deciding what to do.
Federal estate tax exemption
Dear Liz: You mentioned that the federal estate tax exemption limit this year is $5.49 million per person. Can I double that if married?
Answer: Essentially, yes. Married couples can double the amount that can be given or bequeathed to heirs tax free. If one spouse doesn't use up his or her exemption, the surviving spouse can use the remaining amount in addition to the surviving spouse's own exemption.
You also should know that you can leave an unlimited amount of money to a spouse who is a U.S. citizen. (The rules for non-citizen spouses are different and could fill a whole column on their own.) This is known as the unlimited marital deduction.