Don’t bury yourself in debt to pay for college

Money Talk

Dear Liz: My daughter is a sophomore at a very expensive college, and federal loans cover only $6,500 of her costs. She has taken out two private student loans with me as a cosigner, one at 6.5% interest and the second at 9.9%. I need $15,000 more for this semester’s tuition. I am an unemployed single mother but cannot get much financial aid. She is an above-average student but cannot find any awards or scholarships.

Answer: Your daughter may need to look for a less expensive education, since it appears neither of you can really afford the one she’s getting.

Unlike federal student loans, private student loans tend to be expensive, with variable rates and less flexible repayment options. Borrowers can easily find themselves taking on far more debt than they will be able to repay after graduation, yet this debt typically can’t be discharged in bankruptcy -- it can follow your daughter for life.

A better option, if you must borrow, is for you to take out PLUS loans. These are federal loans for parents and graduate students that allow you to borrow the difference between your daughter’s college costs and any financial aid, including federal student loans, she gets. The rates are fixed at 8.5% or less.

PLUS loans do require a credit check. If you don’t pass -- you’re 90 days or more overdue on a bill or you’ve had a bankruptcy in the last five years, for example -- your daughter’s eligibility for student loans would be increased somewhat to help compensate.

But both of you should be thinking about alternatives. You really shouldn’t borrow money if you don’t have a way to pay it back. When you’re unemployed, taking on $15,000 a semester in debt is pretty foolish.

If her school won’t reconsider her aid package in light of your unemployment, she should be researching less expensive schools to which she could transfer her credits.

There’s good debt and toxic debt

Dear Liz: I am a single woman with a base salary of $101,000 plus bonuses, which so far have been significant. I divorced three years ago, and I am still digging out of debt. Last year I put all of my bonus toward debt but still have about $20,000 remaining. I will soon get another bonus of $38,000 before taxes and 401(k) contributions.

Is it wise to just pay off all the debt, or should I target the higher-interest-rate loans and put some in savings? I am thinking that I would have just enough to eliminate all my debt except my mortgage.

Answer: Debt comes in three basic flavors: toxic, good and neutral. Toxic debt includes credit card debt, payday loans and other high- or variable-rate borrowing. Good debt includes borrowing that can help you build wealth, such as a moderate amount of mortgage or student loan debt. Neutral debt includes everything that’s not actually toxic but that isn’t helping you build wealth, such as fixed-rate car or personal loans.

You should get rid of toxic debt as quickly as possible, so use your bonus to pay off any that you have. Then consider any neutral debt you owe. If you already have substantial emergency savings, you could pay off that neutral debt. If, however, you don’t have an emergency stash equal to at least three months’ worth of expenses, and your neutral debt has low rates, consider building up your savings instead.

Finally, make sure to review your spending and saving plans to make sure you’re living within your base salary. Bonuses are great but are variable by their nature, and you don’t want to count on them to pay your bills or bail you out of a jam.

Credit card due dates on holidays

Dear Liz: In a recent column, you wrote that if a credit card due date falls on a banking holiday, the due date is moved to the next business day. I found myself in exactly that situation in November, because my due date fell on Veterans Day, and my credit card issuer refused to remove the late fee. It would be helpful if you would clarify exactly how due dates work.

Answer: Most of the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009, including many of the new rules about due dates, don’t go into effect until Feb. 22. Some issuers changed their policies to implement the changes earlier, but others did not.

Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at Distributed by No More Red Inc.