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Should you pay off student loans or save for retirement? Both, and here’s why

Piggy bank
Workers would be wise to start saving for retirement now rather than waiting until their debt is paid off.
(Los Angeles Times)

Dear Liz: What are your recommendations for a recent dental school graduate, now practicing in California, who has about $250,000 of dental school loans to pay off but who also knows the importance of starting to save for retirement?

Answer: If you’re the graduate, congratulations. Your debt load is obviously significant, but so is your earning potential. The Bureau of Labor Statistics reports that the median pay for dentists nationwide is more than $150,000 a year. The range in California is typically $154,712 to $202,602, according to Salary.com.

Ideally, you wouldn’t have borrowed more in total than you expected to earn your first year on the job. That would have made it possible to pay off the debt within 10 years without stinting on other goals. A more realistic plan now is to repay your loans over 20 years or so. That will lower your monthly payment to a more manageable level, although it will increase the total interest you pay. If you can’t afford to make the payments right now on a 20-year plan, investigate income-based repayment plans, such as Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE), for your federal student loans.

Like other graduates, you’d be wise to start saving for retirement now rather than waiting until your debt is gone. The longer you wait to start, the harder it is to catch up, and you’ll have missed all the tax breaks, company matches and tax-deferred compounding you could have earned.

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Also be sure to buy long-term disability insurance, even though it may be expensive. Losing your livelihood would be catastrophic, since you would still owe the education debt, which typically can’t be erased in bankruptcy.

Medicare has a prerequisite

Dear Liz: In a recent column, you mentioned that Medicare Part A is free, but that requires 40 quarters (or 10 years) of U.S. employment to qualify. There are, unfortunately, many of us with offshore employment who have found this out too late. Even if one has worked in a country with a tax treaty with the U.S. that allows you to transfer pension credits to Social Security, that will not allow you to qualify for Medicare. I think it would have been very helpful if I had known this about 10 years ago!

Answer: Medicare is typically premium-free, because the vast majority of people who get Medicare Part A either worked long enough to accrue the necessary quarters or have a spouse or ex-spouse who did. (Similar to Social Security, the marriage must have lasted at least 10 years for divorced spouses to have access to Medicare based on an ex-spouse’s record.)

But of course there are exceptions, and you’re one of them. People who don’t accrue the necessary quarters typically can pay premiums to get Part A coverage if they are age 65 or older and a citizen or permanent resident of the United States. The standard monthly premium for Part A is $437 for people who paid Medicare taxes for less than 30 quarters and $240 for those with 30 to 39 quarters.

Benefits’ disappearance is no accident

Dear Liz: You recently indicated that restricted applications for Social Security spousal benefits are no longer available to people born on or after Jan. 2, 1954. Who is responsible for this change, and when was that enacted? Is there any way it can be reversed?

Answer: Congress is unlikely to revive what was widely seen as a loophole that allowed some people to take spousal benefits while their own benefits continued to grow.

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Congress changed the rules with the Bipartisan Budget Act of 2015. As is typical with Social Security, the change didn’t affect people who were already at or near typical retirement age. So people who were 62 or older in 2015 are still allowed to file restricted applications when they reach their full retirement age of 66. They can collect spousal benefits while their own benefits accrue delayed retirement credits, as long as the other spouse is receiving his or her own retirement benefit. (Congress also ended “file and suspend,” which would have allowed one spouse to trigger benefits for the other without starting his or her own benefit.)

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.


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