Suze Orman's Action Plan (24 page)

ACTION:
Don’t worry—you don’t have to. Thanks to legislation passed in 2008, parents no longer have to start repaying a PLUS loan within 60 days of receiving the money. You can now defer repayment until your child finishes school. That means you won’t have to make loan payments during the four years when you are most likely using some of your monthly income to pay for school costs. The delay also means that families can make repayment of the PLUS a family affair: Legally, the parent is responsible for repayment of the loan, but having your child help with repayment will ease the burden.

Another reason I prefer PLUS loans over private
loans is that in the event the parent dies or is permanently disabled, the debt is forgiven; private lenders are not required to forgive debt.

ACTION:
Before you agree to take out a PLUS loan, you must have a serious talk with your child about how much you expect them to contribute to the eventual repayment of the PLUS. That is an important and honest conversation to have ahead of school. It may spur your child to push extra hard to earn the most money possible during the summer (or work part time during school) to build up some reserves. It might also put the cost for spring break in Cabo—definitely a “want,” not a “need”—into perspective.

ACTION:
Forget private loans and use a PLUS if you plan to help your kid pay for school.

Students who want a private student loan need to have a FICO score of at least 680. Few teenagers have a FICO score. So lenders are now insisting that the student get a cosigner on the loan, and that person needs to have a strong FICO score.

Rather than cosign a private loan, you are far better off applying for a Parental PLUS loan and making it clear to your child that she is expected to repay some or all of the loan once she graduates. Part of my reason for relying on the PLUS program is a simple practical matter: In the wake of the financial crisis that began in 2008, it became much harder to obtain a private student loan. But even if the storm passes, the private loan skies part, and lenders start plying your kids with offers for easy private loans, I want you to say no. PLUS loans are usually a better choice over private loans. Private student loans have variable rates, and those rates can be 1% to 10% more than a benchmark index. Even if you initially qualify for a competitive interest rate (you’ll need a FICO score above 720 to even have a shot), you run the risk of future rate hikes. I’ll take the 8.5% fixed rate on the PLUS loan, thank you very much.

ACTION:
Contact the financial aid office at each school immediately and let them know about the layoff. There may be more money—aid or loans—based on your changed financial status. But I want to be clear: No school is a bottomless pit, and the sad fact is that many schools—especially public
universities—are feeling the economic pinch too. But chances are you may get some extra help from the school. And just to reiterate: Please make sure your child has maxed out on all available Stafford loans. At a maximum fixed rate of 6.8%, it is an affordable way to borrow for school.

You can also obtain a PLUS loan, assuming you are current on your bills, and you can defer payment until your child graduates. By then you should be back at work and your child can also contribute to the PLUS repayment. But I want to be very clear here: You must limit what you borrow to what you can truly afford. I encourage you to go to the College Board’s website and use its online calculator to see what PLUS loans you take out today will cost to repay:
http://apps.collegeboard.com/fincalc/parpay.jsp
. It is crucial that you go through this exercise with your newfound commitment to honesty front and center. If you will not be able to handle the repayment, do not take out the loan.

If not taking on debt is honestly what is best for you, you must not beat yourself up that you cannot continue to pay for school. I wish I could tell you to “do whatever is necessary” to keep your kid in school right now. But I don’t traffic in wishful thinking; I am focused on the realistic actions you must take to ensure your long-term financial security. So here’s the bottom line: You may need to tell your kids you can’t keep paying for school
now that your personal economic situation has changed. If that means your child needs to transfer to a less expensive school or take a year off to earn money to cover the costs himself, that is what needs to happen.

I understand how difficult that is to consider, but hard times require making hard choices. Taking on debt you can’t afford is never smart; in today’s world, with the economic outlook so bleak, you must not take on more than you can realistically handle.

ACTION:
If you have federal loans, there are a variety of programs you may qualify for that can make repayment more affordable. For example: The Income-Based Repayment Plan introduced in 2009 for federal student loans (though not PLUS loans) makes repayment affordable for graduates who pursue careers in traditionally lower-paying fields such as teaching and public service. The best move you can make is to show up for the exit interview with your financial aid office and learn about your options. You can also learn more about your repayment options at
finaid.org
.

The worst thing any recent graduate can do is assume they can “hide” or “ignore” their student
loan debt until they get settled into a job and have the cash flow to handle payments. Big, big mistake. Fall behind on your student loans and you will ruin your credit profile. You need to understand that student loans are debts, and if you don’t pay your debts it gets reported to the credit bureaus. Faster than you can say, “Wow, I am so screwed,” you have a FICO score below 700. In my book, it’s never okay to have a low FICO score, but in the aftermath of the financial crisis that began in 2009, it is flat-out dumb. Yes, dumb. In the past, even if you had a lousy FICO score you could still get what you wanted. The only hassle is that you would have to pay more for everything—a higher deposit for the cellphone, for example, or a higher rate for a car loan. But now a lousy FICO score means big trouble. Lenders, landlords, and even employers simply won’t want to do business with you. In a world where everyone is trying to reduce their risk, a lousy FICO score brands you as a high risk.

And just to drive home this point: Even if you declare bankruptcy, your student loan debt in most cases will not be forgiven. This is debt you can’t outrun.

ACTION:
With federal loans, you can apply for an unemployment deferment; if you are working less than 30 hours a week, you will not have to start repayment. But again, you must
apply
for this deferment. If you simply don’t pay, it is going to start showing up on your credit reports as a delinquency. If you have a subsidized federal loan, interest will not continue to build up during this deferment. If your loan is unsubsidized, interest does accrue. Your financial aid office can walk you through all your federal loan repayment options. You can also get help at
finaid.org
.

ACTION:
Consolidating your federal loans is smart. The main advantage is that you can pile together all your loans from the four years of school into one mega-loan that requires just one monthly payment. This will likely keep your FICO score in good shape, because you will find it easier to stay on top of things with a single payment.

The fixed consolidation rate for all Stafford loans issued after July 1, 2006, is 6.8%.

ACTION:
With private student loans you have limited options. You are basically at the mercy of your lender’s repayment policy, and they are not required to grant any deferments. It’s completely at their discretion.

I
n previous chapters of this book I explained how to protect your money from being decimated by risk. You must have an emergency savings fund, and it must be in a federally insured bank or credit union. Your retirement and college funds must have an age-appropriate mix of stocks, bonds, and cash.

Those strategies go a long way toward increasing your family’s security. The final piece of risk management focuses on how to protect your family from being decimated by the risk of the unknown. Bad things happen, and when they do, it is painful—it doesn’t matter who you are or where things stand in your life.

Let’s start with job risk. By the fall of 2009, the base unemployment rate of 10.2% was more than double the average in 2007. Add in the legions of part-time, underemployed workers, and the unemployed/underemployed rate reaches 17.5%. One out of nearly every six Americans who wants to work full-time can’t. That, of course, isn’t a permanent situation. As we pull out of the recession, we will likely see the unemployment rate decline. But there is the very real possibility that the recovery, when it comes, could be a “jobless” recovery; businesses skittish to overinvest amid forecasts of moderate domestic economic growth could well be slow to hire. That’s just one reason I recommend an eight-month emergency cash fund. It may take a very long time to get back to work.

Illness and injury are also looming risks that must be planned for. As I write this in the fall of 2009, Congress is debating and negotiating health care reform that would extend coverage to millions of uninsured Americans as well as make it easier for millions more to hold on to coverage they live in fear of losing. Yet any new legislation will take years to be fully implemented. The bill that narrowly passed the House in early November 2009 sets a 2013 date for enacting broader coverage. In the meantime, you can’t let your family live with the risk of staying uninsured or under-insured.

And let’s talk about another sunny topic: the
prospect that you could die prematurely. I know it is excruciating to contemplate. There is no plan or action that will alleviate the pain your family will endure, but you can most definitely alleviate their financial stress—by making sure there is ample life insurance if you have yet to build other assets they can rely on, and by creating the essential must-have documents of a will and revocable living trust.

There is no way to insulate your family from bad news, but what is wholly in your control is how well prepared you and your family are to weather hard times. The New Rules for Protecting Your Family and Yourself are simply a recognition that risk is not just in the stock market and the real estate market. It can descend on your family at any time. Now that your eyes are open and you are aware of the risks out there, isn’t it time to make sure your family is as protected as possible for whatever “what if” may strike?

• Build a substantial savings account today so you will be okay if you are laid off.
  

• Do not—repeat, do not—go without health insurance.
  

• Shop for private health insurance if you are laid off; it is often less expensive than COBRA.
  

• Purchase an affordable term life insurance policy if anyone is dependent on your income.
  

• Make sure you have all your estate-planning documents in order.