Help parents pay back loans
College is costly, says Pete the Planner,
QAt ages 30 and 31, my wife and I have our financial house pretty well in order. The last thing hanging over our heads is the substantial Parent PLUS loan balance my wife’s parents have. They haven’t prepared well for retirement at all — both are in commission-based careers and in the years following 2008 they fell on extremely hard times. They grew so desperate they cashed out my father-in-law’s retirement accounts to make ends meet, obviously at the worst possible time. Thankfully in the short term they are now doing better, but long term I worry about their ability to retire.
The Parent PLUS loans in their names are split into two consolidated loans. One was solely for my wife and has a balance of roughly $15,000 and an interest rate of 6.8%. The other has a balance of $75,000 at 3.4% but is a combined balance between my wife’s college expenses and her sister’s. The share of the balance between the two is entirely unknown. Monthly payments are $300 and $500, respectively.
We are paying the $300/month on the smaller balance because we know it was only for my wife’s education, but the other $500 payment is being made by her parents. The sister is not contributing. We have $2,500/month in margin we could use to clear out that smaller loan pretty quickly, but we also have an older home in need of some renovations that we’d like to save up and pay cash for. What should we do? — DEREK
A Your question not only illuminates the retirement crises facing so many of the estimated 10,000 Baby Boomers who retire every day, but it also speaks to the college funding dilemma which hammers those same Boomers. Throw in not one, but two commission incomes and we’ve got ourselves a quality quagmire.
While there are a ton of moving pieces that intertwine to create the scenario you’re in, it’s best to untangle the separate factors and consider their intricacies individually.
Your in-laws have Parent PLUS loans because your wife got an education that no one could objectively afford. Yes, that’s a bit of a stinging observation, but you shouldn’t let it upset you. And the observation isn’t my opinion, it’s a fact.
Your wife likely capped-out the amount of student loans she could personally acquire, and then her parents were “forced” to take on Parent PLUS loans so that your wife could finish her degree. We’ve just established that your wife couldn’t afford the degree she earned at the time she was earning it, and based on the reality of your inlaw’s financial life, they couldn’t and can’t afford it either.
The second factor is that your in-laws fell on hard times while your wife was in college. Thus, they acquired their Parent PLUS loans at arguably the worst financial years of their adult lives, so far.
Factor No. 3 is the liquidation of your father-in-law’s retirement account. I never like seeing a person grab their future to save their present, but he had to do what he had to do. Whereas his present life might have stabilized, his future has gotten markedly worse.
The other factors of note are the commission incomes, the $75,000 loan for your wife and her sister, the sister’s inability to help and the unawareness of how much your wife’s degree actually cost.
Stepping in to handle the $15,000 loan is admirable, logical and warranted. You should definitely pay it off in its entirety and never look back. If you’d prefer to do that while still funding your home renovations, have at it, but just know a 6.8% interest rate isn’t fun.
The $75,000 loan is stickier. Take the time to calculate what your wife’s share of that $75,000 is and then supplement your inlaw’s $500 payment to help pay off the debt faster.
For your in-laws, the “have a lot of money” ship has sailed. Their goal should be to not need a lot of money. They can accomplish this by aggressively paying off all debt, including their mortgage, if they have one.
If appropriate, help your inlaws project the retirement income that will be available when they turn 70, and then help them find a way to wean themselves off their current income to meet the retirement income available in the future.
You’re smart to tackle this problem now, because it will only get worse if ignored.
One last note — proceed delicately and with grace. If you think you’re uncomfortable with your in-laws’ reality, just imagine how they feel.