| Marrying into debt - pay theirs off? bankruptcy? |
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pfannkuchen
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| Marrying into debt - pay theirs off? bankruptcy? |
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So I'm getting married in a few months. My fiancee makes ~$30K but has some significant debts due to student loans (~$65K). I make ~$100K and have ~$100K in non-retirement investments (another ~$100K in retirement investments).
We reside in a non-common law state, so as I understand it her debt/credit will not affect me in any way (we will maintain separate finances). So it seems I have 2 options - either pay off her debt with my investments, or keep our finances independent and let her pay off her debt and the 6.25% interest.
I know that's a personal choice, but my question here is whether or not there are options I'm missing. Is bankruptcy worth looking into for her? I've been told the threshold is pretty stringent. I assume once we get married she definitely will not be able to, correct? For what it's worth the majority of her debt is fed-funded student loans (~50K).
Thanks ahead of time.
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Sat Mar 28, 2015 10:12 pm |
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GardenCat
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Hi
I believe that student loans, especially fed funded, are NOT forgiven in a BK. SO... you have the option of just paying off the student loans slowly over time if the interest rates are low on the loans (5% or less). If there are various loans, see what you can do with consolidation to make them into one loan with a low interest rate. Plus, the interest on the student loans is tax deductible..
5% or less interest rate is very good! If you invest your assets into a low fee fund that matches the S&P500, you will average around 10-11% return per year over 30 years or so - which will lead you into quite significant assets in the future. Vanguard and Fidelity are two of the best low-fee fund families.
Debt is ok if you can manage it without stressing your current situation, whatever that may be. Don't sacrifice significant future asset growth to pay off relatively low interest rate and tax-deductible interest loans.
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Sat Mar 28, 2015 11:30 pm |
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oldguy
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Congratulations on your upcoming marriage!!
What Garden Cat said. First - SL's cannot be forgiven (that law was made decades OK cuz broke college kids stiffed their lenders & blew off their loans immediately after graduating.)
I would merge your finances, that makes a marriage more 'together" - after marriage the "yours"/"mine" goes away & everything becomes "ours". Including that $65k loan.
I would not pull capital from either of your $100k funds. Let the power of compounding work, let them both continue to grow tax deferred. If you are using an 11%/yr Index Fund, your $200k will be doubling every 6 to 7 years, don't interrupt that growth just to retire a $65k debt, keep it & pay it monthly, full term (after you consolidate below 6.5%).
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Sun Mar 29, 2015 2:39 am |
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pfannkuchen
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Thanks for the advice. You both mention a 10-12% return... I have my bank manage my investments and I'm not seeing anything near that (maybe 5% after the bank's fees). Is 10-12% a benchmark that should be easily achievable? Should I be pulling my money out of their management and putting/leaving it in something more profitable?
Oldguy - You suggest "merging our finances"... is this just relationship advice or is there some economic benefit? She has a very low credit score (low 500's) and at least some of her loan is now with a collection agency. I have a very high credit score (800+). Wouldn't merging our finances drop my score?
Thanks ahead of time.
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Sun Mar 29, 2015 8:06 pm |
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oldguy
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quote:
She has a very low credit score (low 500's) and at least some of her loan is now with a collection agency. I have a very high credit score (800+). Wouldn't merging our finances drop my score?
LOL - I don't really pay much attn, we were married before credit scores were invented. When we buy a rental house or a car or something, they check us, they're both in the 800's. A super credit score isn't something to base decisions on, do what's best for you two, regardless of the scoring - people get 'best rate' house, car, loans with scores in the 700's.
quote:
You both mention a 10-12% return... I have my bank manage my investments and I'm not seeing anything near that (maybe 5% after the bank's fees). Is 10-12% a benchmark that should be easily achievable? Should I be pulling my money out of their management and putting/leaving it in something more profitable?
For sure - banks are good for banking - and notoriously poor for investing. The no-load mutual fund companies - Vanguard, Fidelity, TRPrice - charge between 0.1% and 0.2% per yr. So if you buy a 11.1% fund, you get to keep 11%. A bank probably won't invest in 11% vehicles - and their fees could be as high as 5%.
And that decision is important to your far future - $200k at 11%/yr for 30 y = $4,400,000. At 5%/yr, it's only $865,000. So it's a big deal for you.
You are prolly constrained on where you keep your 401k account - but you can put your taxable account wherever you want - and invest it in the SP500 Index Fund.
Here's a site for you -
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.VRhjdeHmeUl
The SP500 has a longterm average return of 11%/yr. Think in terms of 30 yrs, check a few 30-yr-blocks, they average close to 11%, +/- a point.
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Sun Mar 29, 2015 8:53 pm |
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Publius
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quote:
You both mention a 10-12% return... I have my bank manage my investments and I'm not seeing anything near that (maybe 5% after the bank's fees). Is 10-12% a benchmark that should be easily achievable? Should I be pulling my money out of their management and putting/leaving it in something more profitable?
quote:
And that decision is important to your far future - $200k at 11%/yr for 30 y = $4,400,000. At 5%/yr, it's only $865,000. So it's a big deal for you.
Keep in mind, pfann, that this is the average over 30 year blocks, and oldguy isn't suggesting that this fund is going to reliably return 11% every year. 30 years is typically used because it is a fair approximation of your "accumulation lifespan".
That being said, if your investments returned only 5% last year, you drastically underperformed the broader market. The S&P500 returned > 13% in 2014 without reinvesting dividends.
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Mon Mar 30, 2015 3:15 am |
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littleroc02us
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I agree with OldGuy's suggestion that you merge your finances once married. Once married we changed our pronouns from an "I" to a "We". I think that is important because your marriage is stronger when you work together to gain wealth.
As for bankruptcy. It won't help at all. Like everyone has said you cannot bankrupt student loans thank god. I personally never understood borrowing 100k to a college student that has no income. Another one of Governments brilliant ideas. At least they were smart enough to make them non bankruptable.
So why does your fiance have 65k in student loans but only makes 30k. Did she get a degree in something that has potential for a good salary?
So my advice is to wait until your married and then work together to pay off her student loans no matter the interest rate. The reason being is when you pay those off you'll have a sense of peace and you'll feel like you've gotten a raise not having to pay that debt, which in turn allows you the freedom to invest substantially.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Mon Mar 30, 2015 2:49 pm |
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oldguy
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quote:
but only makes 30k. Did she get a degree in something that has potential for a good salary?
That might be a good thing for she and you to investigate together - ie, why is she on a min wage job? If she has a non-marketable degree, maybe you can fix that, eg, a dual degree, a masters degree, etc - something that is marketable, a STEM degree. You make $100k so you know the drill, you understand what is marketable. If she also earned $100k, or even $80k or $60k, the next 50 yrs will be more fun for both of you. 
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Mon Mar 30, 2015 3:21 pm |
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pfannkuchen
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Thanks everyone - yeah she was working towards a degree in social work and stopped a few credits short, so she didn't even get a degree for the money. It blows my mind that she thought it was OK to spend so much money on such a trivial degree, but live and learn I suppose.
FWIW, once we're married she'll be able to take advantage of the tuition assistance programs offered through my job so she can finish her degree.
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Mon Mar 30, 2015 11:26 pm |
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oldguy
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quote:
yeah she was working towards a degree in social work and stopped a few credits short,
Yeah, a really bad choice. As you probably know, Social Work is one of the least valued degrees, the pay is close to min wage - is there any other degree that she could apply her credits toward?
Surprisingly, Lib Arts grads are paid higher than Soc Workers after a few yrs out of college.
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Tue Mar 31, 2015 2:06 am |
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