Soon-to-Be-Weds Should Commit to Reducing Debt, Not Adding to It

Q. I have a question about debt. My fiancee and I have a combined income of $75,000. She is a doctor and has medical school loans totaling $140,000, accruing interest at 8%. We have not paid anything on the loans yet and probably won’t be able to do much until she is out of residency in two years. We also have approximately $1,000 on a low-interest credit card (3.9%). We are getting married in March and plan to put the $6,000 cost on the card, which we could probably pay off in four to six months. But should we put the money toward paying off the student loans instead, because the interest rate is so much higher? Is there anywhere we can get a lower rate for the school loans?

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A. You’re committing to each other. How about committing not to go any further into debt?

Although $6,000 isn’t an extravagant sum for a wedding, it’s too much debt to add on top of the burden you’re already carrying--regardless of the rate. And, by the way, that nifty 3.9% you have isn’t going to last for much longer; most probably it’s an introductory teaser that’s about to bounce back up into the stratosphere. You can chase after other introductory rates and keep moving your balance from card to card--or you can pledge yourself to a life of building wealth rather than frittering it away.

It’s way too easy to get in the habit of carrying, and adding to, a credit card balance. The effects on your financial well-being are nothing short of corrosive.

The typical American with a $5,000 credit card balance, for example, pays almost $800 a year in interest charges. If that $800 a year were invested instead at 8%, it would be worth more than $100,000 in 30 years.

You’ve got at least three months to put money aside for your wedding. You say you could pay off $6,000 in credit card charges in four to six months. That means you have at least $1,000 a month to spare, and probably more. Rather than charge your wedding costs, concentrate on paying off your $1,000 debt, then saving $1,000-plus a month in a money market account, where you can earn 4% and build up a fund to pay for your wedding. Let compound interest work for you rather than against you.

If you don’t want to trim your matrimonial expenses, you will still be a little short of your goal and will have to use the card for some expenses. But keep it to a minimum, and pay the balance off when it arrives.

Once the wedding is over, get to work on that Mt. Whitney of student loan debt. The $1,000 a month you set aside for the wedding is just about what your payments will be if you have a 20-year loan term. When your wife is out of her residency and making real money, you can negotiate with your lender to shorten the loan term or step up the payments.

Your fiancee might be able to lower her interest rate through the Department of Education’s new Direct Loan consolidation program. The loan consolidation would lower her interest rate to 7.46% initially, and the variable rate would be capped at 8.25%. She should call the Direct Loan Origination Center at (800) 557-7392 from 8 a.m. to 8 p.m. EST. She must apply before Jan. 31 to get the 7.46% rate.

Save for Retirement? Or College?

Q. My life savings are all in my IRA and 401(k) accounts. Will these accounts, which are not accessible without tax penalties, be considered in determining my daughter’s eligibility for college financial aid? I have no cash to finance her upcoming education.

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A. Retirement accounts such as IRAs, Keoghs and 401(k)s are not counted when determining eligibility for financial aid. This fact is lost on many parents, who are neglecting their own retirement savings to fund their children’s education accounts.

Remember this: At the very least, your child will be able to get student loans to pay for college. Nobody is going to lend you money for your retirement. In a perfect world, you would be able to save for both, but given the choice, take care of your own needs first, much as you would put on your own oxygen mask in an airplane emergency before helping your child.

If you are cash-poor, you have several options, from borrowing against life insurance to a home equity loan to tapping your 401(k). For a complete discussion of the pros and cons as well as a guide to the financial aid process, see “Kiplinger’s Financing College” by Kristin Davis (Kiplinger Books, $17.95).

Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at [email protected] or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.