With This Much Debt, Only Tony Soprano Will Give Loan

Question: I’m 25 and single. Two years ago I inherited my grandparents’ 100-year-old house. I borrowed $75,000 to repair and remodel it. Now I am in debt up to my ears with a few credit cards ($2,000 total) and student loans ($12,000).

I make the same amount I did when I was approved for all of this credit and I barely pay my bills each month. I have no money left for groceries, gas or unexpected costs, much less recreation or entertainment. My biggest problem is that I have a $513.48 house payment plus a $300 home equity payment each month, which is three-quarters of what I make. I’ve tried to get a debt consolidation loan but no lender will talk to me once they find out what my debt ratio is.

I’m working full-time to make ends meet while barely hanging on in college, and I don’t know what to do. Selling the house is not an option at this point.

Why can’t I get debt consolidation and combine all my debt into one payment?

Answer: You can’t get a loan because you’ve already borrowed too much money. Even if you could talk a lender into extending you credit, it would be at the kind of rates Tony Soprano charges, which would mean higher monthly payments -- and really nasty penalties should you get behind.

Legitimate lenders these days are handing out loans like lollipops. If you can’t get one, or if you’re paying high interest rates, that’s a pretty good sign that you are in way, way over your head.

There is an answer: Sell the house, before you lose it to foreclosure.

If that’s really not an option, then you need to drop out of college for a while and get a better-paying job so you can make the payments.

Oh, yes, and stop using those credit cards.

You’re lucky, in a way. Many people live beyond their means for years and don’t find themselves in a box canyon until much later in life, when it’s a lot harder to recover from a credit disaster.

You’ve learned a valuable lesson while you’re still young enough to benefit from it -- and that’s never to borrow more than you can comfortably pay back.

Smart Management of Money Isn’t Penalized

Q: I recently applied for a loan and was given my FICO credit score, which was 790. The credit manager said my score would have been higher except I wasn’t carrying balances on any of my accounts. My wife and I pay in cash for most things and prefer not to pay interest. I think it’s an utter rip-off that people are being penalized for not forking over hard-earned cash to credit card companies in the form of interest payments.

A: Most people aren’t being “penalized� for not carrying a balance. Only those with exceptionally high scores are likely to experience any diminution at all in their score because of this issue, said Fair Isaac spokesman Craig Watts, and the damage is so minor that it’s hardly noticeable.

The score formula, by the way, doesn’t measure whether high scorers pay interest. It measures whether they use their accounts at all. As noted above, the score generally doesn’t distinguish between a balance that’s paid off and one that’s carried over.

Rather than feeling ripped-off, you should feel proud you’ve handled credit so responsibly. With your score, you can qualify for the best rates lenders offer, and they’ll be falling all over themselves to give you credit whenever you want it. Which, given your smart money management, probably won’t be often.

Expiration Date Is for 529 Plans’ Tax Bonus

Q: We have a 4-month-old son and would like to start contributing to a 529 plan for his college education. However, I’ve read that the plans end in 2010.

Must the money be withdrawn from the plan if he is not old enough for college? How is the withdrawal taxed or penalized when the plan ends? Are there any tax consequences when the plan ends for the grandparents who contributed?

A: Whoa, whoa, whoa! The 529 plans do not “end� in 2010. That’s the year when their tax-free status is scheduled to expire. But the plans themselves will go on.

Also known as college savings plans, 529s are run by individual states and allow parents and others to put aside money for college that can be invested, tax-deferred, until it’s time for college. The money can be used for any college in any state, and there are no income limitations on who can contribute.

Until last year, any withdrawals from a 529 plan to pay for college were taxed at the child’s rate, which is typically lower than the parent’s. Congress made the withdrawals tax-free in 2001, but lawmakers put an expiration date on this little bonus for budget-balancing purposes.

So go ahead and keep contributing. Even if Congress doesn’t extend the tax-free status for withdrawals, 529 plans are still a great deal for most parents.

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Liz Pulliam Weston is a contributor to The Times, a columnist for MSN.com and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at [email protected] or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries.