what to do....college loan

16 years ago

Hi, please help me sort out my options on this one.

My daughter is in her last year of PharmD. She has already incurred 90K in loans. I have savings bond EE I have bought long time ago in her name worth about 25K now. She didn't know about them until recently. She said if I give it to her now she will use it to pay for her tuition this year. Being these bonds were bought before 1990 they don't qualify for educational bonds therefore she will have to pay taxes on it reducing it's value. I was thinking of giving it to her gradually to either help pay for her loan or fund her IRA. What would you do? Thanks.

Comments (11)

western_pa_luann
16 years ago
I think that since the bond is in her name (and she is not a child anymore), that she should be able to do what she wants with it!
jet_ny
Original Author
16 years ago
That's true, I'm just looking for the best way to get the most value for this money that will help her in her situation.She is leaving it up to me to decide.
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I don't think you need to do anything right now. If the house sells at a satisfactory price, then both the first mortgage and the equity loan balance will be paid off at the closing, and the balance (minus agent's commission, if your using one) will go to you. You definitely should NOT pay off the loan with your savings. That cash provides you with financial flexbility that you will lose if you pay off the loan. A recent widow should hang on to her cash reserves until life settles down and her financial situation becomes more certain. If the equity loan is a HELOC with a floating interest rate and the house doesn't sell by the end of the summer season, you probably should do a refinance and combine both loans into one so that you don't have to worry about the possibility of rising interest rates inflating the size of the HELOC payments.
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Greetings Both/Amy, My suggestion relates to more skillful use of your income tax refund. That substantial cheque from the IRS after income tax returns go in every year may gladden your husband's heart ... ... but - it - drains - his - wallet!! You know the amount of his tax refund last year. If he gets paid monthly, divide that amount by 12 (or the number of paycheques that he receives during the year). If he gets paid monthly, as of Jan. 31, he made a loan to the IRS of that amount, on which he received no benefit, i.e. they paid him no interest on that amount ... and they held it until the date of the refund ... if it were June 1, that loan was for 16 months. I suggest that you calculate how much interest you're paying on your HELOC on that amount for 16 months. As of the end of Feb., he made another interest-free loan of the same amount to the IRS ... for 15 months. Calculate how much interest you're paying on your HELOC on that amount for that period. As of the end of Dec., he'd made 12 such loans. Calculate the interest on each of those amounts for the relevant periods, then add them all together. For example, on $1,200. at 5%, the amount would be $60.00 if the full amount ran for a full year, but when we average, it's about half of that period, it'd be $30. for the year. Then we figure that the full amount was owing for 4 months, Jan. 31 '09 till May 31 '09, or 1/3 of $60., or $20., which means $50.00 in total. Then I propose that you get 5 - $10.00 bills, fan them out in your hand and, if your husband smokes, ask him to get out his cigaret lighter and burn them. If he shows a willingness to do so ... snatch the bills away in a hurry. But - that's about what his lack of financial acumen is costing your family. Every year. Reduce the amount of withholding by that amount and use it to pay down your HELOC! That'll produce a benefit for your family - interest-free loans to the IRS don't. Good wishes for increasingly skillful use of your income and assets, year by year. Good wishes also for having a great year in 2010. ole joyful
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ian_bc_north
16 years ago
I would think that her income would be low enough that taxes would not be a big consideration.
duluthinbloomz4
16 years ago
Might be nice being able to add less to the already mounting debt. There isn't any way to mitigate the tax incurred by cashing in bonds, but it seems like a small price to pay in view of the good it would do.

If you'd like to know exactly what the bonds are worth, the Treasury has a savings bond calculator. And if I weren't such a Luddite, I'd be able to post a link to: www.treasurydirect.gov

Treasury Direct website will come up, enter the green Individual/Personal site
Under Welcome to TD, select "Convert your paper savings bonds"
on the right related links, select "Savings Bond Calculator"
scroll down choices to "get started"
with the drop downs, select your denomination and enter bond issue date ( i.e. 05/1990). The bond serial # is not necessary. A graph will appear giving you interest earned and current value and will do a running total for multiple bonds just by continuing to plug the denomination and issue date information into the calculator.
jet_ny
Original Author
16 years ago
I'm sorry i wasn't clear. I have the savings bond wizard, it's a great tool. I have a total of 23 bonds the majority of which were bought between 1986-88. Total original investment was $9,562.50, interest earned so far is $16,297.16 and current value is $25,859.66.

If I give it to her now, it's true that her tax bracket is lower. She could pay her last year of tuition with it and limit her loan to 90K. If she finishes her degree chances are that she could get a decent paying job and will not be strapped to pay her loan. If she can't get a job right away, she could cash these little by little and start paying her loans until she could get settled. Or she could just use this pay extra towards her principal loan ( can she do that? designate a portion towards the principal?)

There maybe other options I am not seeing. I just want to know whats the best way to use this money.
sparksals
16 years ago
Even though she has left it up to you to decide, you should let her decide. She knows best how the money will help her. This would be a great life lesson on how to make a life altering decision.
sparksals
16 years ago
The reason I suggest you let her decide is because what if the decision you make doesn't benefit her most and she harbours resentment? What if she deep down has an idea of how she wants the money spent and the decision you make is contrary to hers?

She's an adult now and this is an adult decision she should make. I don't want it to sound wrong, but mom shouldn't be making her decisions anymore.
brody_miasmom
16 years ago
It seems like it is pretty much a wash as long as she plans to use the proceeds to pay off her student loans.

Personally, I use the money to pay next year's tuition. If she can cash 1/2 this year (2007) and 1/2 next year (2008) the effect on her taxes will be even further negated.
saphire
16 years ago
When does she graduate? Assuming she has no other income it would be much better to give it to her this year or over 2 years (assuming she does not start working until late in 2008. It is silly to give it to her after she starts working and is in a higher tax bracket
jet_ny
Original Author
16 years ago
She graduates in 2008. It really does makes sense to give it to her now so she can cash half of it this year and pay the first semester and the rest she can cash next year to pay the balance. Thanks to you all for your input.
joyfulguy
16 years ago
Suppose you figure out what her currently taxable income level is, which likely is somewhat lower than the level at which she must begin to pay tax.

How about cashing out enough to bring her income level up to the break-even point, or somewhat over?

There's another consideration.

As she's in her last year of schooling, on graduation, if she finds work, she'll have employment income, and the taxable rate on the amount of the income that she derives from the bonds will be above that, so at her highest marginal tax rate.

Which may well be higher than if she cashes a substantial portion of them now.

Maybe it would have been well to have cashed some annually, as she was going through school, which might have meant even lower tax liability ... plus having avoided some of that accumulating interest cost. But losing the increased value of the the bonds' earnings in the meantime, of course.

ole joyful

what to do....college loan

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what to do....college loan

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