Suze Orman answers 22 questions on student loans, investing and retirement

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/ Source: TODAY
By Robin Kawakami

Register for Suze Orman’s Personal Finance Online course here, and it’s yours to keep forever, including future updates. Use the code TODAY.

Suze Orman wants Americans to get their financial houses in order. She’s not only giving away her Personal Finance Online Course for free through Oct. 3, but she also joined TODAY for a recent Facebook chat to answer readers’ burning questions about everything from retirement and 529 plans to tackling student loan debt.

TODAY

Student Loans

Every time I'm able to put a little money in savings, something happens and I end up having to deplete my savings. How do I avoid that? I have no credit card debt, but am drowning in student loan debt.

Suze Orman: The most dangerous debt you can ever have is student loan debt because student loan debt is not dischargeable in bankruptcy. So I want you to change your attitude -- stop feeling like you're drowning in student loan debt and start feeling like you're swimming in the future of your life...and that your student loan debt allowed you to get there. Change your attitude and you'll see your financial life change, too.

I cannot pay my tuition and living expenses. Is there any way to lower or work off college debt? I am 58 years old.

You have to understand that student loan debt does not go away. They have the legal authority to garnish your social security check. So, you have got to get the word "can't" out of your vocabulary. You might want to think about getting a job at a non-profit organization because if you do, you then can pay back your student loan debt under the IBR method and after 10 years, it's totally forgiven. Then, at 68, if you want, you can claim full social security. No student loan payment + extra income from social security should help you a lot!

How do you pay Parent Plus loans off when you can't afford the payments?

I'm sorry to say to you — you should've thought about that before you took a parent plus loan. Because you are on the hook for those loans and there's absolutely no way for you to get around them. if you really can't afford to make payments on them, you are to ask your child who you took these loans out for to help you. They owe it to you to help pay for their college education. So, go ask them right now!

Can you explain the student loan strategy you mentioned on air earlier today? [see the segment above]

Kyana, who was on the TODAY Show this morning had $40,000 of a student loan that she was paying back $150 a month under the IBR or Income Based Repayment Program. Under the standard repayment method, her payments, on a $40,000 loan would be about $400 a month. So, what's happening to her is that the $250 less per month that she is paying on IBR from the standard method is being put on the back of her loan. Her loan + interest is growing rather than decreasing. In 20 years, when her loan will be forgiven, she will have approx. $80,000 of student loan debt forgiven because it's grown. She is going to owe ordinary income taxes on the entire $80,000 that year. She is far better off simply paying an extra $250 a month now that she can afford, so that in 10 years her loan is paid off and she doesn't have to worry about income taxes. The only people who should ever do an IBR student loan are those that work for a non-profit place of employment. For after 10 years, their loan is forgiven, and they do not owe income tax on it. Big difference for someone that works in the public sector like Kyana does!

RELATED: Suze Orman: 'Don't give your kids an allowance' and other money tips for parents

We have several student loan companies. How do we consolidate and what company do you recommend? Should be combine both mine and my husband’s?

You should NEVER EVER combine your student loan with your husband's! You are to keep that as separate as can be! Are you kidding me!?

Other Debt

How do I determine which credit card to pay off first? Should it be the one with the least balance and work my way to all others? Facing credit card debt can be overwhelming, but I want to pay them all off.

Add up all your minimum payments that are due. Add 20% to that figure. So, let's say you owe $300 a month for the minimum payment due for all your credit cards — 20% of that is $60. You are to pay the minimum payment due this month every month from now on, even if the min. payment due next month is less. You are to add that $60 to the highest interest rate card you are paying. When that card is paid off, you take that entire amount plus that $60 and you add it to the second highest interest rate card that you are currently paying. Keep rolling down like that. In my new online course, it will show you exactly how to do it. So, make sure you download it now!

I have credit card debt about $15,000. Should I pay it off by taking money out of my trust or get a loan from a bank or credit union?

No! Don't do any of that. Why don't you just simply do a balance transfer to a credit card at a 0% interest rate for 21 months? Really start focusing on paying it off every single month.

I have always been told, "Don't close a credit card with all that good history." But which is better or worse on the credit score: having open thousands in a lines of credit or keep that good history? I have a lot of good history in other areas of my credit report too. I am just trying to slim down my debt and credit to make it more manageable.

History only accounts for 10% of your FICO score. 30% of your FICO score is made up of your debt to credit limit ratio, which essentially means how much you owe on all your credit cards in comparison to the credit limit that you have on all your cards. So, closing down your credit cards is the worst thing you can possibly do! Once you've paid off a credit card, just cut it up, but don't close it down! This, of course, assumes you're not paying an annual charge for these credit cards. If you are, that's reason enough to close that credit card down. It makes no sense to keep any of your credit cards at department stores open.

Retirement

I am taking early retirement next year because it is a defined benefit and I am concerned the company might change it to a 401k. My plan is more than others at the company because it has a cost-of-living increase. I have no credit card debt, only five years left to pay off my mortgage. I am scared [that] it’s not enough, but I know i can get by. I also have the opportunity to work for other companies, just not as much income, but a friendlier and honest environment. Is my plan for no debt and happy life worth it?

How do you have a happy life if you quit and you're scared to death?! When operating from fear, you will ALWAYS make financial mistakes! Are you sure if they take the defined benefit away next year that you'll lose it? I don't think so! They're not going to just give it to new employees. Check it out more carefully, but as long as you're afraid to do something, it's better to do nothing than something that scares you.

RELATED: Suze Orman: You'll spend more in retirement than you do now

I am 59 years old and am a widow. I am presently unemployed. My husband did not have a pension. I have no mortgage but am lacking an income. Should I take my husbands Social Security at a reduced rate when I turn age 60? I have a small pension but would make no sense to take that too early. I have some stock and receive dividends. What is your advice for me? I have been trying to get a job for over a year now with no luck. I have no medical insurance and am too young for Medicare.

If your social security (when you turn full retirement age) is larger than his reduced amount now, then I would take his reduced amount now to help you get by. When you turn 66 or 67, switch to yours. if you're really struggling that much, you might want to consider selling your home and moving some place where you can afford to buy something that's far less than where you're living now -- where you would be able to afford making your payments and getting health insurance.

Investing

Best investment I can put money into?

The best investment is you! If you have any credit card debt, car loan debt, student loan debt, that should all be paid off before you make an investment. It goes without saying, however, if you work for an employer that has a 401K that matches, that is the best place to put your money.

What do you think about 529 accounts for young children?

LOVE them! Go to savingsforcollege.com. It is the website by Joseph Hurley — he is the nation's expert on 529 plans.

What is the best account to start for a child? Should we look for ones that gain most money?

The best account for a child is a 529 plan. Be very careful of [Uniform Gifts to Minors Act] UGMA accounts. For any money in a UGMA account is counted again the child's eligibility for financial aid. 529s are the way to go!

How should I save money for my son’s college? Was wondering if you recommend the 529NY saves plan? And are there penalties on it when taken out?

No penalties, no taxes! As long as it's used for the child's education.

We are a single family income and we have a 6-year-old. I am worried that we aren't able to save for his college yet. If we could find $20-$50/month to put away where would be the best place to put it?

From the sounds of it, you should get life insurance to protect this child if something happened to you or your spouse if you're married. You also need a living, revocable trust, because minors can't inherit money. Please make sure you have protected them in every possible way if something were to go wrong. If you've done everything to protect them, use a 529 plan!

What are some good strategies for investing with my Roth other than stocks?

With a Roth IRA at a discount brokerage firm, you could buy individual bonds and/or any investment that they may offer. But at this point in time, stocks, especially those that pay a nice dividend and it's a good company — it's a great way to go.

In this up and down market, what would a moderate risk level diverse portfolio look like?

It would absolutely have dividend paying stocks in it to curve the bite of a down turning market. For at least, you're getting income while the market is on this roller coaster ride!

What do you think about trading exchange-traded funds (ETFs)? Isn't it a good way to make some quick bucks?

No! Trading anything is never a good way to make quick bucks. True wealth is built over acquiring a large position of stock in great companies.

I'm in my forties and would like to retire in about 15 years. I have been contributing to my 401k since I was in my twenties. Should I keep my investments in high risk or lower risk?

Keep investments in high risk.

My 27-year-old kid just got a "real" job as a Union carpenter. With that job comes an annuity. How much should he be putting into that annuity weekly?

I would only be putting money into the annuity if they match his contribution. Otherwise, he is far better off doing his own individual Roth IRA where he can max out at $5,500 a year. If they do match his contribution, he should only contribute up to the point of the match, and then take any extra money and put that toward any student loan debt he may have, credit card debt he may have OR an emergency fund!

I have a substantial amount in my 401k from previous company. Do I leave it with the current investment group? If not, where should I move it? I have a new job and have several years still to work?

I would do an IRA rollover with it. At any major discount brokerage firm. Invest it in either exchange traded funds, index funds or dividend paying stocks. But I would do so on a dollar cost averaging basis. Do not invest lump sum now.

My 24-year-old daughter has a 401/403 with her job [that she’s] been at six years. She is student in school quitting her job in a month so she can do school full time. What is the best thing she can do with her money in 401k/ 403b when she quits?

When she quits, do an IRA rollover with it at a major discount brokerage program. Invest it. See answer above for more info.