LA Times, Sunday, March 6, 2005

Money Talk

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Now's the Time to Lock in Low Rate on Federal Student Loans by Liz Pulliam Weston

Question: I have about $14,000 in student loans, all with variable interest rates that are now about 4%. I haven't been paying any of them because I've been in school, but I recently became a part-time student and I received a notice from the lender that I will have to start making payments.

As a single mother earning less than $20,000 a year, I barely make enough to raise two children, much less make big payments. Any pointers that you could provide?

Answer: You'll want to act fast to lock in the low interest rate you currently enjoy. The rate on federal student loans is expected to jump July 1, perhaps by 2 percentage points. That could greatly increase your interest costs over the life of these loans.

Right now, you can lock in a payment of about $142 a month. After the rates climb, your payment could be $155. Over the 10-year course of the loan, the difference could cost you about $1,600.

In addition, Congress is talking about eliminating the option of fixed-rate consolidation loans. In the future, all student loans may well be variable, and that could expose borrowers to big swings in their payments.

Those who act by July 1, however, will still be able to enjoy the benefit of a low-cost, fixed-rate consolidation loan. Consolidating now could help you avoid the expected stampede as borrowers rush to take advantage of this narrowing window of opportunity.

Once you've locked in your rate, you can explore other options. Lenders offer a variety of payment choices, including plans that are based on your income and others that allow you to defer payments for as long as three years, based on economic hardship. For more information, you can contact the Department of Education at (800) USA- LEARN (872-5327) or by visiting http://www.studentaid.ed.gov.

Rising IRA Limits Offer Chance to Save More

Q: You recently wrote that the maximum that could be contributed to an IRA was $4,000. I thought the limit was $3,000, or $3,500 if you are 50 or older. When did the limit change?

A: On Jan. 1. The contribution limit for people under 50 rose to $4,000 this year; people 50 and older may make an additional "catch-up" contribution of $500, for a total of $4,500.

The $4,000 limit is scheduled to remain in effect until 2008, when it will rise to $5,000 annually. The catch-up amount, however, will rise to $1,000 next year. That means in 2006 and 2007, people 50 and older will be able to contribute a total of $5,000 a year.

When the regular limit rises again in 2008, people under 50 will be able to contribute a maximum of $5,000, while those 50 and older can contribute $6,000 annually.

You have until April 15, by the way, to make an IRA contribution for the previous tax year. But you can contribute only the previous year's limit. So if you're funding a 2004 IRA, you're limited to $3,000 (or $3,500 if you're 50 or older).

Simple it isn't. But for those who can afford to contribute more, the rising limits offer a great opportunity to put away more tax-deferred dough.

Sharing the Importance of Estate Planning

Dear Liz: I don't have a question, but I want to share a personal experience that may help illustrate why people should make an estate plan.

My father died in 1982 and left my mother quite well off. Two years later, my mother remarried, sold the family farm and used the cash to build a nice home in a resort area. Two years after that, she died and my stepfather inherited her entire estate, including the nice new house.

I don't believe either my father or my mother would have wanted this man to inherit everything instead of their children. I hope my experience may help parents to do much more diligent planning on behalf of their children, and perhaps even help children ask important questions before it's too late.

A: Your situation is all too common. Although there's a possibility that your parents ultimately didn't want you to inherit, the more likely explanation is that they simply put off estate planning.

When you don't have a will or a living trust, the rules of the state where you die dictate who gets what, and often the surviving spouse gets everything. If that's not the outcome you want, you need to take steps now to make sure your wishes are honored.

-----------Liz Pulliam Weston is the author of "Your Credit Score: How to Fix, Improve and Protect the 3-Digit Number That Shapes Your Financial Future." Questions for Money Talk can be submitted to her at 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or at http://www.lizweston.com. She regrets that she cannot respond personally to queries.

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