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Published January 17, 2011, 12:00 AM

Money Talk: Put retirement savings above paying debt

Q: It’s still not clear to me how I should prioritize saving for retirement, paying down (massive) student loan debt and buying or building a modest house, even though I have read a number of your articles and answers to many other readers’ questions.

By: Liz Weston, INFORUM

Q: It’s still not clear to me how I should prioritize saving for retirement, paying down (massive) student loan debt and buying or building a modest house, even though I have read a number of your articles and answers to many other readers’ questions.

Once I pay off what is left of my credit card debt and build up an emergency fund, what then? Do I put retirement first, paying down student loans second and a modest house last? Or should I pay my student loans last – for instance, by opting for an income-based repayment rather than the higher, regular payment amount and going for the house instead?

A: You should put retirement saving first now, even before you pay off your debt. If you don’t get a relatively early start putting away money for retirement, you’re unlikely to be able to catch up later. Those who start saving after age 35 have a very tough time putting away enough money to comfortably retire, says Roger Ibbotson, founder of Ibbotson Associates financial research firm and a Yale School of Management professor.

The ideal time to start saving for retirement is with your first job.

Prioritizing retirement means you’ll have less money for other goals, so paying down your debt and building up an emergency fund will take longer, but so be it. The amount of extra interest you pay on your debt will be overshadowed by the tax breaks and investment gains you’ll make in the long run in your retirement accounts.

After paying off your credit card debt, your next goals will depend on your individual situation. If all your education debt is federal student loans rather than private loans, then you needn’t be in a rush to pay it off. That’s because federal student loans have relatively low, fixed rates and many flexible repayment options.

You also may qualify for student loan forgiveness in 10 years if you work in public service or 25 years if you don’t. An income-based repayment plan would allow you to minimize your payments so you could put money toward other goals.

If, on the other hand, you have some private student loans, you’ll probably want to make paying that off a priority since the rates are variable and you don’t have as many repayment options. (You probably wouldn’t be able to make income-based payments, for example.)

When to prioritize a home purchase depends, again, on your individual situation. If you’re sure you’re where you want to be for the next 10 years or so and are eager to own a home, you could start a down-payment fund as soon as you finish paying off the credit card debt.

Q: What can I do to get credit card debts that are over seven years old off my credit reports? I have at least three accounts that are 10 or more years old, but the collection agencies keep selling the accounts to other collectors who report the accounts as younger than they are.

A: The collection agencies are violating federal credit reporting laws. Negative information such as charged-off accounts and collections are supposed to be removed from your credit reports seven years and 180 days after the account first goes delinquent (typically when you miss your first payment). Collection agencies are not allowed to “reset the clock” when an account is sold.

You can dispute these accounts with the credit bureaus, but the reselling and illegal reporting may continue. If it does, you will need to contact the collection agencies directly and tell them to stop. If they refuse, you may need an attorney’s help to get them to mend their ways. You can find a lawyer familiar with credit reporting laws through the National Association of Consumer Advocates at www.naca.net.

You might think that paying the bills would help, but you really don’t want to deal with a collector so unethical that it would change the date on a debt. Such a company is unlikely to deal in good faith, and you don’t want to give it any ammunition to do you further harm, such as access to your bank account (which it could have if you wrote it a check) or even your phone number, since it may start harassing you.


Liz Weston is the author of the upcoming book “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via the “Contact Liz” form at http://asklizweston.com.

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