← HerMoney with Jean Chatzky
HerMoney with Jean Chatzky
Ep 457: What You Need To Know About the 2025 Economy
00:46:01
And how to plan for uncertainty.
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- [00:01]
Jean Chatsky
You're listening to an Airwave Media podcast.
- [00:05]
Katherine Edwards
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- [00:36]
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- [01:08]
Jean Chatsky
Hey everybody, thanks for joining us on HerMoney today. I'm Jean Chatsky. It is 2025, which seems crazy to me because 2000 just does not seem like that long a time ago. And maybe that is some perspective on my age. But I gotta tell you, that is just how I'm feeling. Feeling. And over the holiday stretch, which by the way, I hope you enjoyed as much as I did, I. I really didn't work. And I. I can't tell you how long it's been since I can say that I really didn't work. I mean usually even if I go on vacation, I'm checking my email, I'm editing something I just didn't. I just didn't do it. I did a thousand piece jigsaw puzzle. It was one of the New Yorker magazine jigsaw puzzles. The covers, which are maddening because it's not like the pieces are all the same size. They're all die cut into random triangles. And then I got to the end and four pieces were missing. Four. And I gotta say I blame Norman, who is a little too cute to blame, but I blame him anyway. Anyway, that is not why we are here today. I heard from many of you over the past couple of weeks with questions about the economy specifically where are we going this year. And sure, a little trepidation is always expected anytime a new president takes office, but the Wall Street Journal does report that Americans are Feeling especially, especially bleak about the economy right now, measurably worse than we did last year about jobs, inflation, income, business, and more. I found it very interesting reading the New York Times over the past couple of days. James Carville wrote an interesting column that credited the fact that Democrats didn't acknowledge how bleak everyone was feeling with the Trump victory. He said the fact that Democrats didn't tap into that was the reason that Trump won. And what Democrats did instead was focused on the numbers that told a different story. The fact that the stock market reached record highs in 2024, with the S&P 500 climbing nearly 28%, that the unemployment rate is still low at 4.2%. And. And the New York Times reported that 2024 was actually our most stable, stable economy since the pandemic. Which all begs the question, where are we? Like, where are we right now? And why is there such a disconnect? The word that I keep hearing thrown around is uncertainty. We are worried about what might be on the horizon. President Elect Trump has made a lot of claims about what he's going to do when he takes office, but we do really have absolutely no way of knowing what he'll prioritize or how those decisions may have a ripple effect on our personal economies, which, of course, is what matters. And so we've got a lot of questions. And while I do not have a crystal ball, I do have the next best thing. Katherine Edwards is my guest today. She's a PhD economist, an independent economic policy consultant, and a Bloomberg columnist. She has over 200,000 followers on TikTok. You should all follow her there. We'll link to her profile in the show notes. And she has this ability to break down complicated economic issues and talk about what they actually mean for you, which is, of course, exactly what we care about. Katherine, welcome. Thank you so much for being here.
- [05:06]
Katherine Edwards
Thank you so much for having me.
- [05:09]
Jean Chatsky
So the first question is a loaded one. Where are we really right now? And what should we be prepared for going into 2025?
- [05:19]
Katherine Edwards
What I tell people is that we are coming out of an absolute fever dream. The extent to which the pandemic disrupted our economy, we felt it at the time. But the reverberations of the closures, the people moving, people having money that they saved, supply chains being disrupted, those carried on and lingered far longer than the pandemic itself, which itself didn't exactly go away quickly. And that shock to the economy, you can't. You can't move on to normal times so quickly. And I think that so Much of what makes the current economy so confusing is just how extreme of an economic event we all lived through. The US economy in a single month in 2020 shed 22.5 million jobs. The unemployment rate was posted at 14%, but was actually closer to 20. And that recovery was rapid. But it, our economy is not meant to do anything very quickly. What I tell people is that it's like we're on a massive ship that is $20 trillion in size. You don't like abrupt movements. You want a steady pace, you want a charted course, and you want that type of predictability. If you go through a massive storm, if you're struck by lightning three times, I mean, you emerge okay, but you, you are, you aren't the same as if you weren't struck before. That is what I tell people of how to think about the economy right now. That like, yeah, we're in a ship struck by lightning, like, everybody's okay and we're still moving forward, but that doesn't mean we're unaffected by what we just lived through.
- [06:55]
Jean Chatsky
Does that explain why people are feeling so bad? Or is the bleakness sort of all inflation and the fact that our salaries have not really kept up with inflation?
- [07:10]
Katherine Edwards
I think that the economic problems that the Trump campaign successfully tapped into have 40 years of antecedents. The US economy has been structurally not fair and not beneficial for the bottom half of Americans for decades. The real break in America's economy that I think is now becoming so palpable is, is started around 1980, which is, or 1979. 1980 we had a massive recession, an inflationary recession at the start of the 80s. It actually rolled into another recession a couple months later. And since then, our economic growth has been incredibly disparate. Incomes at the top rise orders of magnitude faster than incomes at the bottom. And slowly and surely the American economy is taking these hallmark goods that people want to afford, like housing, like college, like health care, and they're just pulling away for more and more Americans. And maybe when it was the bottom 20%, you know, you didn't feel it across the economy. Maybe when it was the bottom 40%, you didn't feel it across the economy. But it's getting to the point where the bottom 60 to 70% of Americans feel like they can't afford their life. That's not one president, one year, one election. That is a four decade structural problem that needs very deep rooted solutions to address and they won't be solved quickly.
- [08:34]
Jean Chatsky
Are there solutions that are being proposed that things where it looks like we'll make some movement against these problems. The sort of things that people cast their vote for.
- [08:49]
Katherine Edwards
Unfortunately, I don't see any at the moment. The Republican Party is, well, I should say leadership in the Republican Party is completely devoted to tax cuts. And We've done this four times previously. We had a massive tax cut in 2001. It was followed by a tax cut in 2003, which was followed by a massive tax cut in 2012, which was followed by a massive Tax cut in 2017. The provisions of the 2017 tax cut are about to expire. Now, those four tax cuts combined cost the federal government over $8 trillion. The proposals for the 2025 extensions, which Trump has made a campaign promise, which Republicans are absolutely committed to doing, will cost north of 4 trillion, possibly 5. So I tell people, if you think you can spend $13 trillion in SOLVE housing, that is the path forward. Unfortunately, Republicans have no appetite for anything other than tax cuts. Once they get into leadership, it is their number one policy. And they've done it again and again and again. I testified in front of the House committee as a minority expert. So the Democrats invited me. The Republicans were in charge, and it was me next to four people. And they, they talked about tax cuts as if, you know, they are the cure all for the economy. This is everything the economy needs can come from a tax cut. And we're very upset to think that we have sunk $8 trillion into that investment and it has solved none of the problems that voters are angry about. Healthcare isn't more affordable. Housing isn't more affordable. Childcare isn't more affordable. People don't have paid sick days. The minimum wage is $7 and 25 cents an hour. People can't afford college. They have all kinds of debts. Another tax cut is not going to solve those problems because they've had 20 years to show they're not going to solve those problems. But unfortunately, that is the number one Republican priority when they take leadership in January.
- [10:49]
Jean Chatsky
So I'm always a big advocate for controlling the things that you can control, Right? When we talk about the economy with a capital E and these tax cuts that are coming our way, I can't do anything about that, but maybe I can do a little something about my online shopping habit, right? Maybe I can do a little something about, I don't know, about my credit score and then get some better interest rates. And so as we sort of frame the rest of this conversation on the economy, I do want to try to be a little proactive about things that we can do to help ourselves. Wall street analysts have predicted that US Gross domestic product, adjusted for inflation, gdp, which is basically the growth of the country, will be a little bit more percent next year. That's a bit of a slowdown from this year. It's not catastrophic. So is this an okay trajectory to be on? Are we looking like we're headed for a recession?
- [11:59]
Katherine Edwards
Well, from my perspective, the US Is always headed towards a recession at some point. It's just a matter of when. We have a cyclical economy, it expands and then it contracts in a recession, it recovers and then it expands again and this, this happens. We've had, I think, nine recessions since World War II. So a recession is always coming. And predicting recessions and when they'll come has some motivation. So the, the stock market likes to predict it because they make money off of which way the economy turns either way. Right. It's, I don't call it high stakes gambling, but I don't not call it that. Policymakers try to find out if a recession is coming because they want to act to either delay it, deny it, or somehow prevent it from happening, or at least lessen the pain when it does. But for, you know, your kind of typical American consumer in the economy, predicting the recession or thinking about recession is really so far beyond your control. Keep your financial house in order, but you can't live in fear that your job will be lost and have that be your North Star. Right? You have to, you have to live your life and be positive. What I would say is that there's always a risk that the economy will turn south. You need to know what your biggest vulnerability is. And just going through that exercise will do nothing to prevent a recession if it comes, but could make you feel better about it, because that's what's so bewitching about the economy we have. There's almost nothing that you could do to make the economy stronger, to make the economy weaker, to prevent a bad economy or good economy from affecting you. But you, you know, the things that you have control over your financial house and order, you know, you can, you can do that, but you can't prevent, you can't turn back the tide when the economy is coming your way. This is why, as an economist, I always try to tell people to have empathy, that maybe there are some losers in our economy who just. It's not that they're lazy. It's not that they're not a hard worker or they didn't try. The economy can absolutely rip your economic livelihood from your hands. When you did nothing wrong. And we tend to have very little empathy for those people. I've always thought that it's because we're afraid of admitting that we ourselves could have our economic livelihood stripped from us. Right. It's easier for me to say that unemployed person is lazy, that person without a job, they didn't study hard in school or they, you know, they didn't manage their money well. Because if I studied hard and worked hard and managed my money well, does that mean something bad can happen to me? Unfortunately, yes, it can. But I think people are really reluctant to admit that and be empathetic for those less fortunate in our economy because it would, it would mean admitting that could become, they could become that.
- [14:43]
Jean Chatsky
Oh my gosh, that's such a good point. I mean, we've talked on this show before about people who have had to take a step back from work to care for older parents and how that has been a total disaster for their own personal economy. I grew up in the magazine business. It doesn't exist anymore, at least not the way that it did. And journalists have been having to reinvent themselves for a really long time and we've had it easier than people in so many different industries. I do think that investing, and it's something that we really advocate that women get on board with, not day trading, not, what'd you call it, high stakes gambling, not high stakes gambling, but build a diversified portfolio, low cost, low fee, put money into it on a regular basis. If you believe that the United States and the fortunes of the companies in this country are going to continue to grow, why not have a piece of them? Where do you think, think the stock market, if you, if you want to look at it that way, is, is headed. I mean, stocks have soared since the election. Crypto has soared since the election. I consume a lot of media and look at CNBC and look at Yahoo Finance and look at the Wall Street Journal and the stories are sort of 50, 50. Half of people are saying, yeah, this is it. And half of people are like, yeah, we'll just keep going. What do you think for investors that the sort of best way forward is? Or is it just the long term view?
- [16:22]
Katherine Edwards
I think that you should never find your financial life dependent on what happens in the stock market over the next six months. You should have it dependent on maybe the next 20 years. But short term exposure to the stock market being critical to how your financial life is going is just, it's not advisable. It's very precarious and risky and you could lose. I don't know what type of investments people currently have, but general philosophy I take is the sooner I need my money, the more liquid it should be and the, the longer way, the farther away. Longer way. Words. I forgot numbers. But the farther away the money needs to be, the more acceptable risk is. So if you find yourself in this high stakes decision about what the stock market is going to be over the next six months, that's when the market's won. I mean, they make money off of people making bad bets. And, you know, if you find yourself in this position of like, it could all go south. That's an investment portfolio. That's an investment decision that does not serve anyone but the people who will ultimately make more money. And I, one of the reasons why I call it gambling is because it helps me to understand that the house wins and I am not going to outsmart a casino. And so I can just play it very strategically. If anyone told you I'm walking into a casino and I need to walk out with double my money, right, you're going to look at them and say like, no, no, no, no, no, no. That's not how casinos work. That's not why this is one of the most beautiful buildings you've ever been inside. It's because they are going to walk out with $10,000 of your money. And so that thinking of the stock market that way makes this question of will it go up and down less palpable for your own finances in the moment. I mean, I have money in the stock market, but I think of it as being like a 20 year investment in the future or a 10 year investment in the future and not right now.
- [18:17]
Jean Chatsky
Yeah, absolutely. We are exactly in the same place as far as that recommendation goes. We're going to take a very quick break, but when we come back, I want to talk a little bit about the policies that we've heard that Donald Trump is going to put into place, as well as some of those that we haven't heard all that much about. But maybe you've got some insight. We'll be right back. The post holiday season can be tough, right? The magic is gone. The weather is dreary, the days feel long. As a personal finance expert, I know I shouldn't be saying this, but hear me out. Sometimes in the middle of winter, I need a little retail therapy just to lift my mood. A little treat if you were. And that's where Quince comes in. Quince lets you indulge in everyday luxury without the guilt. They're Mongolian Bullying cashmere sweaters. Yes, the ones that have gone viral. They start at just $50. So how do they make their luxury items so affordable? No middleman, no markups, just direct from the factory prices that are 50 to 80% less than other brands. And they only partner with factories that prioritize safe, ethical and sustainable practices. Right now I'm looking at that fisherman turtleneck sweater. I know that I am not the only one who wants to get lost in a big oversized turtleneck when the temper drops below 30 degrees. Treat yourself this winter without the luxury price tag. Go to quince.comhermoney for 365 day returns plus free shipping on your order. That's quince.comhermoney to get free shipping and 365 day returns. Quince.comhermoney and we are back with Katherine Edwards, an economist who manages to explain things in language that we can all understand. We can't open a newspaper or a website, news website these days without seeing the word tariffs. So are they coming? What are they coming on? What do they mean to us? What, how am I going to feel this?
- [20:25]
Katherine Edwards
We don't know. Tariffs are widely regarded as bad policy for two reasons. One, they're economically destructive because they're, they increase prices. So you're in. It's a policy that increases prices as we're still trying to quell this inflation spike that we lived through after the pandemic. The second reason why they're widely disregarded is that they're very hard to control the consequences of. So you could have your 2D version of the world. Oh, well, I, I put a tariff on something. It's an import tax. Whenever you see tariff, substitute it with import tax. So you put an import tax on something, it makes that something more expensive. The consequences of making that something more expensive are so myriad and unpredictable. It's one of the reasons why economists hate it. For one thing, it can lead to opportunism in pricing. So there was a tariff in Trump's first term on washing machines, not dryers. Economists studied, did this tariff on imported washing machines lead to domestic production of washing machines? And what they found out is that it did marginally. But the kind of bigger cost problem was that it increased the price of dryers, which were not affected by the tariffs. But, you know, I sell a washer and dryer. I almost always sell them as a pair. And if the price of one is going up because of an import tax, I can raise the price of the other because people expect them to be Sold together. That type of opportunism is virtually impossible to map or predict amongst US Sellers. And then you have the whole other problem that you just put an import tax on another country that we absolutely buy other things from and sell to. So how they react is the real, like, million dollar question. Billion dollar question of what is a country going to do if we have promised them, through various pieces of legislation and treaties, that we will not tax your goods, that we just decide to tax their goods, they're going to be cool with it? I don't think so. I mean, Trump's gamble here is that he is such a brilliant negotiator and the US Economy is large enough that we are basically inured from this type of retaliation. But in his own first term, when he had tariffs on specific products from China, they retaliated with their own tariffs against U.S. farmers. And the federal government, while it was collecting tariff money and reducing imports from China, had to then redirect relief towards the farmers who were hit hard by Turin, his retaliation. This becomes a shell game of policy, where you're basically building this byzantine structure of import taxes. They do this, we do this to provide relief, but then the businesses respond in this way. It is the most complicated way to do policy. This is one reason why economists dislike it in general, is that it adds bureaucratic layers to our economy that people take advantage of or people have a hard time understanding and decrease the effectiveness of the policy.
- [23:31]
Jean Chatsky
We are, as I think, you know, a show primarily for women. And according to one estimate from a group called Ready Nation, rising costs of childcare account for 122 billion in lost earnings, productivity and revenue each year. President Elect Trump has said he can fix this with tariffs, that tariffs can fix the child care crisis. Can you connect these dots? Because I can't connect them.
- [24:02]
Katherine Edwards
No, it's a fiction. He just didn't know what to say. So he was asked a question at a kind of press event about child care. He didn't have an answer. And so he just brought it back to tariffs, but they're not connected at all.
- [24:15]
Jean Chatsky
Okay, good. I feel a little smarter now.
- [24:19]
Katherine Edwards
I mean, I think the point he was trying to make, if we want to give it that kind of credit, is that the US Government will get money from tariffs because it's a tax. It's a new tax that they're collecting, that they will have money from that tax, and that that money would be. I mean, that's kind of where it ends. I think he was. Maybe you could read this as tariffs raise Enough money that we could pay for childcare. But there's no concept of a plan here. The problem with child care and the reason why it's an issue Republicans have really failed to be creative on is because it's a market failure. And their kind of philosophy is to pursue things through markets and to rely on the markets. Have markets allocate goods and services. Have markets do this. This is the same reason why they don't have a health care plan. And we are now entering, I think this is year 14 of not having a healthcare plan because this is not their strong suit. I respect them for this. They know how to make markets work. This is what they prefer. How to intervene when a market fails is simply not something that they like doing and are therefore posed to do well. Childcare is an absolute market failure. It will only get worse. There is no way for child care to become better in the United States. It will get lower quality, more expensive, and more scarce and is moving in one direction.
- [25:40]
Jean Chatsky
Wait, when you say it's a market failure, can you be a little bit more specific about what that is? Sure.
- [25:49]
Katherine Edwards
The private supply of child care is neither affordable nor adequate, given the demand for child care. So market failure means I've got supply on one hand, demand on the other, and they should meet. If I want to go out and buy children's shoes, boom, boom, no problem. My kids lose them, I go buy new ones, it's fine. If I want to go out and buy a car, lots of options, lots of buyers. You have a price that meets. If I want to go out and buy childcare, completely different story. I only have limited options in my neighborhood, limited options in my city, and it's priced well above what I can afford. And so these don't meet now, markets don't collapse in totality. We have a $20 trillion size economy. What really is happening is that the scarcity of supply of the private sector, of child care is meeting a demand that is far greater than what it's supplying. And so what you have is the top of the market is clearing, but not the bottom, right? So if I make less than $50,000 a year, I'm not buying child care because child care is too expensive. If I make $300,000 a year, I'm buying child care because I can still afford it. I have enough wages to do so. So the way that this market failure is kind of developing and progressing over time is that childcare. You can imagine that in 1955, maybe 80% of people could afford child care. And every Year, it just gets lower and lower and lower. And people who can't afford the private supply of child care go through kind of informal, often non fully paid services through friends and family, or sometimes they get a subsidy from the government.
- [27:28]
Jean Chatsky
So when. When we went through the pandemic, what we had was a series of market failures when the supply chain basically shut down.
- [27:36]
Katherine Edwards
Yes. And then in the pandemic, the childcare industry almost collapsed, and the government sent an incredible amount of money to prevent that from happening. They were very liberal about it. They just. They gave the money to state governments and said, fix childcare in your state, don't let it collapse in your state. State governments loved this money. They got to basically go in and they could pay people more money, they could establish more slots, they could help people build centers. They were given this really big slush fund to. To prop up childcare in whatever need they needed it most. And then the money ran out and they didn't renew it. I testified in front of the Senate right as the first big expiration of child care funds came in, and the prediction at the time was we were going to lose millions of slots and women were going to drop out of.
- [28:29]
Jean Chatsky
The labor force, which is exactly what happened.
- [28:32]
Katherine Edwards
And it didn't look like it at first because the labor market was so hot that people were being drawn into the labor force. But actually, the Joint Economic Committee research staff just published a study that found if you look at women's labor force participation and divide it by women who have a kid under 6 versus not that all women are increasing, but that group is starting to fall. And it happens. Like the child care money got cut off, the industry had to start rationing again, and now we're seeing those women leave the labor force. So we're losing a worker. Losing a worker reduces the size of the economy.
- [29:08]
Jean Chatsky
Boy, we could do a whole show on that, too. We spent a lot of time on the macro today, and in our last couple of minutes, I just wanted to bring things back to our personal economies. If uncertainty is the word on the street right now, if people are still feeling bleak or just cautious, how would you suggest that we manage our money, that we manage our lives going into 2025 to shore up our own economies?
- [29:41]
Katherine Edwards
Well, the best principles are the ones that you don't need to abandon when circumstances change. So stay true to that and keep your north of financial security, your north. For me, the most startling and upsetting statistic that came from exit polls of the 2024 election were the overwhelming majority of Americans who felt America's best economic era was behind us. That is categorically not true. It is so absolutely and categorically not true. I cannot stress enough that the best is yet to come because we don't have paid sick days in our economy. We don't have paid family leave where a minimum wage is $7.25 an hour. The idea that there was like an economy in the 50s that was better than the one now or better than one in the future when we've done almost nothing to protect workers, we've pursued no kind of pro worker policy in the U.S. it's absurd. The best economic era is the one that we are going to build. And what I stress to you and to your listeners is to stay positive because the bleakness, the negativity, people take advantage of that and they say, see, wasn't it better in the past? Shouldn't we march backward? Shouldn't maybe women stay home so they don't take the job of a man and embrace that? Shouldn't we just build everything and manufacture it here? There is no solution from the past. It has to come from the future. We have to build the future together. And we can't do that if people think that we should be marching backwards. So look forward, be optimistic, believe that the economy can be better and then you will demand it from your elected officials. Right now, all we're demanding from our elected officials is the right to be mad about how hard things are right now. There's nothing coming that's going to help them unless you feel like it's possible. And then we can manifest this as a country once we think it's actually within our grasp.
- [31:39]
Jean Chatsky
Katherine Edwards, I hope that you'll come back. I really enjoyed this. I learned a lot from you. And if you ever want to run for office, I will vote for you. Okay?
- [31:50]
Katherine Edwards
Okay, sounds good. Bye. I love this country. I think we have the most remarkable country, society, economy, people in the world. And I just, it makes me upset to see people be so down on it. I am here to be positive. And we are going, we're America. We're going to crush this. You have to. We're going to build so many great things.
- [32:11]
Jean Chatsky
Happy 2025. We will link to all of your socials in our show notes. I hope we get to talk again.
- [32:18]
Katherine Edwards
Thank you so much for having me.
- [32:20]
Jean Chatsky
Thanks. And we'll be right back.
- [32:22]
Katherine Edwards
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- [32:54]
Jean Chatsky
And we are back with your mailbag. Kelly Hultgren is joining me on a very, very, very cold day. So Kelly and I are recording this sort of mid morning. I am still in my running clothes because as you know, I stay in my running clothes until I actually run. And it's so cold that I haven't run yet. I'm sort of hoping for an additional degree or two before. Before I get out there.
- [33:25]
Kelly Hultgren
Yeah, when you're brokering degrees or just like a peep, a little peep from the sun would be nice.
- [33:31]
Jean Chatsky
I'm seeing a little bit of sun, so I'm thinking when we're done here, I'm gonna actually. But it, you know, I went online and I was like, running clothes in 20 degree weather and I. You need layers. You gotta layer up, my friend.
- [33:46]
Katherine Edwards
Yeah.
- [33:47]
Kelly Hultgren
The response, if I were on the other side of the algorithm, would be like, don't.
- [33:51]
Jean Chatsky
Treadmill. Treadmill, don't.
- [33:53]
Kelly Hultgren
Yeah, treadmill. That's right, treadmill. Don't. Or treadmill. Or your peloton. Right, you have your peloton.
- [33:58]
Jean Chatsky
Exactly. I do have a peloton. I. Yeah, I'm feeling a little. And I don't know about you, we both have dogs. So, you know, of course I get outside with the dog, but I'm feeling a little housebound. And so I would like to, despite the cold, get outside. And I'm sure we have a colleague, Sarah Pierce, who lives in Watertown, New York, where they had three feet of snow the other day. So I have nothing to complain about.
- [34:28]
Kelly Hultgren
We shouldn't complain. We really shouldn't. But even still, props to you for getting out there. I'm not going to be running, but I will bundle up and go get a latte.
- [34:39]
Jean Chatsky
There you go. It all works. You've got to get a little sunshine. We've got some questions. Let's get into it.
- [34:46]
Kelly Hultgren
We do. We do. So we're going to take one question today since it's a long one, but it's a great one. It comes from Carolyn, who is asking how to pay off student loans for her kids. She writes, I was so happy to stumble upon your podcast a few months ago and have found your weekly episodes to be so thought provoking and helpful. I hope you can address my question. When my husband and I had our second child in 2006, our financial advisor advised us to prioritize saving for retirement over college because no one will give you a loan to retire. And she put that in quotes. So that's what we did.
- [35:19]
Jean Chatsky
People say it all the time. You've heard me say the same thing. It's very common advice. But it makes college difficult down the road.
- [35:29]
Kelly Hultgren
So she says that's what we did. Unfortunately, life dealt us some challenges along the way, including several layoffs for my husband and my cancer diagnosis and treatment, both of which resulted in a lot of financial instability and us not saving for college for our children. I'm so sorry to hear that, Carolyn. So fast forward to today and here we are with a junior in college and a soon to be freshman in college. The junior's college expenses have been covered by a mix of us paying approximately 15,000 out of pocket, her maxing out her student loan allotment approximately 6,000 for which we plan to help her pay, and us taking out a parent plus loan approximately 15,000 thus far. Side note, she attended community college for a year and a half for which no loans were needed. Our son has been attending a private school on a generous scholarship for which we've paid approximately approximately $15,000 out of pocket per year. We plan to continue to pay $15,000 out of pocket for him to attend college and do the same parent plus and student loan mix to cover the rest of his expenses. Our plan is to just chip away at the loans over time. Here are some additional details. Our children attend or will attend a college that is charging us about 30 to 32,000 per year. We pay for that with cash and loans split about 5050 between the two. Both children have or will have approximately $30,000 in scholarships and grants. We do not receive any financial support from grandparents or other family members. We are not big spenders and live very frugally. For example, our three cars are 7 to 11 years old. Two are paid off. We vacation once a year at a rent free family member's beach house. Our debt is one car loan, a monthly payment of $323 in our mortgage. Otherwise we pay off our credit cards in full every month. We have about 700,000 in retirement savings and contribute about $20,000 annually. We have about six years left on our mortgage on a home currently valued at about 500,000. Our combined income is 241,000 and we anticipate inheriting about 100,000 in the next one to five years. We're in our early 50s and plan to work until 67. The big question, we know the loan interest will be brutal. So I'm wondering if the Parent plus loan is the best option or if we should take out a second mortgage on our home or is there another approach you would recommend? Jean, what do you think?
- [37:56]
Jean Chatsky
Boy, oh boy, there's a lot here. And Carolyn, I just, I get the sense that you are beating yourself up about this and I want to just tell you, you've done a really good, good job, right? You've got significant retirement savings. You've got a house that is going to be paid off while you're in your 50s, which a lot of people just can't say these days. You continue to save at a really good rate. You've been really smart, clearly about how you've both raised and advised your kids. The idea that your daughter went to community college for the first almost two years basically saved you half of the cost of her college. It's an incredibly smart way to earn a four year college degree. To do the first two years at a community college where basically it does usually cost about nothing. The kids usually live at home and then they go to a four year school for the other two years. They earn the four year degree at half the cost. I mean, it is really so smart and not enough people go down that road. And with your son, you applied for the right mix or he applied for the right mix of scholarships and grants to cut the cost in half. So you've done a really, really good job. And I think that you are very well on track for retirement because these college costs will start to dissipate in a couple of years and you should be able to, especially when that mortgage rolls off the books, really increase the amount that you're socking away for retirement and start maxing out the availability to put money for both of you into retirement plans. So let's put that aside and let's answer your question. Your question is, should you be looking at anything else besides Parent plus loans? And my answer is yeah, you should actually be looking at private loans. And here's the reason I get the sense, because you are so financially on top of things that you probably have very good credit scores. Parent plus loans, although they have some of the same repayment provisions as other federal loans that allow you to do things like qualify for some income based repayment and potentially defer loans if you get into a financial jam, also come with origination fees that can be about 4 percentage points on the loan That's a huge amount of money. And the interest rates on Parent plus loans are often higher than the interest rates on federal loans. Federal loans are made based on your credit worthiness. And so if your creditworthiness is solid, and it sounds like yours is, you may be able to do better with a private student loan than you even could with a heloc. And although HELOC rates may also be lower than those on Parent plus loans, I don't love the idea that you're going to put your home on the line for this. Could you? You could, and you could still time it so that you get out of your mortgage before you retire, but I would just spreadsheet this. I would price out a HELOC knowing that I don't love the idea of you putting your home on the line against the cost of these Parent plus loans, against the cost of a private student loan. Go through the process, see what you can qualify for. There's a good website called Credible, which will allow you to compare the various cost of private student loans against one another, and you'll be able to use that to make a decent decision. And finally, you don't mention what your kids are going to be doing when they come out of school. In general, we don't like to see students borrowing more than they expect to earn the first year out of school in total. But if your kids are only borrowing up to the limit of their own federal aid availability, they probably won't be. And I'd suggest you think about how much money they're going to be earning and whether they might have the capacity to pay back those federal loans themselves without you doing it. If you've already promised them, I understand. But if you haven't promised, I'd let their financial situation shake out before you make the promise. Maybe they live at home for a little while to get a jump on repaying those student loans. A lot of kids are doing that now. Maybe they're going to go into banking. You don't say what they're doing, but if they're going into banking or if they're going into coding, they could be earning a significant amount of money. So don't allow yourself to feel so bad about the fact that they have loans that you jump the gun before allowing them the responsibility of paying some of those loans off. If nothing else, know that it will help them build credit. And that is a nice jump on adult life as well.
- [44:00]
Kelly Hultgren
Everything you said, Jean, and I was just going to add that I think it's extremely generous to have the mentality that you do and the fact that you are financially trying to do as much as you can for this extremely generous. And my head went to where yours did too at the end Gene of understanding what their earning potential is and the path for repayment with their salaries in mind too as part of this. So everything you said. Thank you. Thank you Jean. Thank you Carolyn for writing in.
- [44:31]
Jean Chatsky
Thanks Kelly. And if you've got a question for us, please send it our way@mailbaghermoney.com thanks so much for joining me today on HerMoney. If you love this episode, please give us a five star review on Apple Podcasts. We always value your feedback and if you want to keep keep the financial conversations going, join me for a deeper dive. HerMoney has two incredible programs, Finance Fix, which is an eight week program designed to give you the ultimate money makeover, and Investing Fix, which is our investing club for women that meets bi weekly on Zoom. With both programs we are leveling the playing fields for women's financial financial confidence and power. I would love to see you there. We'd like to thank our sponsor, Edelman Financial Engines. Her Money is produced by Hayley Pascalides. Our music is provided by Video Helper and our show comes to you through Megaphone. This podcast is also part of the Airwave Media Podcast Network. You can find us and other shows like us@airwavemedia.com thanks for joining us and we'll talk soon.
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