Money 911: How to plan for special-needs child?

Q: I am 30 years old, a full-time undergrad student, and a wife and mother of two young children. My husband is also a full-time student, and we live off of our student loans and grants. I will be graduating next May, and want very badly to go on to grad school for a master's in architecture, but am not sure if I will be "dooming" my family because of the amount of debt we already have from school loans. I have somewhere around $50,000 in school loans, and my husband has around $20,000. Should I hold off on going to grad school and just enter the work force with my bachelor's, or is it better in this economy to stay in school? Please help! — Mary Esther, Davis, Calif.

David Bach: Investing wisely in higher education is one of the best financial decisions you can make. And now is a great time to go to school because of the difficult job market (hence the reason graduate schools have record applications). More education means higher earnings for life, and if you treat student loans like the investment they're meant to be, you'll reap rich rewards. It's been quoted that a higher education can be worth up to an additional million dollars during your lifetime.

With that said, what concerns me is that you say that you and your family "live off of your student loans and grants."

If you are borrowing money for school to live off, then you really are borrowing money for living expenses, not for education purposes. With the responsibility of raising a young family — you didn't mention whether you have credit card debt, any savings, health insurance, etc. — and the fact that your husband isn't yet earning an income either, I'd really like to see you make plans to start working at least part time. You can continue going to school to get your advanced degree, but I'd recommend doing it on a part-time basis. Once you start bringing in some income, I'd like to see you completely stop living off your loans and instead use them solely for paying tuition.

If you are fortunate enough to get a job in your chosen career field, you may even be able to get tuition benefits from your employer. This would allow you to go for your master's part time, while getting your tuition paid for in full or in part.

Q: I am a self-employed contractor. I was working in North Dakota but was let go at the end of 2008. I have not been able to find any work in my area and cannot collect unemployment. I have managed to keep the house and car payments current by doing side work. However, I am three months behind on $40,000 of credit card debt, the phone is ringing off the hook and I have been turned over to collection. Is there anything I can do other than filing bankruptcy? — Rodger, Mishawaka, Ind.

Carmen Wong Ulrich: You can head to a nonprofit credit counselor to help with managing your debts. However, they will not be able to negotiate what you have in collections, which is something you should consider.

Since your credit score is low already, right now the priority is keeping yourself from going into bankruptcy and your creditors from suing you. So, closer to the end of the month, when folks who work in collections have quotas to fill, call the collection companies and try to negotiate settlements for a portion of what you owe.

Once a debt is fully in collections and no longer the property of the original lender, you can try to settle your debt for less than the total you owe — down to as low as 30 percent to 40 percent, all with the knowledge that the collection company purchases the debt for much less, usually only 10 percent of what you owe. You've just got to get the ball rolling in terms of speaking with them and working out a plan.

Arm yourself with this: Be very pleasant and patient — they are used to being yelled at all day long! And, if you settle for less than you owe, they may ask for the full amount right away, which is something you may be unable to do. Try this before heading to bankruptcy, and should you need to file for bankruptcy, make sure you make that appointment with a nonprofit credit counselor first to take another look at your situation.

Video   Help with your 401K, mortgage payments June 3: TODAY financial editor Jean Chatzky, personal finance expert David Bach and CNBC’s Carmen Wong Ulrich answer viewers’ financial questions. Today show

Q: My 25-year-old grandson is locked into several Sallie Mae and Direct Loan student loans ranging in interest rates from 7 percent to 10 percent. He has been informed by Sallie Mae that his monthly payment is $450 to satisfy the loans. Is there any way to get these loans refinanced to a lower overall rate that will allow him to better afford his monthly payment? He is getting married next year and this payment is killing his budget. — Larry, Crete, Ill.

Jean Chatzky: It sounds like your grandson has a combination of private and federal loans. Unfortunately, you can't consolidate those loans together. For the private loans, Sallie Mae does not offer consolidation, but there are ways to lower your grandson's monthly payment.

If he owes more than $20,000, he may be able to extend his loan term. The typical repayment term is 15 years, but he may be able to spread it out to 20, 25 or 30 years. That means he'll pay more over the life of the loan, because he'll accrue more interest, but his monthly payments will be lower.

The second option is switching to an interest-only payment plan for a while, something I'd only recommend in extreme circumstances, because with this option, he's not paying down the principle. Sallie Mae allows you to do this for a maximum of four years, and there isn't a minimum loan amount.

With both options, your grandson can always opt to pay more if he has more money in any given month, or change his payment plan at any time. So if he wants to lower his payments just to save up for his wedding, one of these may fit the bill.

For the federal loans, he can look into consolidating through the Department of Education. However, if his loans are already fixed-rate loans, there isn't really a reason to do this. There is also a new payment plan beginning on July 1 for federal loans. It's income-based repayment, and it's an option for people who might qualify for partial financial hardship — if he meets that criteria, his payment would be calculated as a percentage of his discretionary income.

Q: I am a 23-year-old small business owner wanting to invest fairly aggressively. I have maxed out my Roth IRA for several years. In addition, I have about $4,000 in stocks and index funds along with $3,000 in various term CDs. Should I take that money and simply create a Roth IRA for my wife? I hesitate doing this as I don't want to tie up all of that money until our 60s. Also, do you recommend only buying mutual funds and index funds? I recently read that only 25 percent of stocks have a positive return, so it is better just to invest in the broader market. — Justin, Chicago

David Bach: Congratulations on being 23 years old, running your own business and being so smart financially. I promise you many people reading this wish they had started "paying themselves first" in their early 20s.

I suggest that you consider funding a SEP IRA. Over the long run the amount of money you can save being self-employed is incredible with a Self Employed Pension IRA account. In 2009 you can save up to $49,000 (2008 was $46,000) in a SEP IRA and contributions are generally 100 percent tax-deductible. For incorporated businesses, annual contributions can be made up to 25 percent of W-2 income. And for those taxed as sole proprietors, SEP IRA contributions of 20 percent of adjusted earned income can be made annually. Annual compensation of more than $245,000 in 2009 cannot be taken into consideration for determining contributions.

Generally a SEP IRA must be established and funded by your tax filing deadline (April 15 for a sole proprietor). Filing extensions extend the period for establishing and funding the SEP plan (Oct. 15 for a sole proprietor).

With that said, I also want you to focus on saving for emergency purposes, and my goal, especially for self-employed people, is to work to have a year's worth of expenses in savings. So rather then completely max out your retirement accounts, I also want you to build an emergency account and use an FDIC-insured savings account at a national bank.

As for the question of whether you should invest in mutual funds vs. individual stocks, it really depends on what you are investing in. In small plans like yours, especially when you are starting out and investing monthly or even every few weeks, it makes more sense in my opinion to dollar-cost average into mutual funds (index funds) or exchange-traded mutual funds because of their broad-based diversification. I recommend you start by investing in the Dow Jones Industrial Average and the Standard & Poor's 500. You can buy both indexes by investing in the exchange-traded fund symbol (DIA) and the S&P 500 exchange-traded fund (SPY). I personally own both and I own the Nasdaq exchange-traded fund symbol (QQQQ). For more information on exchange-traded funds, visit this iShares Web site.

MORE FROM TECHNOLOGY & MONEY

Technology & Money Section Front

Can your name affect your career? 10 tips to find seasonal work this year   Stop holiday overspending before it starts   Is the recovery real on Wall Street?   Study: Wall St. execs cashed in before collapse Long-term unemployed face dwindling options Just because it’s on Twitter, it (still) isn’t true Decade's top 10 Internet moments   Find a great home for less than $500,000   Slideshow: Neat! 2009’s best microscope images Technology & Money Section Front   Add Technology & Money headlines to your news reader: