The Gallaghers' Plan

Let the Kids Cover College

Much as Gallagher would love to free her daughters from college debt, she simply cannot afford to pay Allyson's loans or continue borrowing for Kelsey, says Kennedy. Fortunately, Allyson is already well positioned to pay her own loans, and Kelsey, a fashion merchandising major, has her whole career ahead of her. He recommends that Kelsey assume all future loans, repaying herself with future proceeds of a life insurance policy on Judy that names Kelsey as beneficiary.

If Kelsey does take extra loans, her total debt may be more manageable than Gallagher expects. As of July 1, 2009, federal loans—though not parental loans like the one Gallagher took out—are eligible for a revised and more-generous income-based repayment plan that keeps installments from ballooning beyond a borrower's ability to pay. If a balance still remains after 25 years of payments— sooner if a borrower enters public service—the remainder is forgiven.

Make Your Wishes Known

Gallagher has a will but not long-term care insurance and doesn't consider it a priority right now. However, with no spouse to lean on, she needs to let her daughters know her wishes for her later years. Kennedy suggests she stipulate her preferences for care and outline a general plan in writing.

She also needs to provide the girls with her power-of-attorney and health care proxy, which will allow them to make financial and medical decisions for their mother if she is unable to make them herself. For $500 or so, an attorney specializing in estate planning can draw up both documents.

—Lani Luciano

To follow Judy Gallagher's progress in her Money Makeover, read updates at the Payoff.