Owning their home free and clear would give this family more cash to cover tuition expenses. By Thomas M. Anderson, Contributing Editor March 12, 2010 OUR READER Who: Rachel Aptekar, 46 Where: Davis, Cal. Question: Should I use spare income to slash mortgage debt or invest in a 529 plan?A part-time biology instructor at two colleges, Rachel earmarks $12,000 a year for her family's future. Her top priority is to save for college for her three children -- a commendable goal, but more complicated than it seems. In fact, her solution appears to be to do something unexpected. Rachel is considering two options: Burn the family's mortgage by 2013, a year before Laura, 14, graduates from high school, or invest $1,000 a month in college-savings accounts for all three children (including Dylan, 12, and Wesley, 10). With a state-sponsored 529 college-savings account, earnings are tax-free if used for tuition, books, school fees, or room and board. Retirement is key. Rachel and her husband, Christopher Cassels, first need to review their retirement savings. When college bills come due, kids and their parents can use current income or scholarships, or they can borrow. But you can't get loans to fund retirement. Christopher, 44, a county government supervisor, contributes to an investment plan for public employees and to a Roth IRA. An extra boost from Rachel would help shore up the family's retirement security. Plus, Rachel and Christopher could withdraw their Roth contributions tax-free and penalty-free at any time for any purpose, including education. Advertisement But there are exceptions, and Rachel and Christopher are that rarest of couples who could own their home free and clear before their children are out of their bedrooms. They have a 15-year loan at a fixed rate of 5%, and they figure the house is worth about $400,000. If Rachel whacks away at the principal with full force, the mortgage stands to be paid off by 2013. Their monthly cash flow would be vastly improved, and they're not worried about losing a tax break by paying off a mortgage early. They don't get any tax benefit from paying mortgage interest now because they use the standard deduction -- at $11,400 for 2010, it's bigger than all their itemized deductions combined. The college angle. The formulas for how much parents are expected to pay for college differ between public and private schools. The federal formula, which governs federal financial aid and public-college awards, does not consider home equity. Many private schools do factor it in, however, so a paid-off house is a disadvantage. Money in a 529 plan can also restrict aid. Nevertheless, the family should still qualify for some assistance because there will be two, and possibly three, siblings in college at the same time, all being financed on a middle-class income. That situation will count in their favor when it comes to financial aid, especially if the children apply to public colleges. Bottom line: Rachel should lean toward extra mortgage payments. If all else stays the same, she'll eventually have $12,000 a year, plus the thousands the couple conserve by not owing on a mortgage, to cover college costs or expand retirement contributions. Less debt equals more flexibility.