Pay off a Mortgage or Save for College?
Owning their home free and clear would give this family more cash to cover tuition expenses.
OUR READER
Who: Rachel Aptekar, 46
Where: Davis, Cal.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
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.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Stock Market Today: Dow Logs Longest Losing Streak Since April
The November Producer Price Index showed that inflation remains a tough beast to tame.
By Karee Venema Published
-
Why Uber Stock Is Volatile After GM's Cruise Announcement
Uber stock is swinging this week following news that General Motors is restructuring its Cruise unit. Here's what you need to know.
By Joey Solitro Published
-
Roth IRA Contribution Limits for 2024 and 2025
Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
By Jackie Stewart Last updated
-
How to Find Foreclosed Homes: Best Foreclosure Listings Sites
Making Your Money Last Find foreclosed homes for sale on these foreclosure listing websites. Search for properties on these free, paid or government sites.
By Bob Niedt Last updated
-
Luxury Home Prices Rise as the Rich Dodge High Mortgage Rates
Luxury home prices rose 9% to the highest third-quarter level on record, Redfin reports, growing nearly three times faster than non-luxury prices.
By Kathryn Pomroy Published
-
Four Tips for Renting Out Your Home on Airbnb
real estate Here's what you should know before listing your home on Airbnb.
By Miriam Cross Published
-
Five Ways to a Cheap Last-Minute Vacation
Travel It is possible to pull off a cheap last-minute vacation. Here are some tips to make it happen.
By Vaishali Varu Last updated
-
How to Figure Out How Much Life Insurance You Need
insurance Instead of relying on rules of thumb, you’re better off taking a systematic approach to figuring your life insurance needs.
By Kimberly Lankford Last updated
-
Amazon Big Deal Days Is Coming! We’ve Got All the Details
Amazon Prime To kick off the holiday season with a bang, Amazon Big Deal Days runs Tuesday, October 8 and Wednesday, October 9.
By Bob Niedt Last updated
-
How to Shop for Life Insurance in 3 Easy Steps
insurance Shopping for life insurance? You may be able to estimate how much you need online, but that's just the start of your search.
By Kaitlin Pitsker Published