<p>I am trying to figure out the best way to pay off an existing equity loan and to fund the 529 account at the same time.
I asked this question in financial aid section (more complicated version).</p>
<p>I am hoping got get more responses from parents forum.</p>
<p>Options are:
(1) Pay off the equity loan (principal & interest) during the five year term in monthly or annual installments without funding the 529 plan. </p>
<p>(2) Pay only the interest for equity loan in monthly installments and settle the principal loan at the end of five year term. The amount that would have gone to pay the principal in option 1 is used to fund the 529 plan.</p>
<p>I am trying to figure out which option would give the highest yield at the end of the five year term</p>
<p>Interesting choice. Paying off the he loan gives you a known return, let’s say it’s 7% on the money not borrowed. The 529 plan return is unknown and depends on what you invest in and how that asset class does. You also have to address financial aid and how a 529 balance vs home equity counts towards financial aid calculations. </p>
<p>But more to the point, with option 1, you end up with a lower loan balance but no college savings. So how do you pay for college? Take out a new home equity loan?</p>
<p>Option 2, you have some money earmarked for college. </p>
<p>How do you pay for college under each option ?</p>
<p>It’s wonderful that you want to help out your child, but you really need to put yourself first.</p>
<p>I did read your post on the financial thread.</p>
<p>I would caution you not to use what little retirement savings you have to pay for your child’s college tuition. You will never be able to make up for those lost years. You should really try to save even more for your retirement.</p>
<p>Option 1. I would encourage you to pay off your home equity loan both principal and equity together during the remaining 5 years of the loan. If anything happened and you coudn’t make those payments you could lose your house.</p>
<p>I think I read in a previous post that you child was looking at HYP type schools. There are good state college/university options out there. I’m not sure if taking on this type of debt makes sense, either for the parent or the child. It looks like your child has very good scores and very good grades, so I would guess that money would be forthcoming from the schools he/she is accepted to.</p>
<p>I know that you are willing to make the saciface for your child, but don’t do it at the possible expense of your own future.</p>
<p>What’s your tax bracket? The interest you pay on your equity loan may be deductible, the income accruing in the 529 is tax-free. That can be a significant advantage, all other things being equal. You might want to analyze the outcome both ways using after-tax dollars.</p>
<p>Depends also on time frame. When will your child be starting college? The feds are said to be about to lower interest rates. Maybe you can refinance the whole house including the equity line at a good rate that you can comfortably handle one payment on. Then do the 529 as well? We have been happy with the Michigan 529. We’re not Michigan residents. The age band funds have been very good for us. Good steady 7-12 percent growth. There’s also a fixed growth fund available that is the same one offered in TIAA-CREF retirement plans. It’s pretty low though – about 4 percent last I checked.</p>
<p>If your talking 5 years till due, pay off the equity loan. While we all can assume an aggressive portfoilo in a 529 could “make” more money, the possibility strongly exists that it also won’t or it could go backwards. </p>
<p>If your working with 5 years, you really don’t have the ability to recover from a bad market cycle. So then you go conservative and your returns even with the tax break may be lower than the cost of the loan. </p>
<p>You have to remember there are expenses especially in “no loads” that will eat into an investment. I love the “look no commissions” in our no loads, while the expenses are double, even triple inside. Remember every thing has a cost and time horizion. If you are working with 5 years, be certain rather than hoping. pay down your loan.</p>
<ul>
<li><p>you need to look at after tax return. While 529 returns are tax free, the HEL may be tax deductible, depending on whether you itemize deductions and other factors.</p></li>
<li><p>you have a guaranteed cost with the HEL, but only a possible return with the 529. Worse, you can also lose part of your investment with a 529.</p></li>
<li><p>if your HEL is variable rate, count on the cost going up.</p></li>
<li><p>some 529 programs have horrendous built in expenses which eat into the returns.</p></li>
</ul>
<p>OOM points out an issue that is easy to overlook: aggressive portfolios (such as all stock, or even an aggressive all stock portfolio invested in, say technology stocks) offer the possibility of higher returns by requiring investors to take the risk of higher losses. There is no way around this, as it is a fundamental principle of investing around which institutional investors, who drive the markets, build their portfolios. Put another way, there is a risk-reward tradeoff. FWIW, “quants” on wall street are constantly looking for ways to get higher returns at lower risk. They have a tough time doing so.</p>