Credit Card Debt vs College savings

[it99]

I'm wondering if I should try savings for my childs college in 9 years(I have 10k so far and want him to go to a private school0 or concentrate on paying off credit cards. Currently been saving $75 a month.

Have 131k mort, 42k 2nd mort, 17k auto, 40k credit card debt(12-16%). Income 112k.
We've been just doing min payments on credit cards because money has been tight.
It scares on the credit card statements how much you end up paying if your just doing min payments.

Should I even be bothering with college savings right now until I get a good chunk of credit card payed off?

Thank you

[disneysteve]

You should absolutely be putting spare money to the credit cards. Forget about college savings for now. Paying minimum payments can result in it taking several DECADES to repay CC balances. Your 9 year old will be married with children of his own before you get those cards paid off if you keep making only the minimum payment.

[jpg7n16]

Ummm... I would say it would be more helpful, both to you and your child, for you to post your monthly budget to get help on controlling monthly expenses.

You have a fantastic income, but soo much debt. Methinks there are problems in the budget.

You should be doing both savings and paying down debt. It doesn't have to be one or the other.


You may want to rethink the private school thing.

[disneysteve]

Originally Posted by it99

Income 112k.
We've been just doing min payments on credit cards because money has been tight.

Originally Posted by jpg7n16

You have a fantastic income, but soo much debt. Methinks there are problems in the budget.

I totally missed the income figure when I read this the first time. Thanks for pointing that out jpg.

OP, why is money so tight on a 112K income? Where is it all going? Where did the 40K in CC debt come from? Your mortgage is very reasonable for your income. The car is a bit much but not terrible. It is the CCs that are killing you right now. Why are you only able to save $75/month with that kind of income?

[jIM_Ohio]

General priority is take care of own finances first and worry about college for others next.

I would suggest this applies to you. You have 9 years to clear up financial picture for yourself to fund kids college.


Here are questions

1) How old are you?
2) Are you willing to work longer to make sure child gets college education? Longer means 10-15 years longer (rough guess).
3) How much of college do you want to pay for? 100% (4 years tuition paid 100%) or something less than 100%?


Here is what you do (IMO). In 8 years you want "most" of the plan functional and by 9 years you want all of the plan functional- meaning if something saves you money in year 10, that money is not available to pay for college (because bill was due in 8 or 9 years, not 10). So realize while one course of action might save you "more" money, if it does not help get kid to college in 8 years, even though it makes sense, you might miss out on opportunities to save more money.

40k credit card debt needs to be eliminated. On 112k income, can you free up 20-30k? Get this paid off ASAP. If kid is playing AAU basketball, select soccer or other, you are best off reducing that cost to rid yourself of this debt ASAP. Stop using the cards entirely as well.

Set a goal to be cc debt free in 3 years (preferably 2). Calculate payments for a 3 year payoff and this is your new "minimum" to pay. This is going to be about $1000/mo.

In same 3 year timetable, I am assuming the 17k car debt is close to paid off. I am assuming this payment is about $500/mo?

This means you are at college minus 6 years (72 months) and have about 172k of mortgage debt to payoff
you have about $1500/mo from above available. It will be close, but you should have "most" of the house paid off by time college starts in 9 years.

So route 1 is apply all $1500/mo to mortgage (2nd mortgage then first mortgage once paid off. I know you can pay off 2nd mortgage in 6 years, not sure if 1st mortgage can be paid off in 6 years too (it will be close, if credit cards are gone in 2 years, both are paid off).

route 2 is keep the mortgages, and take the $1500/mo for 6 years and save it in bank (this is $108,000 for tuition which will need to cover 4 years, so about $26k tuition per year)

For route 1 (pay off both mortgages), there is information I do not know...
I don't know interest rate on mortgage, and what balance will be 3 years into this plan to know for sure.

Then once college starts you have

$500/mo car payment
plus $1000 you freed up to pay off credit card
plus 2nd mortgage payment
plus 1st mortage payment (I think)

I am guessing that is $3000/mo
which means you have 48k per year available to pay cash for college. More money is available for college if all debt is paid off prior to child starting college.

and as a fallback plan you have 2 things going for you

1) You should be eligible for federal tax credits for education (see below)
2) You have equity in home which can be used to fund the education as well

Because over these 9 years your retirement plans are not getting contributions, it will likely cost you another 10-20 years of working to retire.

The hope credit for 2010 was $2500. It is also known as the AOC credit
http://www.irs.gov/pub/irs-pdf/f8863.pdf

It used to be 100% of first $X and 50% of next $X. I cannot open the pdf right now to verify it is still that way (that means its 100% of first $1600 and 50% of next $1600 so you need $3200 of expenses to get $2500 back on tax return). If you use 529 monies, you CANNOT take this credit (you must use cash/taxable income to pay for expenses you claim the credit against).


The above plan presents the least amount of risk to you and also helps your financial situation the best over 9 years and still gives money for college.

There are probably other ways to tackle this-
such as choose an amount you want to provide (like 10,000 per year) and add it up ($40,000), then divide that by the 9*12=108 months) and set aside that $370/mo into a savings account.

My opinion is that $370/mo or whatever the amount is will be much better served over next 9 years paying down the excessive debt you already have.

[it99]

I keep asking myself where our money goes.
We had a house flood and ended up doing some extra remodeling of our kitchen/bathroom that insurance didn't cover.
Also needed a new hot water heater,furnace.
Saving 5% for 401k, $250 medicines/month, min payments on CC are over 1k.

[jIM_Ohio]

Originally Posted by it99

I keep asking myself where our money goes.
We had a house flood and ended up doing some extra remodeling of our kitchen/bathroom that insurance didn't cover.
Also needed a new hot water heater,furnace.
Saving 5% for 401k, $250 medicines/month, min payments on CC are over 1k.

Here is what to do

1) list income- gross and net pay per month (if you get paid every other week, use 2 paychecks as monthly income)

2) list expenses (detailed list)
include annual and monthly expenses

3) list debts
minimum payment/ interest rate/ balance due

if debts are listed in budget, please correlate them

[disneysteve]

Originally Posted by it99

I keep asking myself where our money goes.

The first step is knowing the answer to this question.

You and your spouse should keep a spending log for a month. Write down every penny that you spend on absolutely anything. Then add to that list one month's share of any expenses that aren't paid on a monthly basis like insurance premiums, car registration, magazine subscriptions, job-related fees, etc.

Then sit down and review the information you've gathered. See what is a need and what is a want. Then you can start cutting back and freeing up money for debt reduction and savings. Putting 5% in the 401k is a good start but it isn't nearly enough if you ever hope to actually retire.

[jpg7n16]

May I suggest you and your family use one of these budget templates:

Family Monthly Budget Planner - Templates
Personal Monthly Budget Spreadsheet


They are free to download and can give you a good idea of some things to keep in mind as you budget. If you know you pay the item sometimes, but not every month - then take what you expect to pay total for the year, and divide that by 12. Include it every month in the budget, and after 12 months, it will average out.

[littleroc02us]

What I don't get is you make 110k and you are broke. Where is all your money going? You do have 57k in liabilties. You owe 173k on your mortgage. If you continue to try and put money away for college it won't help anyone. You need to get on a written budget and try to figure how you can pay off all of your debt. You make way to much money to have such high debt. Your mortgage payment is very small, so you have to ask yourself "where is all the money going"..

Goodluck.

[it99]

My current retirement you put in 5% and company matches 10%.
I think I know the answer to this question but would it be worth stopping retirement investing and for a few years until debt is paid off? I'm thinking no but not 100%

[disneysteve]

Originally Posted by it99

I think I know the answer to this question but would it be worth stopping retirement investing and for a few years until debt is paid off?

The answer is probably no, but you need to address these two comments:

Originally Posted by littleroc02us

What I don't get is you make 110k and you are broke.

Originally Posted by jIM_Ohio

1) list income
2) list expenses (detailed list)
3) list debts

You earn enough that you should be able to maintain your retirement contributions and not miss out on the company match and still take care of your debt. In order to do that, however, you need to get control of your spending issues. Some people have income problems. Most have spending problems. You earn plenty of money. You just need to get control of where it is all going.

[snshijuptr]

Originally Posted by it99

I have 10k so far and want him to go to a private school

Just had to address this. Especially if your child is 9-10 years old, you should have very little idea of where that child will go to college. Remember that it will be their decision as to where they will attend. I know that in many states "public university" = "crap", but you don't know what the university situation will be like in 9 years. You also don't know if your child will want to attend college. I have a friend whose mother "knew" she would be a computer scientist, and after suffering through 2.5 years of college, the girl dropped out and is now a successful chef. Any college money you set aside is ultimately a gift to your child to use however he wishes.

So, get your own house in order, then set your children up for a hazy future. If anything, you are saving your child from having to support you in your old age.

[jpg7n16]

What I hope is clear is that we are not ignoring your questions about debt vs college savings.

We are trying to help you find a way that you can have ALL of the following.

• Debt reduction
• College savings (for public or private school of your choice)
• Retirement savings

The best way to help you get all 3 is to create/evaluate a solid budget. That way we can help you free up the cash to achieve ALL these goals.

[Ana72]

A lot of things here have I learned because this is not a simple matter. It's something that everybody should know.

[it99]

My emergencey fund is prett low just 5k.
But I have contemeplated just using it to pay down the Credit Card debt, which will help make it easier to pay quicker and then I'll be able to replish it pretty quickly when the debt is paid off. If I need emergency funds, I can just get it from the credit card. But in the mean time I'm saving interest on that 5k that I paid off on the card. Does this make sense? In 3 years thats probably hundreds of dollars.

[James00]

This is very good way to express the views about the credit card debt vs college savings both the opponents are inversely related to each other.

[Cassius King]

Originally Posted by it99

My emergencey fund is prett low just 5k.
But I have contemeplated just using it to pay down the Credit Card debt, which will help make it easier to pay quicker and then I'll be able to replish it pretty quickly when the debt is paid off. If I need emergency funds, I can just get it from the credit card. But in the mean time I'm saving interest on that 5k that I paid off on the card. Does this make sense? In 3 years thats probably hundreds of dollars.

I would leave the EF of $5k alone right now. I would take the $10k from the college savings account and pay down my credit card debt. I would then attack the credit card debt with avengence and then build up the EF to a more proper level.

[it99]

If I take out college savings won't I get penaized with taxes?
It a NY 529 plan

[disneysteve]

Originally Posted by Cassius King

I would take the $10k from the college savings account and pay down my credit card debt

Originally Posted by it99

If I take out college savings won't I get penaized with taxes?
It a NY 529 plan

Yes. You will be penalized if you withdraw money from a 529. Leave it there. Just don't add to it right now.