Do you think I should reduce college saving for this...?

**Gailete** · 07-03-2008, 09:43 AM

I've ran all sorts of numbers and I'm just undecided. I really want this home equity loan paid off by the time we move. Any thoughts would be appreciated.

You have already stated what you should do. You want it paid off, pay it off.

As another frugal measure, be sure to help those kids with their homework so that good grades will help towards scholarships, etc. Paying to help your kids through college is not an obligation, but is a nice thing if you can afford it. Your children will be more blessed financially if you take care of your own finances now so that you won't be a burden to them later.

Gail

**disneysteve** · 07-03-2008, 10:30 AM

I started to reply to this thread earlier and was going to say pay off the loan before worrying about college savings. And then it occurred to me that we have a HEL and I contribute $300/month to our daughter's 529, so basically the same situation as the OP, though our HEL rate is lower than yours at 5.99%.

I guess my thinking has been that after the tax deduction, the effective cost of the HEL is about 4.5% and the investment account would outperform that.

From a strictly financial point of view, it is a tough call because it depends on the performance of the investments. But I don't think paying off the 7.5% loan is a bad idea. It will make you more comfortable with your finances. It will improve cash flow. And it is a high enough rate, even after tax deduction, to make it worth doing for a guaranteed gain.

**Slug** · 07-03-2008, 10:36 AM

You're torn. How about you split the difference and put half as much towards the college accounts and use that to pay down the HELOC. You may not have it paid off, but you'll be paying it down more quickly while still dollar cost averaging into your college accounts. Honestly, you have 7 more years of time horizon before your first kid heads off. That's a pretty safe bet when you're buying in these market conditions. Yeah, so I'd split the difference.

**jIM_Ohio** · 07-03-2008, 11:07 AM

Originally posted by disneysteve View Post

I started to reply to this thread earlier and was going to say pay off the loan before worrying about college savings. And then it occurred to me that we have a HEL and I contribute $300/month to our daughter's 529, so basically the same situation as the OP, though our HEL rate is lower than yours at 5.99%.

I guess my thinking has been that after the tax deduction, the effective cost of the HEL is about 4.5% and the investment account would outperform that.

From a strictly financial point of view, it is a tough call because it depends on the performance of the investments. But I don't think paying off the 7.5% loan is a bad idea. It will make you more comfortable with your finances. It will improve cash flow. And it is a high enough rate, even after tax deduction, to make it worth doing for a guaranteed gain.

This is similar to my advice, with additional comments (as usual).

1) OP needs to run their numbers- if the extra payments on the HELOC pay it off in 2-3 years, then paying off should come out way ahead (because the interest rate/ rate of return is high)
2) if the investments are returning 10-15%, the above advice tilts in favor of investing now instead of paying off 7.5% debt.
3) when dealing with debt vs invest situations, the important issue to realize is TIME. If the debt payoff is long (5-15-25 years), then typically you want to look at interest rates and make the decision there. If the time is short (less than 5 years, preferably less than 2) to pay off the debt, usually being debt free sooner frees up the cash flow.

Cash flow- if you paid off the HELOC early, then moved, would the cash flow still be there at new residence, would you use it for kids education, new house payment, or spend it?

**creditcardfree** · 07-03-2008, 11:22 AM

Originally posted by jIM_Ohio View Post

Cash flow- if you paid off the HELOC early, then moved, would the cash flow still be there at new residence, would you use it for kids education, new house payment, or spend it?

Once the HEL is paid off, there would be additional funds to begin using it towards college savings again.

The equity in our home now plus what is added by paying off HEL is what we would use for the downpayment on our next home. We have no idea where we might move, but we are not looking for larger homes than we already have.

Cash flow should stay the same. DH may even have a promotion soon after the next move, which means more pay.

Prior to sending in $166/mo for each daughter...we sent $90 for oldest and $55 for youngest since we have a longer time horizon. So the monthly amount was $145 instead of $362. I could go back to those amounts and send in an additional $217 to the home equity loan.

$217 + $385 = $602/mo extra to loan

Total payment would be $602 + $118 regular pmt = $720.

Anyone else have any thoughts on this?

**Slug** · 07-03-2008, 12:18 PM

Again the danger of stopping your investment in the college funds altogether is that you're missing out on an opportunity to dollar cost avg. in a down market.

**cptacek** · 07-04-2008, 11:18 AM

I ran an amortization schedule for you, and if your goal is to get the loan paid off with a small extra payment (of $4.51) on 12/2010 (2.5 years from now), you only need to send in $475 a month extra.

If you pay in $602 extra, you'll be done by 7/2010.

You seem to be torn on whether to reduce your kids college or pay off the heloc. If you send an extra ~$500 a month to the heloc and use the rest of the funds to save for kids college, you can reach both goals.

**creditcardfree** · 07-05-2008, 07:38 AM

Originally posted by cptacek View Post

I ran an amortization schedule for you, and if your goal is to get the loan paid off with a small extra payment (of $4.51) on 12/2010 (2.5 years from now), you only need to send in $475 a month extra.

If you pay in $602 extra, you'll be done by 7/2010.

You seem to be torn on whether to reduce your kids college or pay off the heloc. If you send an extra ~$500 a month to the heloc and use the rest of the funds to save for kids college, you can reach both goals.

Thanks cptacek! I think that is exactly what I will do. Since a $475 payment is only $90 more than I'm planning to start sending in, I will simply reduce each child's education amount by $45 each.

Each child's new payment amount will be $166 - $45 = $121

Thanks everyone!! I'm not sure why I couldn't get to this one on my own

!

**cptacek** · 07-05-2008, 06:11 PM

You're welcome. Sometimes is just takes a few dozen more eyes before you can focus on exactly what you want to do

**Scanner** · 07-05-2008, 10:58 PM

I wouldn't pay off the HELOC. . .you can retire the debt when you sell your house.

Stay on track with college savings.

**creditcardfree** · 07-06-2008, 11:08 AM

Scanner, I am aware that the debt will retire when we sell.

Because we will sell and use a real estate agent, the equity in our home will eventually erode to 0...if we sell our home every 5 years. It could be we shouldn't even be buying homes...decided on that one yet.

I want to pay off the debt to save the interest as well as guarantee that we will have cash allocated to a larger down payment on the next home.

Do you think I should reduce college saving for this...?