College savings vs. pay off credit cards

[laxdad]

Hi there - new to the forum and need some advice.

My wife and I are debating whether it's better to put any bonuses and/or stock sales that we plan this year towards paying down our credit card debt or towards our college savings. We have amassed nearly $40K in CC debt during her transition to a new career and have unfortunately also had to put one of our kids into a private school, taking almost all of our savings (other than retirement savings in IRAs/401(k)). I would like to take any extra money that I get this year in commissions and/or planned stock sales (I plan to liquidate all my company shares as they vest) and use this money to pay down credit cards first. However, we have a high school junior who will be starting college in fall of 2011 that we have been putting money away to get him through his first year at least, expecting that my wife's career will kick in and start contributing income at that point.

Are there any financial aid implications here, or is this just a straightforward "get out of debt first and worry about savings" later? Seems to me that you have more options to raise the money (college loans, etc.) if you are in good shape financially (good credit scores, etc.) than if you have lots of CC debt and some cash.

Thanks for any help/insight!

[jIM_Ohio]

Welcome to the site.

I would definitely pay down the cc debt before investing in a 529 plan or other college savings plan.


You did not list your ages or overall financial picture, but here is my line of thinking...

You are in your 30's or 40's and have a 401k, but its not enough to retire on (yet). You have some cc debt, probably a mortgage, at least 2 kids and 2 working spouses.

I suggest you make a timeline of financial goals. Retirement. 40k debt paid off. College for kid 1. College for kid 2. Payoff mortgage. Add a "cost" for each of those goals. Then try to find a way to pay for the various goals.

For example if you have 10 years to pay off mortgage, and kid #2 starts college in 8 years, you might decide to pay off mortgage a little faster so you have no mortgage and can cover tuition for youngest child. At same time you might be able to free up some cash flow and pay down the 40k debt sooner on timeline, opening up possibility of paying for later part of older kid's college.

Focus on the timeline so you do not fall further behind, and eventually get ahead.

Pay down debt first... and I think most on the board would agree.

[zeldo]

Pay down debt first. Paying down debt is like investing with zero risk. As the current financial disaster has shown there are very few ways of investing that yield anything like the interest rates paid on debt, without large risks associated with them.

Also try and get off the credit cards and onto another form of debt that has a lower interest rate.

[aida2003]

Yes, CC debt must go first unless it has 0-4% interest rate which I doubt. Think of that as an investment at the rate the CC co. charges you.

[laxdad]

Thanks everyone. I'm also inclined to deal with the CC debt first, as I am effectively getting a raise every time I pay a card off. Problem is, I feel very uncomfortable using what savings that I have for my oldest kid's college (he is currently a HS junior) to pay off that debt. And my wife is adamant that we not touch that money, and that any bonuses we receive this year continue to feed that fund. To me, it just feels like we dump money into a savings account in one hand while we are burning money in debt service on the other hand. Of course, the compromise is to do a little of both but in some ways then it seems like you are not accomplishing either goal...

I guess my conclusion at the moment is that it is better to have very little savings but a solid credit score than a couple of years of tuition in the bank and a creaky credit rating. The bank account will be empty very quickly when they start college and then we will still have a bunch of credit card debt. I think I'd rather have payments to student loans than credit card companies.

Does this make sense?

Of course, when she starts making some income, we will have a lot more options. The question is what to do while she is getting her business up and running (which may take a year or so) and our first college tuition payments are due. I'm not so concerned about the long-term - there is a sizable inheritance around the corner, as well as IRA and 401(k) money. It's the next 12-24 months that has me concerned.

[jIM_Ohio]

Thanks everyone. I'm also inclined to deal with the CC debt first, as I am effectively getting a raise every time I pay a card off. Problem is, I feel very uncomfortable using what savings that I have for my oldest kid's college (he is currently a HS junior) to pay off that debt. And my wife is adamant that we not touch that money, and that any bonuses we receive this year continue to feed that fund. To me, it just feels like we dump money into a savings account in one hand while we are burning money in debt service on the other hand. Of course, the compromise is to do a little of both but in some ways then it seems like you are not accomplishing either goal...

I guess my conclusion at the moment is that it is better to have very little savings but a solid credit score than a couple of years of tuition in the bank and a creaky credit rating. The bank account will be empty very quickly when they start college and then we will still have a bunch of credit card debt. I think I'd rather have payments to student loans than credit card companies.

Does this make sense?

Of course, when she starts making some income, we will have a lot more options. The question is what to do while she is getting her business up and running (which may take a year or so) and our first college tuition payments are due. I'm not so concerned about the long-term - there is a sizable inheritance around the corner, as well as IRA and 401(k) money. It's the next 12-24 months that has me concerned.

Do you think your son will be able to get financial aid? One thing which could hurt that is "money in the bank"- but that only hurts you if you think otherwise you would be eligible.

[laxdad]

From what I have heard, it's unlikely that he will be eligible for financial aid based on our income (approx. $150K). The fact that my daughter is going to a private school may help, but I'm not sure they care. We will be making two tuition payments when he starts college - all four years of his college will occur simultaneous with her junior and senior year of high school and then continue with her first two years of college.

[cptacek]

Well, if your children are eligible for student loans, they could get them while you are knocking out CC debt. Certain loans are subsidized by the government, so they don't accrue interest until your children are out of school. Once you get the CC debt knocked out, even if it takes 8 years, you can then help them pay off their Student Loan debt.