Bogleheads

Helot · Joined: 03 Mar 2007 Posts: 121

A question for members of the Board ...

My friend mentioned he was considering taking a home equity loan of $50,000 and then depositing it in a 529 plan for his son.

His child is 10 years old.

I don't find the scenario particularly appealing. Borrowing money at 6.??% and investing it for an eight year period hoping to earn a return greater than the interest paid seems extremely risky.

He argues that the tax write-off on the HELOC makes it more appealing for him.

What say you? Assuming you had adequate equity, would you consider such an investment plan for a newborn as opposed to an 8 year old?

Thanks!

mptfan · Joined: 05 Mar 2007 Posts: 1890

vgindexer · Joined: 21 Feb 2008 Posts: 7

robbing Peter to pay Paul....

Random Musings · Joined: 22 Feb 2007 Posts: 2410 Location: Pennsylvania

Another potential problem:

Interest on up to $100,000 of qualifying home-equity indebtedness is deductible on your income tax return, but may not provide a benefit if you are subject to the alternative minimum tax.

RM

gasman · Joined: 30 Jul 2007 Posts: 222

retired at 48 · Posted: Wed Mar 05, 2008 9:05 pm Post subject:

Hi Helot

I used home equity loans often throughout my investing career, including unusual examples like partly funding a second and third home.

In an unusual case, I currently am living off of a HELOC to provide income tax space to convert Regular IRA's to Roth IRA's. That is, if I take withdrawals from my regular IRA to live, then it ups the taxable income. I'll do this for about four years.

An assumption is that if one can take a $50,000 Heloc, one must have built some equity, such as by paying down the mortgage. Why is it that if we call a loan a "mortgage" it is acceptable, but a HELOC, OH, OH!???

Lastly, HELOC's are great ways to help counteract any upcoming large inflation. It keeps one in a borrowed cash position...great for inflation (I know, this is also controversial). But when I paid back my $126.25 monthly mortgage in the 1970's for a 4 bedroom, 1 acre colonial house in upstate NY, it was so easy to write the check as inflation marched onward! BTW I paid that for 30 years...

Retired at 48

grok87 · Joined: 27 Feb 2007 Posts: 3371

EmergDoc · Posted: Wed Mar 05, 2008 11:50 pm Post subject:

High risk? Yes, but he may need to take that risk if he can't save more and can't bear to see his child take out loans. If he can get a 6% HELOC, and is in a marginal bracket of 40%, and has at least $10,700 worth of other deductions, that's only 3.6% he has to beat. I don't think that is a bad margin rate, especially in a tax-protected account. I'd probably take that bet with a 10 year horizon.
_________________
1) Invest you must 2) Time is your friend 3) Impulse is your enemy
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Helot · Joined: 03 Mar 2007 Posts: 121

Excellent feedback.

I appreciate the different perspectives.

Using the analysis of some of the "pros" suggested by a few of you, it seems it would be an even better deal to embark upon this course with a newborn.

Pros:

Any other thoughts?

Opponent Process · Joined: 18 Sep 2007 Posts: 2898 Location: San Diego, CA

what if the kid doesn't want to go to college?

rob · Joined: 19 Feb 2007 Posts: 391 Location: Here

I dunno.... A lot of us do exactly that by having a mortgage and investing for retirement... Just the time scale is different.

I think some thought of priorities needs to go into this IMO.... For those of us that cannot afford to just pay it, we have to make some choices - any $ spent on the kids education is $ not used to fund our retirement.

* Do we have reasonably enough for retirement with some unknown buffer? - If yes, then it's an optimisation issue of how to invest.
- If not then how do we plan to fund retirement?

There are a zillion loan options for college but apart from a reverse mortgage, I don't see a lot of till death loans going? Am I missing something??
_________________

Rob
Its a dangerous business going out your front door. - J.R.R.Tolkien

Helot · Joined: 03 Mar 2007 Posts: 121

"What if the kid doesn't want to go to college?"

I suppose if that is the case you have a few options:

Choose another beneficiary: another child or granchild would be the most obvious options.

Make yourself the beneficiary and vacation in your retirement as a student. Apparently some international schools are eligible. Perhaps a semester at sea!

Simply hold the account for as long as possible and use it as a retirement account of last resort ....

I'm sure there are much more creative options than these.

NateH · Joined: 27 Feb 2007 Posts: 84 Location: Minnesota

I'm wondering just when it became an expectation for a parent to pay for their children's college expenses? Just 10-15 years ago when I was earning my degree, that was a luxury that only a few students had available.

Aren't student loans, pell grants, part-time jobs and possible scholarships a better deal, overall, than leveraging ones home equity to try to reach for college expenses?

Just wondering how many diehards paid their own way (or most of their own way) through college and want their children to share that character-building experience.

Nate

moneyman11 · Joined: 19 Feb 2008 Posts: 360

Opponent Process · Joined: 18 Sep 2007 Posts: 2898 Location: San Diego, CA

market timer · Joined: 21 Aug 2007 Posts: 3076 Location: -$70K

troglodyte · Joined: 13 Sep 2007 Posts: 45

I don't think I would spend any of my house to fund a college education. I would look at many of the other options that are out there before going this route. Just my two cents worth.

retired at 48 · Posted: Thu Mar 06, 2008 8:36 pm Post subject:

Helot's got it right. This is a tax deferred environment, and it really does not have to be used for his own kids education..Have tax free growth now...worry about consequences later. There are ways out of 529's in the long run.

Retired at 48

safrina · Joined: 15 Jul 2008 Posts: 1

Hello everybody, I am currently making monthly payments to the collection agency that holds my defaulted student loan, my credit is otherwise ok. Will I be able to qualify for a 5% down payment mortgages with my spouse his credit is great, although I make the grossest annual income. Can I qualify for a mortgage with a defaulted student loan? Any input on this topic will appreciate.

avalpert · Joined: 22 Mar 2008 Posts: 1767

Bounca · Joined: 26 Feb 2007 Posts: 735

I would sooner do this HELOC approach to max out ROTHs (which we don't have the capacity to do now) rather than fund 529s for our 3 and 6 year old.

ROTHs first then 529s. It has taken me a while to turn around to this approach. Helot, you may want to pose this to your friend. Maybe, he's maxing his ROTHs already, I don't know.

OptionAl · Joined: 26 Mar 2008 Posts: 391

A big no, in my opinion. Your priorities should be:
1. Meeting your mortgage obligations
2. Saving for your retirement
3. Paying for your child's college
Face it, your child can take care of of at least part of #3, there are student loans, he may not be interested in college, and you can always help by borrowing later. #1 and #2, however, are up to you and you alone.

dmcmahon · Joined: 21 Mar 2008 Posts: 891

Are you guys sure the HELOC interest is deductible? I seem to recall you had to use the money for improvements to the home to get the tax deduction.

Edit: nope I'm wrong: you can borrow up to $100k for any purpose; for larger amounts it has to go towards improvements.

Bounca · Joined: 26 Feb 2007 Posts: 735

grabiner · Joined: 21 Feb 2007 Posts: 3882 Location: Columbia, MD