529 or mortgage?

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notmyhand
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529 or mortgage?

Post by notmyhand » Sun Jul 07, 2019 8:50 pm

I am feeling a little guilty and need some reassurance. Can I continue paying off my mortgage before turning my attention to the 529?

Background:
-All retirement accounts are being maxed
-1 child, 9 months old, currently has one year of room & board plus tuition for state school in 529 (35k). Goal is to put in 140k and hope it is enough to pay for state school.
-DH's and my salary are okay, majority of our income comes from our bonuses which are paid quarterly
-Our current expenses equal our current salary, our bonuses are being used for savings.
-Jobs are highly volatile, and we both work at the same company
-Mortgage: 158k left on 425k house at 3.75% (not conforming due to acreage) 15 year mortgage, 2.3k p&I plus 1k taxes/insurance
-State gives 529 deduction for up to 30k but state deduction is lower than mortgage rate

We are hoping to start trying for our second child soon. Unfortunately, we cannot pay an additional daycare expense (2k) from our salaries and I feel highly uncomfortable relying on our bonuses to pay for everyday expenses. Therefore, I want to take two years and finish paying off our mortgage which will drop that expense. Then I will be able to dump all extra money (not counting what is going into retirement accounts) into the 529s.

However I am worried that giving up the two years of time in the market will mean not enough returns to pay for undergrad by the time my child goes to college. For some reason, I also feel guilty not putting something away for my child but if I put everything (not counting retirement money) toward the mortgage then I can breathe better regarding my expenses once it is done.

What would you do - 529, mortgage, or some combination of both and why?

ccieemeritus
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Re: 529 or mortgage?

Post by ccieemeritus » Sun Jul 07, 2019 9:27 pm

No need to feel guilty:

1) You're taking care of your own retirement. As a result you will not be a burden on your (then grown up) kids in retirement. Retirement savings is a higher priority than college savings because kids can borrow for college but retirees _cannot_ borrow for retirement.

2) Your house is a home for all your family members, including your kids.

3) Your jobs are highly volatile. Having an emergency fund is important. But decreasing your debt will improve your flexibility in case of job issues.

4) Your child is only 9 months old. While starting the 529 early is a help thanks to compounding, decreasing your debt will also help thanks to compounding. You have plenty of time. It is not necessary to save the entire tuition/fees/room/board for college in advance. Saving a substantial portion will decrease the burden. Your child can contribute by taking a reasonable amount of loans. You'll also have home equity in case you want to use it as collateral for a supplemental loan.

It is a bit early, but the most important thing is to encourage the kids to major in something with good job prospects.

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Vulcan
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Re: 529 or mortgage?

Post by Vulcan » Sun Jul 07, 2019 9:28 pm

Prioritising paying off mortgage vs 529 is the right thing to do if you may qualify for need based financial aid.

In any case do not start a 529 until retirement accounts are being maxed out.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

Jack FFR1846
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Re: 529 or mortgage?

Post by Jack FFR1846 » Sun Jul 07, 2019 9:38 pm

Take out a HELOC. Then pay down the mortgage. If you need to get that money out later, you can. US Savings Bonds are another potential way to get tax free growth without the penalty if you don't use it for education.

Understand what you can get for tax benefit from your state wrt 529s. Some states have great benefits, some have zero, some have limited benefit.
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grabiner
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Re: 529 or mortgage?

Post by grabiner » Sun Jul 07, 2019 10:58 pm

notmyhand wrote:
Sun Jul 07, 2019 8:50 pm
I am feeling a little guilty and need some reassurance. Can I continue paying off my mortgage before turning my attention to the 529?
You don't need to feel guilty; both of these are investments. If you make an extra mortgage payment this year, you will eliminate future mortgage payments, and those payments can go into the 529 plan. It looks like your mortgage has about seven years left, so an extra $1778 you pay on the mortgage now can be treated as a dedicated payment of $2300 seven years from now when the last month's payment is eliminated.

The difference between your situation and the common question of paying down a mortgage versus investing is that 529 contributions are not limited. If you cut back on 401(k) contributions to pay down your mortgage, you may be unable to make that up later because of the 401(k) limit; this does not apply with 529 plans.
-Mortgage: 158k left on 425k house at 3.75% (not conforming due to acreage) 15 year mortgage, 2.3k p&I plus 1k taxes/insurance
Unless you donate a lot to charity, this isn't enough for you to itemize deductions, so a prepayment is a risk-free 3.75% return, and that is better than the return you can earn if you make a low-risk investment in the 529 plan. (If you want to take more risk, you can do that by moving investments from bonds to stocks, whether you pay down your mortgage or not.)
State gives 529 deduction for up to 30k but state deduction is lower than mortgage rate
With the state deduction up to $30K, you'll have plenty of time to benefit from that deduction in the future.
We are hoping to start trying for our second child soon. Unfortunately, we cannot pay an additional daycare expense (2k) from our salaries and I feel highly uncomfortable relying on our bonuses to pay for everyday expenses. Therefore, I want to take two years and finish paying off our mortgage which will drop that expense.
This is the other advantage of paying off the mortgage; you will reduce your needed emergency fund because you have $2300 less per month that must be spent.
Wiki David Grabiner

cshell2
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Re: 529 or mortgage?

Post by cshell2 » Mon Jul 08, 2019 8:27 am

Vulcan wrote:
Sun Jul 07, 2019 9:28 pm
Prioritising paying off mortgage vs 529 is the right thing to do if you may qualify for need based financial aid.
Unless you're applying to schools that use the CSS profile. In that case home equity is taken into account as well.

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Vulcan
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Re: 529 or mortgage?

Post by Vulcan » Mon Jul 08, 2019 8:30 am

cshell2 wrote:
Mon Jul 08, 2019 8:27 am
Vulcan wrote:
Sun Jul 07, 2019 9:28 pm
Prioritising paying off mortgage vs 529 is the right thing to do if you may qualify for need based financial aid.
Unless you're applying to schools that use the CSS profile. In that case home equity is taken into account as well.
Only at some schools.
Many of the top ones don't.

http://www.thecollegesolution.com/will- ... d-chances/
If you torture the data long enough, it will confess to anything. ~Ronald Coase

pyld76
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Re: 529 or mortgage?

Post by pyld76 » Mon Jul 08, 2019 8:50 am

Your kids can borrow themselves into debtor's prison forever to pay for college. You cannot do that for retirement, or a house, or (almost) anything else. There's admittedly a good bit of human emotion involved in any decisions regarding one's kids.

People have made the point that once you've got the mortgage zero'd that you feed the 529 with that income stream and that you can potentially lessen the need for an emergency fund and if you have a HELOC to draw on if things go really bad, and so forth. This is good stuff.

Unrelated observation from someone who has been there: ignore the bonus potential and budget to your actual income, particularly if you don't have the most stable of profession and you and your spouse work at the same place. You have a good bit of employer risk on the table there. Candidly, this is another reason I'd tend to drift towards paying the mortgage: from what you've shared about your situation, I'd be far more concerned about your short/medium term funding risks in light of your household employment situation and trying to lessen them (say, by eliminating the mortgage) rather than a series of events 16 years off and change that your children can take on ostensibly unlimited debt without a whole lot of downside (or, minimizing the impact of you and your wife simultaneously losing your jobs should be higher on the list than whether or not your kid has to pay %10 of their take-home forever in student loans).

cshell2
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Re: 529 or mortgage?

Post by cshell2 » Mon Jul 08, 2019 8:52 am

Vulcan wrote:
Mon Jul 08, 2019 8:30 am
cshell2 wrote:
Mon Jul 08, 2019 8:27 am
Vulcan wrote:
Sun Jul 07, 2019 9:28 pm
Prioritising paying off mortgage vs 529 is the right thing to do if you may qualify for need based financial aid.
Unless you're applying to schools that use the CSS profile. In that case home equity is taken into account as well.
Only at some schools.
Many of the top ones don't.

http://www.thecollegesolution.com/will- ... d-chances/
I wouldn't say "many". That list only had 13 schools that utilize CSS that ignore home equity. Just saying, it's not a universal truth that home equity is better for financial aid than a 529.

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Vulcan
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Re: 529 or mortgage?

Post by Vulcan » Mon Jul 08, 2019 9:01 am

cshell2 wrote:
Mon Jul 08, 2019 8:52 am
Vulcan wrote:
Mon Jul 08, 2019 8:30 am
cshell2 wrote:
Mon Jul 08, 2019 8:27 am
Vulcan wrote:
Sun Jul 07, 2019 9:28 pm
Prioritising paying off mortgage vs 529 is the right thing to do if you may qualify for need based financial aid.
Unless you're applying to schools that use the CSS profile. In that case home equity is taken into account as well.
Only at some schools.
Many of the top ones don't.

http://www.thecollegesolution.com/will- ... d-chances/
I wouldn't say "many". That list only had 13 schools that utilize CSS that ignore home equity. Just saying, it's not a universal truth that home equity is better for financial aid than a 529.
I said "many of the top ones".
I guess it depends on how one defines the "top":)
If you torture the data long enough, it will confess to anything. ~Ronald Coase

cshell2
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Re: 529 or mortgage?

Post by cshell2 » Mon Jul 08, 2019 9:16 am

Vulcan wrote:
Mon Jul 08, 2019 9:01 am
cshell2 wrote:
Mon Jul 08, 2019 8:52 am
Vulcan wrote:
Mon Jul 08, 2019 8:30 am
cshell2 wrote:
Mon Jul 08, 2019 8:27 am
Vulcan wrote:
Sun Jul 07, 2019 9:28 pm
Prioritising paying off mortgage vs 529 is the right thing to do if you may qualify for need based financial aid.
Unless you're applying to schools that use the CSS profile. In that case home equity is taken into account as well.
Only at some schools.
Many of the top ones don't.

http://www.thecollegesolution.com/will- ... d-chances/
I wouldn't say "many". That list only had 13 schools that utilize CSS that ignore home equity. Just saying, it's not a universal truth that home equity is better for financial aid than a 529.
I said "many of the top ones".
I guess it depends on how one defines the "top":)
Well, from my personal position, my son would never get into Harvard or MIT, but he could get into a lot of private schools that aren't as selective that use CSS. CSS would kill us actually for several reasons, so we had to cross all those schools off our list.

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Vulcan
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Re: 529 or mortgage?

Post by Vulcan » Mon Jul 08, 2019 9:43 am

cshell2 wrote:
Mon Jul 08, 2019 9:16 am
Vulcan wrote:
Mon Jul 08, 2019 9:01 am
I said "many of the top ones".
I guess it depends on how one defines the "top":)
Well, from my personal position, my son would never get into Harvard or MIT, but he could get into a lot of private schools that aren't as selective that use CSS. CSS would kill us actually for several reasons, so we had to cross all those schools off our list.
It's a complicated game with many variables, indeed.

Our elder is applying to a number of schools on that list this year, and paying off the mortgage was a decision we are unlikely to regret even if he does not win the admission lottery.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

rj342
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Re: 529 or mortgage?

Post by rj342 » Mon Jul 08, 2019 9:53 am

It is not an either/or in any case.
It is only natural as a parent to want to help your children avoid college debt, and I would think a certain moral duty to try to help with college, particularly if you received help from your own parents.
HOWEVER, IMO there is NO moral obligation to pay for their entire higher education if you're not rolling in money.

A compromise would be focusing on the mortgage but perhaps doing some early seeding of the 529s, to return to them later once mortgage paid off.

I guess one more angle wrt to degree of mortgage prioritization is how likely are you to stay put in that house long term? If one or both lost your current job, how likely would you be forced to move to another city for employment?

janezoey
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Re: 529 or mortgage?

Post by janezoey » Mon Jul 08, 2019 1:15 pm

I didn't catch how much salary you make or how much emergency funds you have saved. But I look at my finances this way: I rather not have all my networth tied up in my house. Yes, there's better cash flow once the mortgage is done, but you still need to fork over a $1,000 in taxes and insurance every month. So if you both lost your jobs or one of you had to stay home to take care of a family member, can you survive for a long time paying the bare minimum ($1,000 a month for tax and insurance and utilities and food)? The interest rate of 3.75% is really good and is barely above inflation. Once all that money ($425k?) is in the walls of your house, taking the money out again might involve a higher interest rate or selling your house.

I'm not counting my liabilities, but this is roughly the percentage I keep my assets:
Retirement Accounts: 45%
Accessible Cash/Taxable Accounts: 25-30%
House: 20% (how much I've put into the house)
529: 5-10%

The above is my comfort level because I'm skittish and paranoid and also have elders to worry about. It's quite arbitrary because everyone lives in different regions of the country and have different income levels and saving rates. But I know that if I'm 30-something and most of my money is in my house instead of retirement and accessible money, I would be nervous. You should do whatever is comfortable for you.

Lately, I've been warily loading up my 529 accounts. My goal was to get to $354K for two kids in 18 years. If I put in $12k each year for 18 years, I'll probably reach the goal. I would have put in $216k and market gains would be around $138k. Not counting state deductions, I would have saved ~$20,700 in capital gains taxes. If I frontload $30k the first 5 years, and then for the next 13 years, I annually added $1,400 into the accounts, I would reach the same goal of $354k. The principle would be $168,200 and the market gains would be $185,800. I would save $27,870 in capital gains taxes. The difference between frontloading earlier or loading steadily over time is around $55k. Personally, I think the market is at an all time high, so I'm not in a hurry to front load. Perhaps if you calculated the difference between slow-and-steady vs early front-loading, you'll then ask yourself are the gains and tax deductions really worth it to you.

A mortgage rate of 3.75% is really, really good. It would be near the bottom of my list to pay off. (But then again, my mortgage+tax+interest+insurance is under 16% of our household income.) I do pay a little bit extra toward the principle every month, but I know friends that make $200k+ want to recast their loans with a big chunk of money but aren't even maxing out retirement accounts. But what are they saving overall--maybe X amount in mortgage interest (not considering deductions or inflation)? Yes, they gain some cash flow, but they are assuming they will continue to have jobs. They do not have large emergency reserves if they use everything to pay off the mortgage early. In an emergency, they would have to fall back on credit cards or taking money out of retirement which involves penalties. If they both lost their jobs at the same time, it's not like they can just go get a HELOC easy-peasy. If they are in their 30s and 40s, they might ride out a long recession all right and get employment within a year. But if they are in their 50s, they have a real chance of never getting re-employed again. So they have to make sure their savings accounts can generate enough money to pay for the bare minimum until they reach retirement age.

I just think you have to keep everything balanced to reach overall goals. You can hit each goal one by one in a big hurry, but how much are you really saving in exchange for peace of mind? It sounds like you are relying on bonuses, you're jobs are volatile, and the house payments are high enough to make you worry. If any of that is true, perhaps beef up the emergency funds by a lot more before you tackle the 529 and mortgage.
Last edited by janezoey on Mon Jul 08, 2019 2:25 pm, edited 18 times in total.

DaftInvestor
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Re: 529 or mortgage?

Post by DaftInvestor » Mon Jul 08, 2019 1:31 pm

pyld76 wrote:
Mon Jul 08, 2019 8:50 am
Your kids can borrow themselves into debtor's prison forever to pay for college.
Not really - the amount of student loans a kid can take on without an adult-cosigner is limited.
(I realize this probably wasn't your point and you probably know this but I wanted to point this out for others reading. There seems to be a misconception out there that kids can simply borrow as much as they want to get themselves through an expensive college.)

OP: I took a mixed approach (as someone above stated). I payed additional amounts to my mortgage while also continuing to save for college. It doesn't have to be all one or the other.

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