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Question:


I received a $30K settlement check. Should I pay my mortgage debt or save for upcoming college costs for my 2 teens? My home is worth $400K. I have a mortgage (5 yrs left, $48K at 4.75%) and a home equity loan (19 yrs left, $38K at 2%, adjustable).
-DK


Answer:


You have very little debt and plenty of equity in your home. That puts you well ahead of many other people. Because you owe so little and the interest rates you are paying are so low, your best bet seems to be to put the money aside for your kids’ college expenses. What makes this an especially good choice is that you can get some help from the federal government and your state by setting up a tax-favored 529 plan.
 
These plans hold assets intended for tuition and other higher education expenses. Interest, dividends and capital gains accrue free of federal and state tax, and some states also allow a tax deduction on contributions. Between the tax advantages of a 529 plan and the tax breaks you would be losing by paying down your outstanding loans early and foregoing the mortgage-interest deduction on them, putting your windfall into a college fund seems the right way to go. For more on 529 plans, have a look at this very authoritative website: savingforcollege.com.
-Conrad de Aenlle



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