Pay Down Mortgage or Contribute to Son's 529?

Pay Down Mortgage or Contribute to Son's 529?

I just sold my house and moved in with my new husband. We have

three children between us (two are his) and are looking for a bigger

house. Would it make sense to save the $30,000 from the house sale in

my son’s 529 college savings plan account (he is 13 now), or use this

money to buy a house and get a home equity loan to pay off his school

loans later? Would the $30,000 in his 529 college savings plan reduce

the amount of financial aid my son will get?

— Luda B.

Contributing the $30,000 to your son’s 529 college savings plan

account will likely maximize your overall return on investment. The

after-tax interest rate on the mortgage is probably lower than the

tax-free return on investment from the 529 plan, so you will earn more

from the 529 plan than you will save in mortgage interest.

The amount of money you plan on contributing to your son’s 529 plan is

greater than the current annual gift tax exclusion of $13,000 per

recipient ($26,000 if you and your husband give the gift as a couple).

If you contribute the money as a lump sum in a single year it will

trigger five-year gift tax averaging. You can avoid the five-year gift

tax averaging by giving up to the annual gift tax exclusion now,

before the end of the year, and the rest next year.

Fixed-rate home equity loans have interest rates that are slightly

higher than the fixed interest rates on the Parent PLUS loan and much

higher than the interest rates on the Stafford loan. It does not make

sense to plan on using a higher cost home equity loan to pay off your

son’s more favorable student loans. (Home equity lines of credit may

be currently competitive with the Stafford loan, but the interest

rates are unlikely to remain as favorable over the life of the

loan. The interest rate on a HELOC is variable while the interest rate

on the Stafford loan is fixed.)

Since you mentioned contributing the money to your son’s 529 plan and

not to all three children’s 529 plans, it seems that you want to treat

this money as separate property. If you were to use it to help pay for

a new house it would be treated as joint property.

The net home equity for a family’s principal place of residence is

ignored on the Free Application for Federal Student Aid (FAFSA). (The

CSS/Financial Aid PROFILE, which is used by about 250 private

colleges, does consider net home equity capped at 2-3 times annual

income.) On the other hand, money in a 529 plan is treated as a parent

asset on the FAFSA of a dependent student. Less than 4% of dependent

students have any contribution from parent assets. Besides the family

home, money in retirement plans is ignored as an asset and there’s an

age-based asset protection allowance that shelters around $50,000 in

parent assets for most parents of college-age children. Low-income

families may have all their assets ignored on the FAFSA. In a

worst-case scenario as much as 5.64% of the 529 plan account’s value

will count against your son’s aid eligibility (i.e., $1,692 on $30,000

in assets). But Congress is likely to pass legislation that will

ignore all assets on the FAFSA by the time your son enrolls in college.

Source: Fastweb

from Student Loan Debt Relief Now http://ift.tt/2x0sOy3
via Student Loan Debt Relief Now