Pay off mortgage vs. save for college

[sergio]

Hey all,

Got a situation here I was hoping to get some input on.

I recently bought a house. Mortgage of $228,000 @ 4.5%. My monthly payment (PITI + HOA + utilities) is roughly $1800, with $66 of that being PMI. Take home pay after maxing out my 401k, HSA etc. is $5500/month. Have a decent sized emergency fund.

I'd like to start putting away money for my kids college (9 y/o, newborn due in a month, and possibly one more in the next year or two). I'd like them each to have about $50,000 (equivalent in today's dollars) available for when they go to college.

My question is: does it make any sense whatsoever to sock away money now (earning ~2%) for their schooling, or should I pay off the mortgage ASAP (8-10 years)? I'm thinking to pay off the mortgage and then use the cash flow in the future to help out my kids with college.

I do put $1,000 in their 529 plans every year since our state gives us a $500 tax credit. Only the 529 is "invested" in traditional mutual funds, etfs etc. The rest I want to keep in high-yield savings, bonds, CDs etc. due to low risk tolerance and the general restrictiveness of the 529 plan.

 

[nash031]

Based on the arguments you presented above, financially your best move is to pay off the mortgage.

That said, I don't think that's the best overall decision and I think you're being too risk-averse with money that you don't need for 9, 18 and 20+ years.

I would personally let the mortgage ride, invest all of the college savings in appropriate vehicles achieving more than a savings account return. But you do you!

 

[king smoothie]

It looks like you are trying to do what was our goal, pay for half the cost of in state tuition for our children. I have two in college right now (3 more) and we have met/are meeting the goal - but I wouldn't have made it with 2% return. We have also discovered the "hidden" costs of college. Ok, many are not really hidden that well, but most of us tend to not weigh them very much 18 years out. We also discovered it is easy to spend more than you planned. I have heard DW say "I don't want him to be homeless" along with a cash infusion too many times. But as to your question - whichever works for you will move you in the right direction. If the house is paid off before college - that frees up some current income (at that time) for college costs.

 

[joeea]

My monthly payment (PITI + HOA + utilities) is roughly $1800, with $66 of that being PMI.

Why in the world do you have a PMI? Get rid of it as quickly as you possibly can. Then put that money in a 529 plan.

My question is: does it make any sense whatsoever to sock away money now (earning ~2%) for their schooling

With a minimum 9-10 year horizon for one child, and longer for the others, why are you only getting ~2% return?

 

[kgtest]

PMI - Pointless Mortgage Insurance

Pay yourself first by removing that $800 fee each year. Once the PMI is gone, take that $800 and fund a 529 for the state tax credit and/or a brokerage with 75%+ equities. Your time horizon is super long. Go long, and pay down that debt by paying yourself first.

 

[sergio]

Why in the world do you have a PMI? Get rid of it as quickly as you possibly can. Then put that money in a 529 plan.


With a minimum 9-10 year horizon for one child, and longer for the others, why are you only getting ~2% return?

We needed the space for the kids (we were absolutely sick of renting) and we've pretty much settled on the fact that we're staying in our current area for at least 10 years. We have the income, the emergency fund, just didn't have enough time to get to 20% down. We could've put down 10% (maybe 15%), but we opted to go with 5% for the liquidity and to keep a healthy emergency fund.

 

[bloom2708]

Getting to $50k saved for a 9 year old doesn't seem realistic given it was difficult to get 10 or 20% down for the mortgage.

Start small. $50/month per kid into a 529 if you get a state tax deduction. Start with a mix of moderate and aggressive funds. Step the risk back as each child approaches 18 and college. I went to a conservative fund for our college freshman.

We did 50% into 529 and 50% into a taxable account for flexibility. It should cover a 4 year local state school.

4.5% is at the point where that is a pretty good guaranteed return. Tough to get close to the interest deduction at $24k now. So can't say it is only 3.5% with the interest deduction like many did. Even if they just scraped the itemized threshold.

Start small. Save chunks here and there at birthday time. I always found a way to put $1,000 into college for each of the 3 kids on their birthday.

 

[Texas Proud]

Why do you think you will only earn 2% on the college fund?


Also, not 100% up on this but have a bit of knowledge on it... a 529 plan counts a lot more towards what you can 'afford' based on FAFSA then having that money in your regular savings...


So, the tax free growth is a benefit, but it might cost you some benefits later on... now, if you plan to fund 100% of college and are not looking for help in tuition etc. then this is not an issue....

 

[nash031]

PMI - Pointless Mortgage Insurance

Pay yourself first by removing that $800 fee each year. Once the PMI is gone, take that $800 and fund a 529 for the state tax credit and/or a brokerage with 75%+ equities. Your time horizon is super long. Go long, and pay down that debt by paying yourself first.

This is a great point, and I didn't catch it the first time through. You're losing a lot of money on your college savings by throwing PMI payments down the toilet and saving in a savings account. Do whatever you have to do to ditch that $66/month, then start socking that $66/month and then some into Kid 1's savings, and invest it in an index fund. My $0.02.