Monday, February 22, 2010

Which little piggy? Pay off debt? Or save for college?

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So here's a question I haven't been able to work out. My two kids are smart (or I like to think so) and I predict expensive tuition bills in our future, starting in about 6 years.

We have been saving for college (with some help from Grandma and Grandpa) since they were born.  What with the volatility in the markets and in our incomes, there isn't much in those 529 accounts.

We're in serious debt to the IRS, the State Department of Revenue, credit card issuers, business and mortgage lenders. Our current priority is to pay off the tax bills first and then start making a dent in the other debt.

We are contributing about 10% to my 401K plan at work, with a generous company match. (That seems like the right thing to do and keeps the taxes down on our current income).

So a friend of mind suggested that we'd be better off taking the money going to the 529 college savings plans (which grows tax-free) and using it to pay off our back taxes or other debt. That the more money the kids have when they go to college, the less financial aid they will get. We're not paying much into those accounts, but we're paying some, just to keep the habit going.

I've googled about this, but haven't seen it addressed by any of the debt-reduction strategists.

Thoughts?
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