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Borrow to Fund 529s?

Question: My wife and I have no debt except for $23,000 from a home-equity line. This year, she took some time off, reducing our income and meaning that we might not be able to save into our 529s for two sons, ages 6 and 4. (We will save $36,000 for retirement this year.)

My question: Should I borrow $10,000 from our Home Equity line to fund these 529s? My argument is that I immediately get the NYState 6% tax reduction for that whole $10,000 ($600), that the Home Equity interest rate is small (4.75%) and deductible so effectively even smaller (3.5%), and that there is a lot of upside with the market at about 11,500. My wife's argument is that I am completely nuts. Thank you for your (gentle) reply. David, Amherst, NY.

Answer: No, I'm not going to say you're nuts. And you can make the numbers work if you use the stocks market's average annual rate of return of some 7% (after taking inflation into account). Problem is, the flaw with using averages is that Lake Erie never freezes and stock market returns don't fluctuate.

We get variations of this question all the time. What's unusual about your query is the timing. Usually people want to borrow and put the money into whatever asset is flourishing at the time--Internet stocks, residential real estate, and so on. Right now, it seems that just about everything is weak: The economy, the job market, homes, stocks, even commodities.

Leverage is risky. Borrowing to invest in stocks and bonds can backfire badly since you need to make those interest and principal payments even if the assets you've bet on cratered. So I wouldn't do it.

To put it somewhat differently, I don't think the potential rewards justify the risk. It's wonderful that you are saving for your children's college education. But they'll still be able to go to college even if you don't save in their 529s for a year or two. Maybe they'll have to borrow a bit more to pay for college. But that's the biggest downside I can see.

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