PBS NewsHour business and economics correspondent Paul Solman is now answering questions from Next Avenue visitors about personal finances, business and the economy. His advice will appear on Next Avenue as well as Solman's PBSNewsHour blog, Making Sen$e With Paul Solman,
and the Rundown, NewsHour's blog of news and insight. PBS NewsHour is an hour-long television news program and accompanying website with the mission of providing intelligent, balanced and in-depth reporting and analysis of the day's most important domestic and international issues and news.
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What's the smartest way to fund your kids' college careers? Last year we cashed in some stock and got killed with tax penalties because it looked as though we had a windfall. In fact, we've already stashed some stocks for retirement … which all of a sudden isn't that far away. Taking out a home-equity loan scares us a little (the house will be paid off in eight years). I'm not sure what to do. —Valerie Smith Sheehy
I don't understand, Valerie. You think you would have been better off if you waited for your stock to drop in value before cashing it in, just to avoid a bigger tax bite? Do you see how that makes no sense? It makes even less sense if you believe, as I do, that the tax rates on capital gains are more likely to go up than down.
As for taking out a loan to pay for college, there is one criterion and one criterion only: the interest rate. Get the lowest rate you can. Generally, that will be a home-equity loan, which has another virtue: the lender can't grab the collateral for the loan — your house — should you go bankrupt.
Now comes the hard part. I suspect you're really asking whether you should cash in assets or take out a loan. Here, the calculations can be somewhere between tricky and impossible, but the essential principle is easy to grasp.
Consider, for example, a $10,000 loan versus withdrawing $10,000 from an account.
The basic issue is cost: Which option will cost you more? Say the loan is at 5 percent. Is that a higher rate, after taxes, than you figure to make on $10,000 you've got invested? You can see the complications, I hope.
My wife and I maintain a mortgage on our home because we'd have to liquidate all our non-retirement financial assets to become free and clear. Like you, we don't want to draw down our tax-deferred accounts if we don't have to. Our situation isn't about paying for college, but the thinking behind whether to make loan payments or cash in our savings is just the same.
Paul Solman is a member of the Twitterati and can be followed at Twitter@paulsolman. His daily blog can be followed, well, daily at Making Sen$e by linking here, or just Googling the words: "Making Sense."