Q: My wife and I have remaining federal student loans of $26,000, with a 3.9% interest rate. Is it best for us to increase our monthly payment from $175 to $300 to pay it down more quickly? Or should we put $125 a month into a 529 plan for the children we plan to have in the next two years?
A: The decision to pay down your student loans or to save money in a 529 plan should include both the financial and emotional aspects.
First consider your overall financial situation. For example, setting up an emergency fund and getting your full 401(k) employer match may be more beneficial uses for the extra cash.
Then compare the advantages of paying off a student loan against what you would gain by putting money in a 529 plan:
A 529 plan is federally tax free and many states also offer tax breaks. But remember that the investment return is not guaranteed. You will be comparing an uncertain investment return on the 529 plan for a child you plan on having to a guaranteed interest rate on your own student loans.
With federal student loans you can deduct up to $2,500 in interest. And you can take it without itemizing on your 1040 tax form. The deduction is phased out for taxpayers with adjusted gross incomes of $60,000 to $75,000 (single filers) and $120,000 to $150,000 (married filing jointly).
Once the loan is paid off, you will have extra monthly cash flow that you could use to save for college. Sometimes the emotional satisfaction of paying off the loan trumps other financial considerations.
Since your children are "planned," you can set up a 529 plan and name yourself as the beneficiary, and change the beneficiary later. The downside of a 529 plan is that withdrawals that are not used for qualified college expenses are subject to tax and a penalty.
Since you are still planning for a family, keeping your options flexible is a good approach. You can now save money in a taxable account and make a lump sum initial contribution to a 529 plan after your child is born.
But keep in mind that saving for retirement is usually a higher priority than saving for college.
Tim Kober,NAPFA-registered financial adviser
Cedar Financial Advisors, Beaverton, Ore.
Read previous Money Watch columns:
Retiring home downsizer wonders where to park his money
401(k) a bad option to pay off credit card debt
Hold on to your house a bit, or sell it now?
Money Watch: Investing tips to help put kids through college
Money Watch: How do I make my 401(k) last after retiring?
How to wisely invest an inheritance
How should I invest my money in retirement?
Should I borrow from 401(k) to invest in gold?
How to secure steady retirement income
Protecting retirement savings for the long haul
Is using a home equity loan to pay off mortgage a good idea?
When saving for retirement, even small steps pay off
Pay off debt first or contribute to 401(k)?
How to tell if your stockbroker's on your side
Where can I find a CD yielding 5%?
Government retirement? Keep savings diversified
Tapping into your 401(k) early can be costly
Racing: Top jockey calls for action on prize money - This is Gloucestershire
On The Rails with Jonathan Herbert:
Top jockey Robert Thornton has joined the calls for action over dealing with low levels of prize money in racing.
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Robert Thornton
The 15-time Cheltenham Festival winner says it is “ridiculous” some races are worth less than when he first started riding nearly 20 years ago.
Away from the top levels of the sport at Cheltenham, where tariffs aren’t an issue, prize money sometimes hardly covers training fees.
The decision by top trainers to boycott a £3,000 race at Worcester because prize money fell £900 below tariff – the figure recommended by the Horseman’s Group – brought the issue into sharp focus.
With the agreement of other trainers who pulled their horses out, Nigel Twiston-Davies’ Moulin De La Croix walked over.
The winnings will go towards paying fines imposed by the British Horseracing Authority upon trainers who boycotted the race.
Among those to declare their horses as non-runners were leading lights Jonjo O’Neill, Philip Hobbs and Donald McCain.
Thornton (inset) believes putting on fewer ‘poor’ races, meaning the money currently available isn’t spread as thinly across the sport, was one possible solution.
He also suggested bookmakers, through the Levy Board, and the owners of racecourses could be asked to contribute more.
“It definitely needs sorting out, it’s not good for owners, it’s not good for anybody,” said Thornton, who turned 34 today.
“I’d love to see from now on that races below tariff have no entries, but it’s about getting everyone singing from the same hymn sheet.
“The lower levels need to be brought up. I have no idea how it will be resolved and I don’t think it will be resolved quickly.
“It’s probably not a great way of looking at things and it’s not going to suit everybody, but less of the poor racing is a route I’d go down.
“I don’t know whether it would work or not and I don’t pretend to be that much in the know about it all, but it seems ridiculous that we’re going round now for less money than when I first started nearly 20 years ago.”
Thornton said the decision, led by trainer Charlie Mann, to boycott the Worcester race wasn’t a move that would have been taken lightly.
“The only thing that was probably similar was the threat of strike action over the whip rules, but we’re not the sort of people to do something like that,” he said.
“I read a comment from one bookmaker that what happened at Worcester isn’t the way to treat the betting public, but what about us?
“I realise that without them maybe there wouldn’t be a sport, but we’re providing the sport as much as anything.”
The chairman of Cheltenham and Three Counties Race Club, Mary Philpott, said the trainers had no option but to boycott the race in order to highlight the issue.
She wants bookmakers to contribute more money to the sport.
“My own personal view is that prize money is too low,” she said.
“I’ve owned racehorses and no one goes into it looking to make money, but it would be nice to get a bit back for winning or being placed.”
Racecourse owners Northern Racing and Arena are in discussions with the Horsemen’s Group – representing owners, trainers, jockeys and stable staff – aimed at making sure all their races meet tariff.
Boycott stirs up mixed emotions
THE decision to boycott a race at Worcester in protest at prize money has received mixed views from trainers in Gloucestershire.
Kim Bailey didn’t have a runner in the race but he supported the move and would have taken part in the boycott if he had.
“We, as an industry, desperately need people to own racehorses and enjoy their racing,” said the Andoversford trainer.
“We employ a large number of people and not only that but a large number of people including vets, blacksmiths, tack shops, feed merchants, farmers etcetera depend on those owners supporting racing.
“We have a great sport and a healthy one, which considering the financial climate is staggering. What we don’t need to do is shoot ourselves in the foot by offering peanuts as owners are certainly not monkeys.”
Stow-on-the-Wold trainer Graeme McPherson said it was good that prize money had become a high-profile issue.
But he added: “I see that there is a need to do something about levels of prize money but I’m not convinced that this sort of pressure is the right way to go about it.
“I see the sponsors are really disappointed and Worcester Racecourse will be too.
“I think it’s about going back to basics. For the racecourses to put more money into the prize fund they have got to generate more revenue.
“That means getting more people coming in through the gates. We need to work on persuading people to go racing on Saturday rather than the football, or on a Thursday rather than going to the pub.
“I’m sure owners with horses in the race at Worcester were in support of the move, but owners would have had to pay an entry fee.
“It seems that at the same time owners are saying there’s not enough prize money they’re are writing off money just like that.”
Trainer Chisman fears further woes
Harry Chisman’s campaign to arrest the sharp decline in the number of racehorse owners because of low prize money was highlighted in On the rails in May.
Reacting to the trainers’ boycott at Worcester, the Stow-on-the-Wold trainer said: “I totally sympathise with their frustration but the action is going to be ineffective overall because it doesn’t have the support of enough owners.
“Already the British Horseracing Authority are getting bolshie and saying they’re thinking about fining trainers involved for breaking the rules.
“It’s just more fragmentation.
“It’s the same as the deal with Betfair. Signing a deal with one betting company isn’t going to help the overall position.”
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