Efforts to increase financial aid can cloud the big picture
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Q: I have a $125,000, 30-year mortgage with a fixed rate of 6.125 percent. My son will start college in 2013. I wish to have my mortgage paid off by the time I retire in 2019. I also have a home equity line of credit of $22,000, which I hope to pay off by July 2009, after which I can contribute $1,500 per month to 529 accounts for my kids. I can tap into mutual-fund accounts for about $60,000 after capital-gains taxes. If I use that to pay down my mortgage in September 2008, then I can have my mortgage paid off by July 2017. In addition, I have been told that by cashing in my mutual-fund accounts, I will have fewer assets that will be used in the federal student loan application to calculate my portion of the college costs. Is this a viable strategy?
J.G.K, via e-mail
A: Kyle Meyer, a financial planner in Lincoln, Va., would want a more comprehensive look at your financial situation before recommending that you pay off your mortgage. But Mr. Meyer, a registered investment adviser with the National Association of Personal Financial Advisors, says that he definitely would not do this for college financial aid reasons.
"It's a long time until 2013," he says, "and the strategy you mention may not work as well for a private school that may take into account factors that a public institution would not."
"What happens if the child gets accepted to the Massachusetts Institute of Technology or another elite school?" asks Meyer.
In his experience with college planning, Meyer thinks you can make decisions with the idea that they may positively affect the aid application, but they should not be the main driver. What happens if you receive an inheritance in 2013 or a large bonus? The whole strategy possibly is defeated.
Meyer notes that it's better to save in a cost-effective 529 plan. These state-sponsored higher education investment plans will give assets in them a favorable tax treatment from a financial aid perspective.
Q: I am retired, disabled, and have some tax-sheltered money that has earned nothing for the past two years. I want to find a financial adviser who does not sell any financial products.
A: Your best bet is to contact the National Association of Personal Financial Advisors. This Chicago-area group represents financial planners who work on a fee-only basis, as opposed to collecting a commission on investments that they may recommend. You can reach them at (847) 483-5400. Or log onto their website, napfa.org, and search for a planner in your area.
Regardless of who you choose, carefully interview any potential adviser before committing to them. Ask whether they have worked with people in your situation before, so you can see what sort of experience they have dealing with the investments that may interest you.