DEAR DAVE: My wife and I have $25,000 in credit card debt, $2,500 in medical bills and $89,000 each in student loan debt from when we each got our master’s degrees. We make about $100,000 combined. Our son is 6 years old, and we have $18,000 in a 529 plan for him. Should we use that money to pay off debt instead?
—Sean
DEAR SEAN: I wouldn’t do that, if I were you. You’ll get destroyed with penalties, because if you take money out of a 529 for anything other than college, you’ll be taxed at your current tax rate and hit with a 20 percent penalty. The other thing is, you’ll have this weird feeling that you took money away from your kid.
Technically, it’s your money. You put it there. But when you did, it was in your child’s name. Plus, that doesn’t really solve your problem. You’ve got a ridiculous amount of debt, and that little bit won’t move the needle very much. Having more money in your hands isn’t the big answer here. What you both need is a behavior change when it comes to money.
My advice is to leave the 529 alone. Stop adding to it for the time being. Put any retirement saving you’re currently doing on hold, too. You guys need to start living on a budget, working a debt snowball plan and looking for extra income. Even tutoring would bring in some additional cash. I’ve got a feeling, too, that those master’s degrees can provide you with more money than you’re currently making.
It can be done, Sean, but it’s going to take a lot of hard work and discipline. It may even take four or five years to get this mess cleaned up, but you can’t keep living without a plan.
—Dave
