As with so many financial strategies, this is better understood when viewed through the lens of a “real world” scenario:
Mom is 47, Dad is 52. They have three kids—the oldest is headed off to his dream college next fall because he moved off the wait list and was offered admission after the May 1st National Decision Day deadline. The middle daughter will be a junior in high school and their youngest is entering the 8th grade. The parents have a 529 Plan for each child and have saved a total of $85,000 in those accounts.
The college-bound student is ecstatic (got into his dream school!) and the parents are in shock (not many discounts offered for a late admit, resulting in an out-of-pocket cost totaling $50,000 for the freshman year—likely to increase by a little over 4 percent each year following). Panic begins to set in; they realize the conventional approach to saving and paying for college falls well short for their oldest child, let alone the two that follow.
This is an ideal time for a deep dive into cash-flow planning that evaluates the use of efficient and effective financing sources. No rocket science here—just common sense prioritization of the financing option available to this family. A quick review of where they can “rent” cash flow for college might include the following:
Home Equity Line Of Credit (HELOC)
• Interest only payments make this much easier on monthly cash flow.
• Allows the family to use capital “trapped” in bricks and mortar during the college years and then refinance after all students have finished college.
Insurance Company Line Of Credit (ILOC)
• Interest only payments make this much easier on monthly cash flow.
• Unstructured loan repayment allows parents to pay back at their discretion, over longer periods of time.