04 Dec What to do with bonus? Pay debt or college bills?

Q. I expect to get a bonus at the end of the year, and I plan to use it to pay college tuition. I’m paying for college through my HELOC, and there is a balance. Does it make more sense to use the bonus to pay down the HELOC and later make the tuition payment, or should I just send the bonus directly to the college?
— Parent

A. Congratulations on your upcoming bonus.

The best course of action depends on several things, including when your tuition is due.

If it is not due for a few months, then there is no benefit to paying the college early, said Dawn Brown, a certified financial planner with Lassus Wherley in New Providence.

If that’s the case, she said, reducing your home equity line of credit may be the best course of action. You can always tap the equity line in the future if you need more funds for tuition.

You should also think about interest rates, given that we are in a period when rates are rising, Brown said. That means lowering the balance on the HELOC will reduce your overall costs for the loan.

“Also keep in mind that the interest paid on the HELOC is not tax deductible as you are using the funds for tuition and not related to the purchase or improvement of your home,” Brown said.

We imagine cash might be tight with those tuition payments, but maybe it’s time to take another look at your overall spending.

“It may be useful to examine your overall budget to see if you can find funds in your income in addition to the bonus to help pay your tuition and keep the balance of the HELOC low,” Brown said.

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