Investing Stuff
These vehicles are also very different investments. The 529 will offer stocks and bonds, whereas the mortgage paydown will offer a risk-free 6.25%. The 529 has some vulnerability to inflation, but the real estate is thought to be an indirect inflation hedge. Then there are liability, tax, and lumpiness of cash flows implications, among other differences.
We can take some factors off the table if we can answer a question: Will you own the real estate regardless of whether you pay down the mortgage or not?
If so, you will still be exposed to the investment risk/return and inflation benefits of RE either way. Through this lens, paying down the mortgage versus doing the 529 comes down to a choice between market returns and a sure 6.25%. Already we can see it would probably not make investment sense to fund the 529 with a large allocation to bonds yielding 4-5%.
What happens in a few years if you get the opportunity to refinance the properties at 4-5% after paying down most of the mortgage when it was 6.25%? Do you borrow extra and pile money into the 529 at that point?
And is it reasonable to expect an 18 year old to be capable of managing an investment property and earning sufficient cash flow to pay for college? Do they skip a semester if the house needs a roof?
Human Behavior Stuff
Finally, there is the issue of ownership. Paying down the mortgage increases your net worth, while funding the 529 increases your kids' net worth. This is a bigger deal than it seems when one's kids are toddlers.
There may arise conflicts in the teen years where the money you would have gifted to them at age 3 will not be gifted at age 18. What if you disagree with their sexual practices, drug and alcohol use, or their new religion? What if they are simply spendthrifts? What if by this time they've been stealing, lying, and betraying you for years? What if they want to spend all the money to get an art school degree, or major in choir with a minor in philosophy at an expensive private school?
Is it your intent to leave open the possibility of withholding educational funding as a means of exerting influence later, or of not wasting the money if the kids are going to waste it? The stage you set today will map out these future conflicts. In general, will you try to direct their late-teen lives or will you draw a strict boundary between your duties as a parent and their responsibilities as adults who will be leading their own lives (and experiencing most of the consequences)? For a toddler parent, it's an easy call: You're in charge of everything. For the parent of a high school senior, there's much more nuance and the nagging awareness that it's time to let go.
Even worse, the kids may not feel like they can afford to pursue a path without the 529 because they have zero net worth and would have to beg for free money from you. Thus they decide not to do med school because they don't want to either go into debt or show up hat in hand at their parents' doorstep every semester when the bill is due. In this tragic scenario, the money would be there but the customs of ownership and the shame of accepting gifts would prevent its gainful use. The kid tries their hand at selling cars instead of getting a law degree, or becomes a veterinary tech when they'd otherwise have become a doctor. They prioritize getting on their own two feet financially at the expense of a different possible future.
Even if you only want an extra house so that you can rent it to the kid at a discount, or free, think about the conflicts that will arise when they trash the place, or bring in a smoker as a roommate, or adopt 6 cats. I'd never want to rent to a family member or friend. Can you evict your child and throw their stuff on the street corner without destroying your most prized relationship? Either gift them the house or don't.
