The stock market tanks over the next year, and the funds you put your money into in the 529 take a 20% haircut.
Now, does the fact that you have borrowed money at 4%, or that you were able to take a 5% tax break really make up for seeing the statement that says the $10,000 you contributed is now only $8,000 less fees? What if the market does poorly till the time of matriculation and instead of $50k to $60k there's only $30k?
Additionally, you are going to use funds of the 4% money itself to make the minimum payments on the credit card? I don't like it one bit. I may be a bit crass here, but, if you want a dose of reality, I think you should give Suze Orman a call or email this question to her - she'll tell you exactly what she thinks of this idea - no holds barred.
What you didn't say initially is what your financial situation is. The scenario is important in judging if doing this is even appropriate for you (even though I don't think it is appropriate for anyone). Are you carrying balances on any other credit cards? Do you have the full amount available that you really don't even need the funds and could pay it all off if need be? What if by some freak accident you are late with a payment and then they jack the rate to 21% on you? Then what?
Are you implying that you do have a balance on other cards? If so, the prudent thing to do is take the 4% money and pay off the other cards - and continue paying down the other cards and then this 4% balance. If you have outstanding debt on a credit card, why would you throw money into a 529 without having paid those off first? Look at it this way - you're not getting free money and a tax break - you're paying whatever the rate is on those higher interest cards where you are carrying balances - because you aren't paying them off. The NY tax deduction and whatever other benefits you seem to be coming up with are nothing if you are carrying other consumer (non-mortgage/non-deductible) debt.
If you are set on taking this money at 4% (now you're up to $26k), the prudent thing to do would be to pay off any higher interest bearing credit card debt if you have any. If no credit card debt outstanding, then any auto loans. If no debt whatsoever, then I'd still be wary of taking money from a credit card to put into a 529.
Most of the student loans will be owned by your child. He/she will most likely get deferral of any interest/payments due until graduation and then that interest will be deductible. The interest rate will also be close to the best available at the time. Those are good terms.
I would never recommend anyone do what you are thinking. It is no different than buying securities on margin through your brokerage - it's not something your average investor should be doing. You are playing with fire.
I'd advise you to seriously reconsider and think of the absolute worst case scenario (you lose your job and have no income for 6 months) and then ask yourself if it still makes sense.
Good luck with your decision.
[This message has been edited by rsinj (edited December 13, 2004).]