Question: Actually, what he says is that you should only borrow money at x% if you >can invest it somewhere else at >x% after taxes. In order for a 7% loan > >In other words, depending on your marginal tax rate, you can figure out >what your effective return is on paying down a load using the formula:

>effective rate = (loan interest rate) / (1 – marginal tax rate)

>A particularly dramatic example involves credit cards. >With a credit card at 18% and a >marginal tax rate of 33%, you would need to earn over 27%.

Answer: Wrong about the home loans. Since interest on a home loan is a tax deduction (U.S. federal income tax), you only need to equal the rate of return on the home loan *before* taxes in order to break even. If you were to prepay your loan, you would be paying that much more in taxes. As far as your example with credit cards, though, that is exactly correct.

Brent Lofgren, Great Lakes Environmental Research Laboratory, Ann Arbor

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