Are you a parent looking for a college loan?
Most of the press attention is focused on college loans that students take out, but there are parent loans as well.
Today, Im going to focus on PLUS Loans and home equity lines.
For parents, the federal government offers PLUS Loans. At first blush, the terms wont look so great. PLUS Loans offer an interest rate of 7.9%. Parents also have to pay a fee of 4% of the loan amount. Here, however, are four potential benefits of the PLUS Loan:
Okay, sure the 7.9% seems awfully high considering where interest rates are currently. I agree.
Its my understanding that interest rates on these college loans are higher than you could get, say with a home equity loan, because there is no collateral. If you stop making payments on your mortgage, the lender has your house as collateral. If you stop making payments on your PLUS Loan, trust me bad things will happen, but no one will confiscate your kids college diploma.
When you consider how low interest rates are currently, there is little to no room for them to drop further. When interest rates start jumping, parents with a fixed rate loan most likely will be glad they have one. Private college loans have no interest rate ceilings!
You will qualify for a PLUS Loan unless you have an adverse credit history. This would include experiencing a bankruptcy or foreclosure in the past five years.
Everyone borrowing through a PLUS Loan for the upcoming college year will get the 7.9% interest rate. Thats not the case for families using private loans. Private lenders will charge higher interest rates to families with lower FICO scores and will even base interest rate decisions on what schools students are attending.
Parents can borrow up to the cost of their childs college expenses minus any financial aid that the family has received. Of course, that doesnt mean parents should borrow that much. Please read:
If I ever have to borrow for college, Im going to tap into my home equity line of credit. The HELOC is variable, but my loan is one percentage point below prime. Its at a great rate 2.25%, which is one percentage point below the prime rate.
Anticipating college costs, I set up the HELOC when my daughter, who is about to graduate from college, was in high school. Luckily, I didnt need it for my daughter, but its there if I have to tap it for my son, who is finishing up his freshman year in college. I feel fortunate that I have the credit line.
For many parents, their home equity line is going to offer a better interest rate than a PLUS Loan, but there are three potential problems:
1. If you dont possess a line of credit, you might not be able to obtain one now because of tighter loan underwriting.
2. You might not have any home equity!
3. The interest rates on these lines are variable. You could be better off with a fixed rate versus a credit line rate that could significantly increase.
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