Parent PLUS Loan vs. Home Equity Loan: What’s the Best Way to Fund College?
Over the past 20 years, the cost to attend college has skyrocketed. And to make things even trickier, wages aren’t rising at the same pace to offset costs. If you or your child want to pursue a degree but you have no idea how to afford it, you’re not alone.
However, there are a multitude of payment options to help fund education. If you’re a homeowner, you have the added option of tapping into your home’s equity via a HELOC or home equity loan. For many, this is more affordable than high-interest student loans. If you have less-than-perfect credit (anything under 700), you can look to private loan options like a Parent PLUS Loan. You also have a third option that involves no interest or monthly payments: equity sharing.
Before deciding on an option, however, weigh the pros and cons of each as they relate to your financial situation.
Parent PLUS Loan
Best if you have a low credit score
A Parent PLUS Loan is a federal student loan available to biological, adoptive, or stepparents of dependent undergraduate students.
These loans don’t take into account your credit score (though you’ll want to make sure you don’t have an adverse credit history). However, there are several downsides:
- You must use the funds for educational purposes.
- You don’t have the option for income-based repayment plans.
- Defaulting isn’t an option; the Department of Education can sue you.
Interest rates are also significantly higher compared with rates for undergraduate students. Current rates for Parent PLUS Loans are 7.6% compared to 5.05% for federal loans taken on by undergraduate students. That means for a loan of $65,000 you will pay $30,000 in interest over the loan’s 10-year term.
HELOC or Home Equity Loan
Best option if you have enough home equity
As a homeowner, you have the option of accessing the equity built up in your home via a HELOC or a home equity loan. You can likely secure lower interest rates with home equity loans and HELOCs than a Parent PLUS Loan. However, rates will depend on your credit score and HELOCs often have variable rates, meaning interest rates may go up.
Unlike a Parent PLUS Loan, you can use the funds however you want—not just on education. For a HELOC of $100,000 with a 10-year draw period followed by a 20-year repayment period, your monthly payments will likely be lower than a Parent PLUS Loan.
Best if you don’t want to take on debt
Giving the gift of college to your child doesn’t have to come with the burden of interest-heavy student loans. With no debt, interest, or monthly payments, a Hometap Investment allows you to access your home’s equity in exchange for a share of your home’s future value. It can fund higher education—without having to sacrifice your financial goals (or your child’s).
As a parent, you want to give your child the gift of education and keep them out of debt. However, that doesn’t mean you have to put yourself in more debt. Before making a quick decision that could get you the cash you need, consider your options that will help you fund your goals now and in the future.
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The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.