<p>We are kind of torn regarding how to pay for the balance, about (60K) of our D's education. Should we access our home equity via a HELOC or a 2nd mortage. We have about 150k equity ....or use the Parent Plus loan. I think in either case we can opt to defer the payment of the principle (60k) until she graduates (3 years) paying interest only. The interest on the Parent Plus is higher by about 3 percentage points and it is not tax deducdible. The interest on the HELOC floats and I don't think we could get a conventional 2nd morgage with a locked in low rate that would allow us the option of defering payments on the principle. We are stumped.</p>
<p>Nightingale, I would not recommend a home equity line if you live in an area where values are currently on the decline. (and this is coming from a loan officer who makes her living doing mortgages!) I understand the tax deductablility factor, but you are taking a tangible asset, your home’s equity, and using it toward an intangible expense that will not ever increase the value of your home.<br>
Doing a second mortgage to fix the rate will cause the rate on the second to jump substantially higher than a plus loan. Plus, because you receive the money in one fell swoop, you start paying back the principal and interest immediately, thus there is no “deferrement” option.
If you take into consideration the “future” value of money borrowed that you can defer payments on, that may be a better option.</p>
<p>What about a private loan (e.g. from Wells Fargo or other lender) that is not a home equity and not a PLUS? We got a 4.5 % interest rate from Wells when we cosigned a loan for my son.</p>
<p>If you are paying the loan, not her, then do a calculation to determine if you’d benefit from the interest deduction from using a home-based loan.</p>
<p>I’m going to push back at kcbelle for a moment and give you a different answer. First, many of kc’s cautions are appropriate and I’m not arguing with any of that logic. But today with the uncertainty of the banking/lending system you need to consider that some lenders are shutting down access to HELOC’s so if you already have one (or if you can easily get one), it may make sense to access it now if you can afford the interest. A number of financial columnists have echoed that advice. Also, HELOC’s are usually adjustable and hover right around the prime lending rate, currently 3.25%. Now it won’t stay there forever, but at 3.25%, you can make a dent in principal with a little discipline.</p>
<p>All I’m saying is that with current conditions, the answer is not so clear.</p>
<p>
Yes it is tax deductible.</p>
<p>^ My understanding is that the tax deductibility of interest on a PLUS loan is subject to the same income limitations as the tax deductibility of student loans, which means that parents with income over $110K or so would get only a partial deduction and those over $140K would get no deduction. As far as I know, there are no such income limitations for interest on home equity loans. Tax experts: is that correct?</p>
<p>IRS Website</p>
<p>Topic 456 - Student Loan Interest Deduction</p>
<p>You may be able to deduct interest you pay on a qualified student loan. And, if your student loan is canceled, you may not have to include any amount in income.</p>
<p>The deduction is claimed as an adjustment to income so you do not need to itemize your deductions on Schedule A Form 1040.</p>
<p>You can claim the deduction if all of the following apply:</p>
<ol>
<li>You paid interest on a qualified student loan in tax year 2008</li>
<li>Your filing status is not married filing separately</li>
<li>Your modified adjusted gross income is less than $70,000 ($145,000 if filing jointly)</li>
<li>You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return</li>
</ol>
<p>A qualified student loan is a loan you took out solely to pay qualified higher education expenses. See the instructions for Form 1040 to determine if your expenses qualify.</p>
<p>If you file a Form 2555, Form 2555EZ or Form 4563, use Publication 970 instead of the worksheet in the Form 1040 Instructions.</p>
<p>Nightingale - You seem to put a lot emphasis on being able to defer payment on the principal. Why is that? Do you have other expenses that will be lower in a few years.</p>
<p>You are borrowing a LOT of money. If you take a Plus Loan, there will be a tax credit this year…at least that is my understanding…but there IS a maximum on what that amount will be. If you are also paying otherwise, you could benefit from the tax credit AND from being able to deduct the interest on a home equity loan. You need to talk to someone about how to best manage your finances.</p>
<p>delamer- Yes in a few years we will be out from under a couple car loans, brace payments, and we will nearly have our house paid off. Maybe a Plus loan… since payments can be deferred and there is no pre-payment penalty. We can get a 2nd mortgage at that point and later pay off the Plus loan (if that’s the option we choose)with it.</p>
<p>Okay folks - got it. I keep forgetting there are people who make more than I do!</p>
<p>I would take thumper1’s advice - get professional advice.</p>
<p>Any one know under what circumstances HELOC interest is tax deductible … must you do home repairs with the money?</p>
<p>Avoid basing your decision on just the interest rate. The personal and governmental fiscal bubble was based on interest rates being forever low. You will discover that the features of the PLUS are very attractive over a HELOC or 2nd, even if the interest rate is considerably higher. </p>
<p>You can even do a combination PLUS and HELOC.</p>
<p>I know the Plus Loan forgives the debt in the event of a death… not the case with a second mortgage or HELOC. Outside of that I’m having trouble recognizing further benifit with the PLUS loan. I mean an 8% interest rate on the PLUS loan is nearly double the HELOC rate. True the Plus loan is fixed but in the event of hyper inflation I can stop withdrawing on the HELOC and then get into the PLUS.</p>
<p>HELOC rates won’t be 3.25% forever. A HELOC makes sense if you intend to repay principal early in the game but if you intend to let this go with minimum payments consider two things:</p>
<ol>
<li> Your HELOC payment will likely be interest only; and</li>
<li> The HELOC is probably a ten year term which means you will have a refinancing obligation in ten years.</li>
</ol>
<p>You need a game plan before you make a decision here.</p>
<p>Home equity lines convert after 10 years to P&I.</p>
<p>Well after looking into in depth the game plan will be to use HELOC until the interests rates start to rise… I’m thinking hyper-inflation scenarios in three years. At that point I lock it and if the locked rate on it exceeds the then PLUS loan rate I opt into a PLUS loan. In seven years, with the kids out of school, I convert everything to a ten year fixed and pay off the entire cost of their education. So that’s my “blue sky” scenario.</p>
<p>We went the HELOC route, which worked out well for us. YMMV. The only negative we encountered was the temptation to make interest-only payments. While that was relatively painless, after three years it became clear that we needed a plan to repay the principal also! So yes, you should make sure you have a repayment plan in mind.</p>
<p>HELOCs haven’t been nearly as easy to get in the past 2 years as they were in the early 2000s. In addition, banks can pretty much arbitrarily cancel them or reduce the amount. You definitely need a Plan B because even if you can get a HELOC, you can’t count on it being available to you.</p>
<p>There have been a number of articles about homeowners finding their lines of credit abruptly withdrawn. Here’s one from yesterday.</p>
<p>[Homeowners</a> outraged over cancellation of their home equity lines - San Jose Mercury News](<a href=“Homeowners outraged over cancellation of their home equity lines – The Mercury News”>Homeowners outraged over cancellation of their home equity lines – The Mercury News)</p>