So I am a being a bit premature as we don’t have all the decisions or packages in yet but I can say with certainty that there will be a gap between what we can pay with money available and what we will owe.
D will take federal amounts of loan, $5500 etc each year.
For the rest I want to understand my choices of how to finance.
From what I understand choices are HELOC vs re-mortgage and take money out vs parental plus loan.
We do have equity in the house so these are options for us.
My question is is there a big advantage to one over the other for HELOC vs re-mortgage? My very limited understanding of HELOC is that we would have a line of credit and be able to take what we need each year. If we re-finance the mortgage would that mean we take a lump sum of cash out and use it year by year to pay tuition? If so does that negatively affect what we would get in FA next year because we would have that bigger wad of cash in our savings account?
Is there another option for parental borrowing?
Thanks in advance for advice
How much in loans will you need to take.
We personally decided NOT to mortgage our house in any way to pay for college. That included a HELOC. Remember also, that going forward, the interest on a HELOC is no longer deductible on your taxes as it was in the past. But mostly…we all hope for the best for our kids. But anything could,happen that might prevent your kiddo from completing college or getting a degree…and you will now owe money against your home for a college education.
Having said that…you could do either a HELOC or home refinance. Yes, any amount IN your bank account the day you file a FAFSA is considered an asset.
Parent Plus is also your loan.
You could also co-sign a private college loan for your kiddo. That’s another option.
These are a family choice. I’m not sure one is better than the other…they are all loans.
Thanks for your fast response.
So if I throw Parent Plus or private college loan into the mix comparing those to each other and to HELOC or refinance are there differences in interest rates?
You would have to look at the current interest rates from your lenders to determine what they are when yountskemthe loans. No way for us to give you that info here.
But…look at things OTHER than the interest rate. Yes, that is important…but personally, I would be looking at the payback requirements. Do you start laying back immediately upon disbursal (you would,for a mortgage or HELOC, and SOME private loans), or are payments deferred while the student is still a student?
But most important…what are you looking at in loan payments per month, and for how long. For example, if you borrow $25,000 a year, you or your kiddo will have $100,000 plus interest in college loan debt for an undergrad degree. Payments will be in excess of $1200 a month for 10 years. That is a LOT of debt, in my opinion.
But like I said…it’s a personal choice whether to take these huge loans…or not.
In a previous life, I was a loan officer. Loan options are mostly a matter of preference. You could do a HELOC, which would certainly offer flexible terms with good interest rates, but I usually recommend against putting extra liens on your house unless you REALLY have to. You want to try to save back at least a good 10% equity just in case life happens and you might have to sell your house. Another option is a 401k loan, but the albatross would be your life savings…YIKES! The best loan to take out is a Parent Plus loan. They’re offered by most commercial banks, so you can shop around for the best rates and terms. Sallie Mae is the largest provider.
I was able to borrow money against my car at 2% interest and no fees, through a credit union.
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So let’s just say the equity I have in my house is around 70%. If I were to completely refinance and take cash out for college I would still have well over 50% equity in my house and have one payment. Yes I am extending the life of the loan but I don’t see us living in this house beyond another 6 years. My goal at selling time is pay it off and with the money I have buy a much less expensive home.
Does that make sense or I am thinking about it all wrong?
Please no discussion about whether I should borrow money.
Do you have the cash for the fees, etc. for a re-fi?
@swtaffy904
A loan is a loan is a loan.
It’s really your decision which loan to take.
As I already said…I would not take out a loan against my house to finance college…at all.
The reality is…you really have no idea what the real estate market will look like in six years.
@swtaffy904 …Not sure if you have a 401K but what we did one year was take a loan against our 401K. We took it out for 1 year only. Every two weeks the payments came directly out of our paycheck. It worked out good because we were paying the interest back to our self. One drawback is your paycheck will be much less. It worked for us because we didn’t have to come up with the money straight upfront. We also kept our savings at 6% match so we would not lose money. We also were not worried about employment because both my husband and myself are at our jobs each over 10 1/2 years. Just a thought.
@Nurse001 that is an option. I actually have two, one is a small orphan account from an old job. I could take from that and pay it back.
Is that a wiser option in terms of interest etc?
I am not a financial person. I have read here NOT to borrow against my retirement so that’s why I wasn’t considering that
@swtaffy904 I am really not a financial person myself but I would say as long as you keep the loan short like borrowing 1 year at a time you should be fine. The interest is paid back to your account. I think we lost $50 on the loan paperwork. Other than that we really lost nothing. I would do that again over borrowing from my home equity. I want the equity there just in case we sell our home. You can call the provider who holds your 401K to see about taking a loan. We have ours with Fidelity so we can go right online and see terms, how much we want to borrow and then how much the payments will be before we take a loan. Worked out great.
The advantage of the HELOC is that you only take the money when you need it to pay the college bill. If you refinance your house and take cash out in a lump sum, then firstly you will have to pay interest on all of the money, and secondly if that cash is sitting in your account when you do next year’s FAFSA or CSS Profile, you will get less financial aid the following year. For example, if you need to borrow $10K per year for 4 years, then if you are taking that out $40K in a cash out refinance in Jul 2018 and have $30K of that left when you do your FAFSA in Jan 2019, you could potentially lose about $600 of need-based financial aid (5% of the extra cash) in the 2019-20 school year.
Other factors to consider are the interest rates on a HELOC would be floating (i.e. going up over the course of this year), whereas on a refinance they would probably be fixed. Work out the total interest payable for the various alternatives, but don’t forget about the potential financial aid impact.
This is only true for sure if the college guarantees to meet full need.
Some colleges don’t require the Profile after the first year. These retirement accounts are NOT mentioned on the FAFSA at all.
You cannot borrow if you aren’t an employee. If you leave the employer, you have to pay the loan back within 60 days (75?) or it will be considered a distribution (10% penalty?).
There are also limits on the amount you can borrow
Interesting. Ok good to know. But I could borrow from the one with my current employer
^^ If they have a loan program. Not all employers do.
So the downside to HELOC is that you could lose your house to foreclosure if you got in over your head.
The downside to a student loan is that you can never get out from under them, not even in bankruptcy. They often have terrible penalty rates if you fall into default.
Parent PLUS is direct from the government and not the same as a private student loan. You can read about PLUS at https://studentaid.ed.gov/sa/types/loans and about private loans here http://privatestudentloans.guru/
You’d have to be pretty far in default to lose your house on a HELOC. I think a bigger negative are the closing costs on the loan.
Thank you all for explaining the difference. This is what I was looking for.
With the Parent Plus loan it looks like the interest rate is 7%. This is higher than HELOC and mortgage rates. Is there another reason this would be better?