<p>I would like to hear comments on the wisdom of using a HELOC versus taking out a separate educational loan to pay for part of college.</p>
<p>A. we have a lot of equity in our house
B. our Heloc interest rate is at 3%</p>
<p>What you other people done?</p>
<p>Thanks!</p>
<p>This is personal opinion. We used a HELOC BUT we used it only to cover a specific payment NOT to fund all of the college costs. We would not have taken ANY loan for that amount of money. The one term we had two college payments for two kids, the HELOC helped with our “cash flow”.</p>
<p>I know this isn’t what you are asking…but if you are hoping to fund a goodly amount of money with either a HELOC or Parent Plus loan, you might want to reconsider.</p>
<p>Both of our kids DID take the maximum Stafford loans. Those were the only loans we expected to take for college.</p>
<p>We were in the same situation as you. We have a good amount of equity in our home so we took a heloc too. Just made more sense to pay interest on money as we go and as we need it. Not to mention then the interest rate is only 2.4% rather than 6+%.</p>
<p>I think Heloc is better, it generally has lower interest rate. Both interests are tax deductable. Heloc is a bit more of a pain to get, but once you have it, it is so flexible and easy to use and manage, just make sure you get as much as you can up front for all the years that you need to pay for college. And student loan can never be wiped out (not that anyone wants to ever go through bankruptcy).</p>
<p>Generally, the loan with the lower interest rate is better. But remember some student loans let you defer payment without penalty until graduation.</p>
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<p>Plus loan interest is tax deductible?</p>
<p>Yes, it is, if you meet the income requirements, and up to $2500 a year in interest. Cap for income is $140K for joint filers. </p>
<p>If HELOC is available to you, and if you are in the financial situation to do this, understanding the ramifications, you can get a better rate from most HELOCs, given the current interest rates. I hesitate for a few reasons. </p>
<p>If you should need the money for other things later, it is gone, borrowed, and you can’t take a retroactive PLUS or student loan. Those loans are opportunities available only while you have a student in school. The payback terms are flexible, IMO. </p>
<p>I have known a few cases where things went south for families and with the HELOC option bound up, it made it even more difficult. The federal loans will give you time, yes with more interest, if things are tough. If you lose your job and want to start a business and need to get some money, that you borrowed so much on your house can be a problem. You can’t postpone those payments, lost that cache and the PLUS is not available. Banks are not readily lending these days either, so it can put you in a tight spot. </p>
<p>Just understand the possible scenarios and ramifications. Also, yes, this is morbid, but if you die, the PLUS obligation ends. The HELOC stays with the house, which can pose additional hardship if you have family in your home who will still have to continue those payments.</p>
<p>Cpt has it pretty much nailed re: deductibility of PLUS loans. IF we can assume that housing prices are at or near the low, AND you have mucho equity in your house, a HELOC for some of the debt is probably not a bad idea, with a savings of at least 3% on the ‘juice’.</p>
<p>Personally I have rejected the temptation over the years to tie educational expenses to my home. I do have equity, certainly not as much as 5 years ago, but I continue to take out PLUS loans and pay the usurious (comparitively) 6.8%. As cpt said however, I do like the flexibility in managing these loans–deferring, lengthening, shortening, pre-paying, etc. That IS worth something and has value.</p>
<p>Jnm. you stated what I was trying to relate when you said “I have rejected the temptation over the years to tie educational expenses to my home”. That is where I hesitate too. There is a compartmentization that is there when you keep educational expenses in a category separate. </p>
<p>Clearly, by being flexible and considering all available options, one can come up with the best decision to make, and if you are fortunate enough to be able to take a low interest HELOC, that is an alternative to aggressively investigate and consider. But keep the drawbacks in mind too.</p>
<p>Also keep in mind that the HELOC may not be tax deductible. If you pay Alternative Minimum Tax, the home mortgage interest/HELOC interest on the part of the loan that did not go toward buying or improving the house is not deductible. The interest rate on a HELOC is usually adjustable, so it may look good now but get out of hand later.</p>
<p>I’ve been thinking about this a lot now that the acceptances are coming in. I’m a single filer with an unreliable ex (as far as being able to count on him for college expenses for his children). My mortage is almost paid off. On the other hand I’m over 50 and am self employed. My income is not secure. </p>
<p>Bottom line is I am very reluctant to secure further loans with my house. I’m going to need it. I think I am going to go the Plus route, after taking the subsidized loans, and try to pay them down faster than scheduled to mitigate the higher interest rate. I need to be able to sleep at night knowing they can’t take my house.</p>
<p>Though in this economic and tight lending climate, this may not always be true, one is more likely to be able to take out the HELOC in the future to pay of the PLUS. You will not be able to do the reverse as those loans are available only while you have kids in school.</p>
<p>Yeah, cpt, that is why a look at the big picture is in order when making these decisions. I re-fi’d twice in 2010 & each time my mortgage guy, a buddy of mine, was asking me if I wanted to ‘throw some college loan money in there’, as he’s in the same boat & knows my situation. I said call me crazy, but no way. Sometimes you just can’t look at naked interest rates.</p>
<p>Snowdog, depending on your PLUS loan servicer if/when you obtain one, you should be able to work a nice pre-payment deal by stretching out the loan length, making monthly online payments, THEN writing a check marked ‘strictly for principal’ & sending that in whenever you can. Takes discipline but it works.</p>