<p>We are considering different options for spreading out the cost of college and wonder if other people have looked at the advantages/disadvantages of Plus Loans vs. HELOCs. On the one side, Home Equity loans are tax deductible and there are no origination fees. On the other side, HELOC interest rates are variable and it is scary to have one's home tied into increasing debt (although debt is going to increase no matter what). I feel we sailing into stormy uncharted waters and wonder what others have done to spread out the cost of college.</p>
<p>We had two PLUS loans that we consolidated into one last year while interest rates were at historic lows. Interest paid on educational loans may be deductible, depending on your situation.</p>
<p>We are considering a HELOC and pre-paying tuition - advantages for us is that our HELOC is already open and we have already covered the origination fees,etc. We are, especially this year, high income with an expectation that that income will decrease about 10% next year, and stay down for the remaining college years. Also large blocks of our income we receive quarterly, so monthly payment schemes are tough on our cash flow. Income is high enough that most tax breaks phase out for us, as do the favorable loan terms, but assets (except the house) are relatively small compared to our income (big hat, no cattle, that's us).
We are checking on what happens if student wants to transfer, that so far seems OK, you get reimbursed with proration if she leaves in the middle of the year. We get flexibility for repayment, because we can vary our monthly repayment (college on credit cards), we have savings for room and board. grandparents want to chip in also, we will be able to ask them to wait for med/law school, where the big student loans will begin.
It is always scary to have this tied to the house, but in our situation, a loss of job means sell the house no matter what, so it doesn't really change the impact.</p>
<p>One of the advantages of the PLUS loan I read somewhere is that if your late on your payments or are having troubles, they won't repossess anything from you, they sometimes allow you to differ them for a couple of months.</p>
<p>The con might be the variable interest.</p>
<p>You would think more parents would post on here, seeing they are parents and have probably gone through the process with one of their children.</p>
<p>I'm sticking with a HELOC. Already had it and tax-deductible interest. Also, a bit more flexibility - I didn't need to tap into it for S's college expenses this year.</p>
<p>well we have both a HELOC and a PLUS loan
no vs about it!</p>
<p>I'd lean toward the PLUS loan - but there are some HELOC programs that are fixed interest or at least limited as to adjustment rates - if you can get a HELOC with a lower cap than on the PLUS (now 9%) it would be worth considering.</p>
<p>The reasons I would favor PLUS are:
* lower origination fees: if you have an open HELOC, that's one thing, but if you are applying for a new one - then you will have to pay for an appraisal, title report, closing fees, & possibly points.<br>
* the bad thing about a HELOC is that they lend you a bunch of money for a long period, but they don't amortize the loan to pay off within the time. So for example, you might be paying $500/month on a HELOC that is for 15 years, but at the end of 15 years still owe a significant chunk - and you will need to refinance to pay it off. So you either have to do the math yourself & pay extra to principal, or face a potential financial problem down the line
* late fees on payment for a PLUS are a lot less than with a mortgage, in case you miss a payment - and as someone above said, you don't lose your house. (Though the best thing to do is to arrange for automatic withdrawal for payment - then you never have to worry about it).
*PLUS is way more flexible down the line if you want to consolidate or extend the loan up to 25 years. If you get sick or lose your job and income, you can get deferments with PLUS -- and extending or consolidating loans is not going to cost you an arm & a leg. Lose your job with a HELOC and you lose your house.<br>
*No prepayment penalty on a PLUS. </p>
<p>There may be some tax advantages with the HELOC - depending on your tax bracket.... and it does have the advantage of reducing your equity in your home, which in turn may allow you to qualify for more financial aid for your kids -- but I think overall a PLUS is the better choice.</p>
<p>We are older parents. By the time my 2 kids finish college we will be ready for retirement. Facing a loan repayment may be a real burden for us at the time we won't be earning enough to pay it off. We would have to use retirement money. Especially factoring in interest, charges, etc of a loan. </p>
<p>So I need opinions about using money earmarked for retirement rather than face repayment on loans at this time. Interest gained on retirement money (3-4 percent) is less than a higher loan payment with interest at 9 percent. I figure if we use all our retirement $$ we can pay for the 2 kids education without taking out loans. But I am not good with anything finacial so any advice is appreciated.</p>
<p>ebay, if you use all your retirement money to pay for the kid's college, then how are you going to retire? The advantage of a loan can't be seen in terms of interest rates - the point is that a PLUS loan would spread the cost out over 10 years rather than 4 - and potentially up to 25 years, which allows you to keep more of your assets -- and while PLUS is capped at 9%, the current rate is 4% and you probably can realistically expect it to go to 6 or 7% in the next few years. </p>
<p>Of course there is an easier answer. If you are not in a financial position to borrow, and you would have to liquidate your entire retirement savings in order to fund your kids' college educations, then you can't afford to pay for their college. Do you really want to leave them burdened with supporting two aging parents when they are in their early 20's? What about grad school? Under these circumstances, it probably is more fair in the long run to tell your kids that you can't afford to pay for college -- or for a private college, if that's the case -- and let them take on loans to make up the difference between what you can afford and what they want.</p>
<p>Or you don't have to retire. ;)</p>
<p>Note about PLUS for parents of students attending a college located in Massachusetts: </p>
<p>Massachusetts has a program like PLUS called MEFA. Only the interest rate is better and they offer a fixed-rate option, currently about 6 percent. You don't have to be a resident of Massachusetts, just have an offspring attending a college in Massachusetts.</p>
<p>Ebay, I am no financial wizard. However, many of the colleges disregard home equity when they calculate financial aid. Therefore, if you take some of your savings and put them into paying off your mortgage, you will increase your apparent need and possibly get more of a grant. Then you can take out a HELOC against your house and use that $ for college.</p>
<p>I think our problem is that we were so old when we had kids. So we have years and years of accumulated retirement investments that have made us have a high EFC and we do not qualify for finaid. Whether we take out a loan or not, we would still have to REPAY that loan. At the time the loans come due, we would have to repay it from our retirement $$ anyway. No matter how its figured. I don't think FAHSA takes into consideration how close someone is to retirement. Younger parents would have more of an easier time repaying a loan potencially if they have 10 earning years left after their child/children graduate plus raises they may get from years of service. My husband has served his time and is at the peak of his salary.</p>
<p>Well, theres always ebay to rustle up a couple of dollars for college. Being older parents, we also have years of accumulated junk! :)</p>
<p>aparent - our house is inherited from my parents who are deceased. It is a small house and is paid off. If it wasn't paid off, we wouldn't be able to afford to live in it - the taxes are very high in NY - (about 10,000) and it is in constant need of repairs which are also very high in NY. If we had to pay a morgage, we couldn't afford to live in the nice neighboorhood we live in. My neighbor, an older widowed dad had the identical house next to us, sold his and moved to a condo as soon as his 2nd kid graduated from Princeton. I guess this is an option but we do like having a house.</p>
<p>We checked out both home equity (made H very nervous) and PLUS loan, and we ended up going with the MEFA loan TheDad mentioned. I talked several times with a fin. aid person at MIT (she was extremely helpful) and we decided MEFA was the best for us.</p>
<p>I read on one of the financial aid webpages that effective 7/1/06 Stafford Loans were no longer going to be variable but will be fixed at 6.8% and that PLUS loans would be fixed at 7.9%. Has anyone else heard this as well?</p>
<p>Ebay, my problem was with your statement,
[quote]
I figure if we use all our retirement $$
[/quote]
If it was a matter of SOME of your retirement funds, it would be different. It was the word "all" that got to me. </p>
<p>I'm actually quite confused, because generally colleges only expect you to pay about 5% of your assets annually; many don't even count funds that are in retirement accounts. If your EFC is so high that you don't qualify for financial aid based on the value of the retirement assets, then there should be plenty of leeway. </p>
<p>FAFSA DOES take your age into account in its calculations, and it doesn't include either home equity or retirement funds. If a college is considering your retirement accounts, then that will be because of separate information submitted to the college as part of a supplementary question on the CSS Profile, or through the college's own financial aid forms. </p>
<p>Of course if you take out loans you will have to repay them -- but if you spend ALL your retirement money, then you will have nothing left to live on, unless you think that your Social Security will be adequate to cover all your needs. Your dilemma just doesn't make any sense to me - if you won't have the money to make loan payments, then where are you going to get the money to support yourself once you have liquidated your assets? </p>
<p>It's not clear to me whether your kids are already in college. If not, then I think part of the solution will be to choose schools that do not include retirement funds and home equity in their financial aid calculation, so that you will qualify for more financial aid. </p>
<p>I don't think there is a single financial advisor anywhere that would encourage you to liquidate retirement assets to pay for college, at least if that meant taking all or most of your money -- obviously it would be a different thing for someone with a few million stashed away. </p>
<p>If your kids are not yet in college, then be honest with them about your financial situation and let them make their choices accordingly.</p>
<p>Does anyone know anything about Edamerica because apparently if you apply for a plus loan through them they'll give you a 1.25% reduction of whatever the current PLUS loan interest is.</p>
<p>I am not sure about the accumulated retirement assets. If they are in a qualified plan, then they do not count as assets against your EFC. If they are not in a qualified plan, they are not considered retirement assets by FAFSA or Proflie. Your home equity is not considered an asset by FAFSA but is by most colleges using Profile or its own supplement. If your assets are in a qualified pension plan and your student is getting some financial aid, be aware that withdrawals from those plans to pay the tuition is considered income for the subsequent years FAFSA and Profile. In such a case you are far better off taking a home equity loan (if student is at a Profile school) cuz then your assets are decreased for the subsequent year possibly resulting in more aid. If you can hang in there for a few years, you can then--when your student is in senior year, withdraw from the retirement plan and start paying back that home equity loan. Planning all of this can maximize your financial aid, preserve some of your home equity too.</p>
<p>For anyone considering taking a HELOC, please don't assume a tax benefit.</p>
<p>I have read that interest on a HELOC impacts the Alternative Minimum tax that can get triggered or worsened if it has already been triggered.</p>
<p>Best to check with a tax professional.</p>
<p>Calimom -We may have filled out the FAFSA wrong by labeling retirement as investments. Even then, if colleges only expect us to pay 5 percent of our assets, even with the mistake on the FAFSA we can easily afford 5 percent. We didn't recieve any finaid except a 2,500. unsubsidized Stafford Loan leaving us resposible for 42,000 per year. That is why I am wondering how to pay that back with loans. If this is 5 percent, we would have to have assets of something like 2 million? We did write a letter to the school.
We don't have any one in college yet. That is why it is confusing to us at this point and we are trying to come up with a way to figure this out and I am happy for everyones help.</p>