<p>Okay, to get back on track, the impression I’m getting from what’s been said here and elsewhere is that the advantage of PLUS loans is that they’re easier to get and have generous forgiveness and payback policies, but if your credit score is high and you’ve got plenty of equity in your house, a loan from the private sector might be better since it has a significantly better interest rate. (It would be interesting to see just how tight the private sector is with lending in these dark economic days. I’ve got a call in to our mortgage broker.)</p>
<p>Hmmm… if you use a home-equity loan to pay for college expenses, is the interest on the loan available to use as a deduction the same way as a standalone college loan? (PLUS loans and other student loan interest can be deducted whether or not you itemize on your tax return.) We don’t itemize, and if we use a home equity loan we’d lose some of the interest because there’s a several thousand dollar gap right now between our itemized deductions and the standard deduction.</p>
<p>We do itemize, so that wouldn’t be a problem for us. I’ll be talking to our mortgage broker (who is actually a friend, so we trust him) and see what he says and then pass it on. As I understand it, all interest on a home equity loan or line of credit is deductible. And we happen to live in an area where home prices have fallen relatively little (so far!), so there’s still plenty of equity there to tap into.</p>
<p>I’ve likely got a bias toward Cornell, having spent alot of time in Ithaca, but I would certainly think she’ll get a great education and multi-cultural experience there. Imo, $168K could buy alot of plane tickets to Chicago, NY, or wherever! I doubt many kids leave campus on a daily, or even weekly, basis. I would not be willing to pay tens of thousands extra on that basis alone. If there were significant differences in the quality of education or the program of study, that might be a different story.</p>
<p>I’ve talked with our friend the mortgage man, and I just can’t see much advantage to the Parent PLUS loan over a Home Equity Line of Credit–for us, at least. </p>
<p>PLUS: Fees: 3% Origination fee, 1% possible federal default fee</p>
<p>100K HELOC: Fees: No closing costs </p>
<p>PLUS: 8.25% interest rate, fixed rate, tax deductible, interest begins accruing immediately, even though you don’t have to start paying back the loan until graduation (interest just gets capitalized until then).</p>
<p>100K HELOC: Prime rate +3-3/4% (which means the current interest rate is about 4%, since prime is near zero), adjustable rate, tax deductible, interest begins accruing immediately, and you start paying back (I think) immediately. You only pay for whatever part of the 100K line of credit that you use. You can use nothing and pay nothing.</p>
<p>Granted, the prime rate is especially low now, and it will certainly climb as the economy recovers (IF the economy recovers…), but it would have to climb awfully high awfully fast to start even approaching the PLUS rate of 8.25%. If rates really shoot up a year or two or three from now, we have other emergency possibilities (borrowing from grandparents, e.g.) to pay down the HELOC. You can pay down what you borrow whenever you want; you’re just obliged to keep the line of credit open for four years.</p>
<p>To me it seems that the HELOC is the better choice, since we do have a lot of equity in our house, since we have what our friend calls a “perfect” credit score, and since we have backups if interest rates start shooting up. But I’m willing to hear any arguments to the contrary.</p>
<p>Can someone tell me the difference/which is better, a HELOC or total refinance? I can get a great 15 yr rate at 4.35% for a refinance (I will use that $ to help pay for college) vs. the HELOC where I worry rates may increase way above the 4%? Also, I will not be using the $ from the refinance right away (plan is to divide it over a 2-3 yr period and use it proportionately). Where is best place to put that $? A CD? Dump it into my daughter’s 529?</p>
<p>radannie, that sounds like an excellent rate on the 15-year mortgage. Is it APR? One thing to think about is the closing costs of a refinance; most HELOCs have no closing costs. Also, with the fixed-rate refinance, you’ll be paying interest on money (the money for years two, three, and four of college) that you won’t be using for some time. If you dump that money into a CD, you’ll at least make some of it back. </p>
<p>The big downside to the HELOC, of course, is the adjustable rate. HELOC rates change instantly whenever the prime rate changes. If you think you’ll be worrying about that, maybe the refinance is the best way to go. If you’ve got nerves of steel (and a feeling that the economy is going to be in the doldrums for quite a while), the HELOC might be better.</p>
<p>4.76 APR.
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<p>Another thing to think about on a refinance is how many years you are into the mortgage you currently have, if you have one, and what the interest rate on that mortgage is. If you have a 5-6% rate on it now, and you have less than 10 years to go on your current mortgage and are making a serious dent into the principle of that loan (in the beginnnig of a loan, your payments are mostly interest payments), you might want to go for the PLUS or HELOC instead. I think with a PLUS loan you know your interest rate, right? I am not sure since we have never taken out a plus loan. A HELOC’s interest rate will fluctuate. I keep hearing how inflation is on the horizon, but I don’t know when or for how long. This is another thing to consider when doing a HELOC.</p>
<p>When I went to college, I took out the federal loans, but not the federal PLUS loans. $42,000 a year is a lot for student loan for one year. I suggest either take go to the bank for the loan, or go to a different school that is cheaper</p>
<p>We’re looking into PLUS vs. HELOC also. On the face of it, the HELOC seems more attractive-- lower interest rate, no fees. Problem is that mortgage lenders have been getting skittish, and are canceling some HELOC’s and reducing the limits on others, when they can demonstrate that the home has decreased in value significantly (this to reduce their exposure and risk). So there’s not guarantee that the HELOC funds you have available today will be there two years from now.</p>
<p>Also, it seems prudent to keep some HELOC funds in reserve, for unexpected needs, since HELOC can be used for anything, and the PLUS loan can only be used for college expenses. You wouldn’t want to get two years into a 4 year college commitment, intending to fund, for example, 15K per year from your HELOC, and then find out that you didn’t have sufficient HELOC avail for the last couple years.</p>
<p>I just checked with our lender, Ditech, yesterday, so see about refinance and reestablishing a new HELOC at the full 100K that our previous HELOC was originally. No dice-- they’re no longer offering new HELOC’s. And they are among the lenders who are reducing limits on existing HELOC’s.</p>
<p>I think our strategy will be to take out a PLUS loan each year for half of the amount we need, and take the other half from HELOC, in order to keep some of the HELOC in in reserve.</p>
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<p>I would keep it somewhere with high liquidity and safety with such a short investment time. Also, that your home equity is not impacting your efc for FAFSA, but cash you draw out and invest will.</p>
<p>An alternative to a HELOC is to get a private student loan. I have seen advertised rates as low as Prime - 0.5%. Of course, these rates are variable, so re-read post #27 before choosing this option.</p>
<p>Here’s a thought: If Northwestern is offering us 42K in PLUS loans this year (BTW, we’d only really need about half that much, but that’s what they offer because they can offer up to the full cost of attendance and it doesn’t cost the school a cent), presumably another round of those loans would be available in subsequent years, even if we refused them this year. So if we go for a HELOC this year, if interest rates were to begin to shoot up, we could take the full 42K of PLUS loans next year and use half of the money to pay down the HELOC to zero. </p>
<p>(Who knew that you had to be a financial wizard just to finance your kid’s education?!?)</p>
<p>That sounds like a good strategy for the next two years. After that you will have to decide the mix of PLUS and HELOC loans that is right for you in the long term, and adjust your loan portfolio accordingly during your kid’s last two years of college.</p>
<p>Just keep in mind that the important factor for interest rates is what you pay over the life of the loan, not the percentage value. I probably would not qualify with my income for the amount of loans needed for a HELOC (I barely qualified for my mortgage when I refinanced a few years back) – so PLUS has allowed me the flexibility to borrow about half of the cost of my daughter’s college, with fairly modest payments. When my d. graduates – and I no longer have to pay towards tuition and housing – I plan to accelerate payment of the PLUS loans. My son, who is out of college, is already paying down his Stafford on an accelerated basis. If you just pay a lump sum toward principal early on – as my son did with his Americorps benefit - you’ve substantially reduced the effective interest rate. So this makes the PLUS loans a very attractive way of spreading out the payments over time. </p>
<p>I do think if you look at it simply as a straight loan, then the interest rate is pretty high. But when you bring in other factors, its a good tool for college financing for many families, because of various other factors related to the structure of the loan.</p>
<p>This is all excellent advice. Thank you, everyone. Now the hard part: Deciding. (Well, I guess the paying part is hard, too…)</p>
<p>Profile does not include existing retirement funds. So if you put, say $15,000 a year into your 401k, then whatever you have saved up until now is NOT counted as usable for college tuition. HOWEVER, the $15K you planned to save each year for the next 4 years while your S/D is in school? As far as the profile colleges are concenred, that’s money you should divert to paying them instead of putting into your retirement fund. Also, if you have saved any money for your S/D’s younger siblings’ college funds, as far as the profile is concerned, that money is also available.</p>
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<p>That’s not really accurate. They do count that money as income, but under the FAFSA formula, the tax benefit from the contribution almost always outweighs the hit to EFC. It would only be on the lower end of the income scale, where a person has a lower marginal tax rate or little or no income tax liability that the cash value reduced income taxes would not exceed the EFC hit. </p>
<p>In other words, you’ve earned that $15K over the year whether you put it into retirement or not. If you put that $15K into your retirement savings, it will reduces your AGI, and FAFSA will treat it as “untaxed income” – but your taxes will be reduced by a greater amount than your EFC will increase. </p>
<p>Whether you can afford to take that $15K and put it into the retirement account as opposed to applying it to your EFC is a matter of your own choice – and one more reason a PLUS loan might seem attractive. That is, you might decide that $15K earning interest in a a retirement account is a value that offsets the interest that you will pay on $15K over time, given that interest on the saved money can be compounding whereas interest on the loan will not be, as long as you are current with payments.</p>
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Yes it does, in the Parent’s Data section.</p>
<p>My understanding is that if the school thinks you have excessive retirement assets, they will count them.</p>