<p>Can anyone help me sort out pros and cons of plus loans vs. refi our mortgage?
We have good equity in our house, we've owned it for many years. We are thinking about a refi since our interest fairly high right now. We also have a line of credit tied to our equity that we have used when we needed quick cash and knew we could pay it back soon.
I've started working more hours, so we'll be able to pay for school easier, but not all at once.
So ... it seems like the plus loans are higher rates of interest than what we can get with a refi. AND we can write off the interest on a refi, but it doesn't SEEM like we can do that with a plus loan.
Can we wait until after graduation to pay back a plus loan?
Thanks for your help!</p>
<p>Momster,
I've been having that very same dilemma.
What you are saying about each type of loan is correct.
I think you could arrange to have a plus loan repayments start after graduation, but interest starts accruing right away.
The advantage of plus loans is its availability for people who have no other resource, e.g., no home equity to tap.</p>
<p>I'm in the same boat with the two of you. Plus, since we have a lot of home equity, the CSS Profile includes that as an asset available to pay for college, so if I refinanced, my EFC might go down a bit.</p>
<p>you can write off interest with a plus loan. there are pros and cons with each. Plus loans are educational loans that can't be discharged through bankruptcy, you won't lose your home as you could with a HE loan. of course we all think bad things won't happen.</p>
<p>Plus loans - it is easier to finance as you go. you get the money quicker and if you are looking at multiple years you don't have to keep re-financing.</p>
<p>With a plus loan - let's say you need to borrow $6000 for the whole year - that is $3000 for each semester. You would borrow and start paying $6000 now for a home equity loan - for a plus loan you would get approved now but won't pay until the final disbursement is made, the beginning of the second semester - 6 months of interest free!</p>
<p>Another option is to borrow and pay the plus loans until graduation and then pay them all off with one home equity loan. Or you can consolidate them.</p>
<p>The new ruling does also allows the plus loan to be paid back 6 months after the student graduates.</p>
<p>^^^^^
the interest does accrue, however.</p>
<p>I thought that h/e loans were only deductible if you use the proceeds toward the cost/upkeep of the home (like remodeling). Am I wrong?</p>
<p>If you are still questioning "Interest Rate," Please rethink. Can you name the parts of a loan and how the affect the outcome?</p>
<p>There is no easy answer to this. If you are in a financial position where your home equity is affecting the amount of aid your child is eligible for, then definitely borrow against it which will decrease your assets. There are drawbacks to borrowing against your home which have been stressed many times in the news as the home crises spirals. Bear those scenarios in mind.</p>
<p>Another drawback with using the home equity loan for college is that if you need the money for other things like home repair or other emergency situation that may arise, it won't be there if you borrowed for college. You cannot use the PLUS or other college loan for purposes other than COA for college. It is a window of opportunity that is not always open.</p>
<p>^^^^
good point.</p>
<p>A refinance of a mortgage or taking on a first mortgage incurs fees and costs that are not incurred with a PLUS or Stafford or Perkins. We had calculated that the differential in interest rate must be very, very attractive on the side of the mortgage. Currently a 1st/refi will have an interest rate not much different from a Stafford loan and perhaps only slightly less than a PLUS. But when you add in the fees and costs of the Mortgage Closing, the student loans will come out ahead. </p>
<p>The terms.The terms, THE TERMS of the loans are important. Be sure that you understand them and they are up front.</p>
<p>The thing is, your Home equity loan is tied to your home. If you sell your house, if anything, anything should happen, that loan may have to be paid back at a time you may not be ready to do so. I know friends who had taken out over $100k in home equity loans for their kids, and then got into a divorce situation. The house had to be sold which made the loans due immediately. They could have used that money during that time of crisis. Had they take the PLUS loans, they could have done something else. The loans would have still be on a monthly basis, and if you get really tight, you can negotiate some down time. With home equity, you have your house on the line, so there is not as much leeway. You can keep that credit line open and pay off the PLUS loans, if you so wish, once things are more established and kids are out of college. You cannot go retro on the PLUS loans. You borrow for that year according to COA.</p>
<p>This is my first visit and post to this site, and would like some feedback/opinions. Here is my scenario: my husband and I are nearing retirement, but we have two teenagers. My oldest, a senior, has been accepted to several colleges, a mix of private and state schools. The programs, study abroad opportunities, and number of available majors are clearly richer at the privates. I just got my EFC last night from FAFSA: nearly $40,000. That’s amusing. I know we are very lucky that we both have secure jobs. I have a lot to be grateful for, but how is it going to be possible to pay for a private college education? Should I just give up on that idea? We are public sector employees, have an obscenely high mortgage due to a financial disaster a few years ago, and lost most of our college savings in the dot com bust in '99-'00. It has never grown back even to where it was before that loss. I have a Roth with about $20k in it, a public pension plan, and about 100K in IRA/Keough-type retirement savings. Should I suck it up and send him to a state school?</p>
<p>Longprime,</p>
<p>I know that it has been a while since you posted comparing interest rates on mortgage and PLUS loans. </p>
<p>However the current rates for PLUS loans are around 8.5 % whereas I can get a refi for 15 year fixed at 4.25 (or 4.75 with no closing costs). That makes a difference of 3.75 % which is substantial . My son is starting as a freshman this year and after scholarships and Stafford loans we still need about 26K/yr. I have about 250k in home equity and 10 yrs left on my current loan. I think it makes sense for me to refi with cash out of $100k to a 15 yr period as it would not impact my monthly outgo. Is it possible to get my son to co-sign the mortgage?</p>
<p>Would like other perspectives on my situation.</p>
<p>OP: how many years do you have left on your mortgage? If you have had your mortgage for a while, it may actually cost you more in interest payments over the course of the new loan. Compare the amortization schedules between your existing mortgage and the proposed new one to see.</p>
<p>Also, cashing out equity is one thing but it’s extremely difficult to open new HELOCs right now. Banks seem to be doing everything possible to get them off their books. I had one that was closed due to a loop hole and I have equity and excellent credit.</p>
<p>send them to state school. it is the better financial choice.</p>
<p>I’ve been thinking about this same question: home equity vs. PLUS. In these uncertain times, I would not want my kid’s college funding to hinge on the value of my house. If one of the parents loses a job, we may have to sell and move. What about getting the kid through college on PLUS loans, and then maybe consolidate after graduation and pay off the high-interest PLUS loans with a lower-interest home equity loan?</p>
<p>
</p>
<p>PLUS loan is 7.9% with federal direct lending. </p>
<p>If you borrowed $100K @ $25K/year with a PLUS loan, here is how the payments would work out:</p>
<p>Each year you would borrow $25K - and for each separate loan you would have monthly payments of roughly $300. Over the 10 year life of of each loan you will pay interest of roughly $11,250. That means for the 4 loans together, you would pay a $45K in interest on top of the $100K. Because the loans are staggered, you wouldn’t start paying on any until the year of distribution-- but after year 4 you will have monthly payments of roughly $1200 on top of whatever your current mortgage payments are. </p>
<p>On the other hand, if you refi your house over 15 years cashing out $100K, at 4.25%, the payments on the $100K will begin immediately. I don’t know what else you owe on your house, but the portion of your payment attributable to that $100K will be roughly $750 a month and over the 15 year life of the loan you will have paid roughly $35K in interest. </p>
<p>I didn’t account for either loan origination fees or mortgage interest costs in the above example. </p>
<p>But here are some added points:</p>
<p>In year 1, with the PLUS, you are paying out $300 – whereas the refi you are paying $750. Because of the higher payment on the refi, you’ve made cumulative payments of $9000 that first year, including almost $4200 in interest. If you had taken the PLUS loan, because the first payments aren’t due until after the final distribution for the year, during the first year your payments would have been roughly $1800, plus whatever interest was accumulated for the first semester’s distribution of $12,500. </p>
<p>So with that savings maybe you don’t need to borrow so much on the PLUS loan. Instead of the refi, what happens if you pay an additional $5K up front toward tuition and only borrow $20K on the PLUS loan? Your out-of-pocket for the year is actually less - your PLUS payment drops to $240 per month, and you save $2100 in interest over the life of the loan.</p>
<p>Also, think about this – you mentioned Stafford loans for your son. Are they subsidized? If so, will he still qualify for a subsidized Stafford loan in year #2 of college, when you fill out the FAFSA in January and have an extra $75K sitting in the bank? </p>
<p>Finally – you asked whether you can get your son to co-sign on the mortgage. Based on that question, I think you should forget the whole thing and have your son attend a college you can afford. Why? Because I think you want your son to take on the part that is considered to be parental responsibility. I know that many parents don’t see it that way, but the financial aid system and parent loan system is structured with that assumption – NO KID, EVER should be BORROWING $100K for their UNDERGRAD education. If you want your son as a cosigner, you are shifting a burden to him that probably shouldn’t be taken on in the first place.</p>
<p>I’ll add another thing re: the son as a cosigner…if you can’t pay…HE will become responsible for that mortgage. In my opinion, thats quite something to strap a college student with. I’m with Calmom…if you aren’t able to take the loan responsiblity yourselves…it is clearly TOO MUCH loan liability and you need to reconsider the college choice.</p>
<p>My feeling with debt is to look at a lot more than interest rate. </p>
<p>I have taken PLUS loans and I have always looked at it as a matter of “how much can I afford in a monthly payment”. My plan every year was to balance the cost I paid up front for college with the PLUS loans - figuring that for the coming year I need to pay out $X, and then doing rough math to figure out how to allocate that between debt and up-front payment. </p>
<p>In other words if I can pay, $1000 paid per month = $12,000 for the year – if I need to pay $20K to the college, and $20K gives me a $250/month loan payment - $250 x 12 = $3000 total in payments – but I already figure out hat I could manage more – so if I look at the cost differential, then decide to pay $9000 up front and only borrow $11K, now my loan payment drops to $130 - or $1560 for the year – still leaving me roughly $500 shy of that $12K total expenditure. </p>
<p>For me, it usually ended up making sense to pay about half up front and borrow the other half. </p>
<p>The other part of the equation is that at the end of 4 years, I no longer have to pay the “half” for the tuition expenses – which means that I can afford to accelerate payments on the outstanding PLUS loans. So lets say that 4 years have gone by and I managed to pay out $10K each year up front, borrowing $10K each year, with monthly loan payments of $480 in the final year. In year 5, as I no longer have to pay tuition – I’ve got more cash available to supplement that payment (remember, the hypothetical above assumes I can afford $1000 monthly – in my real life situation its actually significantly less, but I wanted to work with round numbers for purposes of discussion). Let’s say that I simply decide to pay $650 a month rather than the $480 due on my loans – that’s going to leave me a lot of flexibility, but it will also substantially accelerate the pay down of the loans, and of course significantly reduce the overall costs in interest. </p>
<p>I opted for PLUS loans because of the flexibility - my reasoning was that I could always pay off PLUS loans with a home equity loan, but I couldn’t go the other direction. I could plan for the PLUS loan on an annual basis, looking at current needs rather than projecting out for 4 years-- a good choice particularly because my older kid dropped out of his expensive private school after the 2nd year. </p>
<p>I do think that the interest rates on PLUS loans is kind of high. It’s an accident of history – when my son was in college, the PLUS was adjustable and was pretty low. Then interest rates started rising, and about the time the adjustable on the PLUS (based on t-note rates) was about to hit 8%, Congress came in with the fixed interest – clearly with the idea of protecting everyone from rising rates in the future. However… after that time, interest rates began to fall again – so what has happened for me is that I am paying roughly 3% on the PLUS loan I took out for my son, and fixed rates on the PLUS loans I took out later for my daughter. In fact, I could have easily paid off my son’s PLUS loan years ago, but I opted not to simply because it made no sense to pay of a 3% loan only to re-borrow the same money at 8%. (Better to conserve resources and borrow less for my daughter). </p>
<p>Again, you need to look at the big picture with all the variables thrown in. One thing I know is that if I ever lose my job and fall behind on the PLUS loan payments… I won’t lose my home. (And PLUS loans have a number of options for renegotiating payments in the event of hardship).</p>