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Types of Aid
The Federal PLUS Loan vs. Home Equity Loans
Using a home equity loan to help pay college costs has been a popular option, since the interest is tax deductible. However, many families would rather have the peace of mind of not putting their house on the line to pay for college.
If you are considering using your home equity to pay for college instead of a PLUS Loan, be sure to consider these points:
Interest Cap
Many home equity loans have very high interest rate caps, which means that if interest rates were to rise, a home equity loan could become a very expensive option--even with the tax advantage.
Liquidity
Parents who hold on to their equity have the peace of mind of preserving their liquidity; they have the funds available for emergencies as well as opportunities.
Insurance
Unlike most home equity loans, the PLUS Loan is fully insured against death and disability and payments can be deferred during times of financial difficulty.
These questions can further help you evaluate the PLUS Loan vs. a home equity loan:
What is the cap on my equity line?
Many home equity loans have very high interest rate caps.
Do I have enough equity available to cover all four years and all of my children?
Many parents don't, and that's why they are taking advantage of the PLUS Loan now while the terms are so favorable.
Would my equity loan be fully insured?
Is it forgiven in the event of death of the parent and/or student or the total disability of the parent? Does it contain a payment deferment or forbearance clause for times of economic difficulty, like the PLUS does?
Am I carrying any debt above 9%?
Most parents in this situation use the PLUS to pay for school, which frees up other monies (equity, for example) to pay off more expensive debts. Nobody wants to be in debt, but taking out a 9% loan is far better than carrying a credit card balance at 17 or 18%.