Unsubsidized Stafford loan vs. home equity line

uml1958 · 03-30-2008, 02:17 PM

My S got $3,500 in unsubsidized Stafford loan with current interest rate of 6.8% from Duke. Should I take home equity line with prime minus 1% (currently around 5-5.5%) instead? Thanks.

thumper1 · 03-30-2008, 02:19 PM

It depends on who you want to be the holder of that loan. The Stafford Loans are in the student's name. The home equity will be in the parent's name.

musictoad · 03-30-2008, 02:22 PM

are you not aware of what is going on in the mortgage and real estate market?

HELOCs are having their limits capped--people who use them to supplement commission income are finding the mortgage co. freezes the loan due to the depreciating home values.

if it isn't happening in your town, it will. just wait.

get a plus loan if you want to fund your child's education and not have him liable. you can get 30 years to pay it off and the payment structure has a great deal of flexibility.

if you have any existing equity right now, enjoy it--don't spend it. it isn't going to last.

mominva · 03-30-2008, 02:32 PM

The student owns the Stafford loan and it becomes their responsibility upon graduation. With unsubsidized, the interest accrues from disbursement, but one could pay the interest as it accrues. I have paid the interest all along for my kids.

sueinphilly · 03-30-2008, 02:36 PM

why is the PLUS rate so damn high?! over 8% ?! ***??

it's totally out of sync with the interest rates for mortgages, home equity, and the fact that the Fed has lowered whatever it is that they lower.

ebeeeee · 03-30-2008, 06:06 PM

musictoad, doesn't your scenario depend on how much equity you have in your home? Even in today's falling markets, some of us have a lot of equity in the home that may mean it is okay to go with the HELOC. Or am I missing something?

drizzit · 03-30-2008, 06:14 PM

It can also depend on where you live. My house is still appreciating in value and the economy is fine for now. However I live in an energy producing state so oil and coal taxes are pumping in the money and employment right now.

I had no problem using a line of credit to ease cash flow problems and help with lump sum tuition payments and a small amount of debt.

Case by case but I used the line of credit and lower interest rates.

ebeeeee · 03-30-2008, 06:41 PM

drizzit, makes sense to me. Ours isn't appreciating but isn't depreciating either. We are in central CA and have been here for a long time so we owe about 1/8th of what the place is currently worth.

BunsenBurner · 03-30-2008, 06:47 PM

Quote:

get a plus loan if you want to fund your child's education and not have him liable. you can get 30 years to pay it off and the payment structure has a great deal of flexibility

Well, I have a question. Why would a bank be willing to give a 30-year loan not backed by any collateral to a person who is obviuosly over 40 years old?

Atlmom · 03-30-2008, 07:29 PM

why would you jeopardize your house when not necessary and NOT house related?

ebeeeee · 03-30-2008, 09:07 PM

atlmom, you have a point. I guess I just know I wouldn't default on the loan in either scenario and the savings in interest rate is attractive.

thisoldman · 03-30-2008, 10:31 PM

One way. You can pay a PLUS with a HELOC but you cannot pay a HELOC with a PLUS.

We did not use a HELOC in 2002-2006 because the rates on PLUS was fixed by law whereas HELOC had market variability.

We did not use HELOC because we are not able to itemize on our taxes whereas PLUS interest is deductible from gross income.

We did not use HELOC because there was much more paperwork.

We did not use HELOC because, I am too familiar with the lending institutions to give them any trust.

We did not use HELOC because the PLUS had consolidation priviledges.

We did not use HELOC because there was PLUS had other "insurance" features that HELOCS do not have.

Do not look at "rate" solely for rate.

musictoad · 03-31-2008, 06:30 AM

I think you need to assume the worst scenario in this economic mess.

if your house is paid for do not use it to fund the education. you will need a place to live. if you loose your job, the heloc still has to be paid. you can get a deferment with a plus loan. the heloc is a recourse loan which means if you default you are still liable unless you declare bankruptcy. the plus is not forgiven in bk unless dire dire circumstances exist.

in my neck of the woods almost 30% of the real estate listings are foreclosures and this is middle class stable solid America. I don't have any idea how many homes are in pre foreclosure or simply not being foreclosed because nothing, nothing is selling and the financing co. doesnt want to flood the market. i have heard of two real estate deals being withdrawn by the mortgage company right at closing. The home three houses away sits empty and hasn't sold in a year. no one bothers to even go thru it anymore. it's now listed with its second realtor and its price has dropped by almost 100k. I am not in Michigan nor Ohio nor CA nor AZ or FLorida. Our RE prices never had the appreciation that the coasts had. There are so many listings in our suburbs it will take years to sell the inventory. And if you are presently working and over age 50 you had better have a plan in case you lose your job because few hire over age 50 or pay what you currently earn.

If you are not planning for the worst you need to start thinking about it.

Chris D · 04-30-2008, 06:10 PM

Take the maximum Student Stafford Loan you can qualify for.
Now the debate is narrowed down to Parent Plus Stafford (8.5% interest rate)versus Home Equity Loan (6.0% interest rate). Granted interest from Stafford Loan is tax deductible but only up to certain Adjusted Gross Income, AGI. You also have to have proof that it is used for educational expenses. While interest from Home Equity Loan is also tax deductible and the only documentation you need is the bank statement comes income tax filing time. If you bought your house at least 4 years ago, I can guess you have enough equity for the loan. My bottom line: if you have no home equity then take the Parent Plus Stafford Loan. If you have enough equity, go for the home equity loan and enjoy the tax advantage without worrying income limit.

jude_36 · 04-30-2008, 06:39 PM

I think (and if I'm wrong about this, someone PLEASE correct me) that home equity counts as an asset on the Profile, and if you have more than 50k in home equity the college will assume that anything over that 50k is available to use to pay tuition. I don't think that consumer debt, including existing PLUS loans, will reduce the amount of money colleges think you can come up with.