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Home Equity Loans

OldDadOldDad 3 replies1 threads New Member
Well, after the good news (getting into college) comes the bad news (paying for college). I'm curious as to what people think about home equity loans as a way to pay for part of tuition expense.

It seems that home equity loans are tax deductible and usually at decent rates. We've got ample equity to work with in our house.

We aren't planning to borrow massively. Son will do the Stafford loan each year. Mainly, we are weighing the PLUS loan that colleges seem to push vs. a local home equity loan. Any thoughts? (I've been reading here for a while, great site!)
edited June 2005
32 replies
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Replies to: Home Equity Loans

  • dharmabumdharmabum 25 replies4 threads New Member
    I asked a similar question titled "Plus Loan vs. Home Equity Line of Credit" in the Parents section of this site which you could probably find a few pages back. Basically, people were split on which works better. If you already have an open HELOC, it makes sense to use that rather than incur the origination fees with PLUS loans. Both can be tax deductible, though the amount of deductible student/PLUS loan interest is capped and the deduction phases out above certain income levels. People also pointed out that HELOC interest deductions can be erased by the Alternative Minimum Tax if one falls into the clutches of the AMT. I don't know what the AMT does to student/PLUS loan interest, but probably nothing good. It was mentionned that PLUS loans have longer repayment periods and under certain conditions payments can be suspended for a period of time. Finally, some posters siad that they were wary of tying one's home to a high level of debt and so preferred the PLUS loan for that reason. One suggestion was to use the HELOC for the first 3 years of college, reducing the equity in the home if one attends a college that counts home equity as an asset, then taking out a PLUS loan at the end and paying off the HELOC. The only other thing I have debated with myself is that the HELOC I have has a variable interest rate which is very low now but could go as high as 17%. PLUS loans are currently capped at a maximum of 9%. Hope this helps and I am curious to see what others recommend.
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  • musicmommusicmom 2447 replies89 threads Senior Member
    Great thread.
    Since we have an open HELOC, we're using it to pay some tuition.
    About 1/3 from 529 plan, about 1/3 on HELOC and about 1/3 out of pocket. Our son is only first year so we'll see if this 'plan' holds up!

    I like the suggestion to take out a PLUS loan at 4th year and pay off the HELOC....especially since ours is variable and PLUS would be fixed.
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  • OldDadOldDad 3 replies1 threads New Member
    Makes sense, thanks for the input. We've talked to a number of banks that offer home equity loans or lines of credit, and the terms are really all over the map. Some will lock in a fixed rate for quite a while, some are variable. One would let us lock in a fixed rate for five years and pay only interest until the note is due. Of course, we'd have to either pay it off or refinance it at whatever rate is in effect then.
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  • ohio_momohio_mom 4029 replies16 threads Senior Member
    This is also something I have to run the numbers on carefully as my son is on grant aid rather than merit, and there is the EFC calculation (e.g., home equity) to take into account. If we go the home equity route (at least this year) I will make sure I can lock in the rate.

    Another issue to consider with the HELOC option is disability/unemployee insurance. The Plus loans let you defer if you are out of work.
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  • EconProfEconProf 35 replies1 threads Junior Member
    I hope some others will weigh in on this topic. We are debating the same issue in my household right now -- HELOC versus PLUS. We don't have an open HELOC, but the PLUS loan has a 4% origination fee.

    This is our first child in college, but we will have another starting when this one graduates.

    Another question: are all PLUS loans created equal? The colleges that my daughter is considering have 'preferred' lenders; there are also PLUS loans offered through a non-profit group in our state of residence, Iowa. My sense is that the fees are the same (4% upfront), so the only question is service.
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  • SaintofmeSaintofme 304 replies40 threads Member
    FYI, all PLUS loans issued after July 1, 2006 will be at a fixed rate of 7.9%. One strategy to consider is to take a bigger amount of PLUS loans for this year if you think that the long-term variable rate of the current PLUS loan arrangement will stay below 7.9%. I don't know if consolidation of PLUS loans will be available anymore once they go to this new fixed rate system. If anyone has any further information on this please post.
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  • patsfanpatsfan 161 replies4 threads Junior Member
    What is the source of the switch to the PLUS loan fixed rate of 7.9%? This represents a substantial increase over the current rate.

    Under the current structure, I would recommend a PLUS loan over Home equity. The PLUS loan rate I am now paying is 3.17% even though it will definitely increase on 7/1/2005. The loan origination fee is 3%.

    I have a problem with home equity loans. Granted they are tax deductible, but you are pledging your house as collateral. The rate is currently 5.25% on an equity loan I have for home improvements. This translates to 3.94% after taxes (assuming a 25% tax rate).

    Also, while neither my son nor myself expect to die, a PLUS loan is forgiven if either the parent or the student dies. PLUS loans are also paid back over a longer period of time.

    My thinking may change if I was looking at 7.9% fixed versus equity.
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  • SaintofmeSaintofme 304 replies40 threads Member
    This is from a well-known financial aid website:

    On February 8, 2002, President Bush signed legislation (Public Law 107-139) changing the interest rates on education loans from variable rates to fixed rates for new loans issued after July 1, 2006. The interest rate on the Stafford Loan will be 6.8% and the interest rate on the PLUS Loan will be 7.9%.

    There is some hope that this legislation may be repealed when the Higher Education Act is reauthorized in Congress this year or next but as things stand now this is how it will be.
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  • EconProfEconProf 35 replies1 threads Junior Member
    If the interest rate is rising to 7.9% next year, wouldn't it make sense to borrow the maximum this year? Specifically, we have a 529 account and we were planning to use 1/4 of it per year and borrow the remainder of what DD needs. However, given the lower interest rate this year, I'm thinking we should borrow the max this year, leave the 529 alone, and borrow less at the higher rate next year. If the rate of return on the 529 were no lower than the interest rate on the PLUS, we'd be no worse off (aside from the origination fee, which is not negligible).

    Of course, we're making a guess about the likely change in interest rates and stock portfolios over the next year!
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  • SaintofmeSaintofme 304 replies40 threads Member
    I would borrow the max this year also pending any further legislative changes.
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  • itstoomuchitstoomuch 1727 replies18 threads. Senior Member
    thankyou saintofme. Posted a new thread. You probably want to move your thoughts over there or start your own.

    We've been screwed.!!!! Middleclass, Again.
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  • OldDadOldDad 3 replies1 threads New Member
    Hmmm, it's sounding like a home equity loan might be a better deal than a PLUS loan, at least for now. A loan origination fee of 3% seems a bit steep, too, although I suppose over the lifetime of the loan it could be offset if the interest rate is better.
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  • anxiousmomanxiousmom 5811 replies105 threads Senior Member
    I have heard that the origination fee is not set in stone. I think my credit union is offering PLUS loans with no origination fee.
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  • 1moremom1moremom 3870 replies95 threads Senior Member
    I think it comes down to gathering the fee, rate and term information for all the different loans, including best guesses for adjustable rates and how long you expect to carry the loan, then "plug and chug" to see what is the best plan for your family.
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  • OldDadOldDad 3 replies1 threads New Member
    Thanks for the input.

    I think you are right, 1moremom. I know when I was checking out home equity loans, there were really huge differences in the offerings of each bank - fixed & variable, short vx. long term, interest only payments vs. principal & interest...
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  • avoidingworkavoidingwork 766 replies20 threads Member
    when i checked out PLUS loans last year, there were several programs which forgive part of the origination fee after you've had the loan for a while. I ended up not getting a PLUS loan; am relying on my HELOC, but was fortunate enough to have had enough cash flow to cover my share of tuition/room & board
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  • EconProfEconProf 35 replies1 threads Junior Member
    The other "fly in the ointment" that I've recently discovered is, if I understand this issue correctly, that some schools are Direct loan and some are FFEL. The direct loan schools require the parent to acquire the loan directly through the school (from Sallie Mae directly?), while the FFEL schools allow parents to find their own PLUS lender. As far as I can tell, there is no break on the origination fee or interest rate if the school is a direct school. However, given my situation, I can get a PLUS loan with a 3% origination fee (instead of 4%) and a 0.25% rate reduction, but only if the school my DD chooses is a FFEL participant. Given the amounts we are considering borrowing, this is a substantial difference for us.
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  • nunofyurbeeskneesnunofyurbeesknees 196 replies29 threads Junior Member
    And another fly in that ointment. If you get hit with the Alternative Minimum Tax I don't think you're able to take the HELOC deduction. Of course, I understand none of this stuff so don't quote me!
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  • angstriddenangstridden 773 replies76 threads Member
    My hubby is a mortgage broker. He says home equity lines are wonderful to use because of the tax breaks..unless you can get a subsidized or interest free loan.
    If you have any questions..ask and I will ask him.
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  • jamimomjamimom 3277 replies1 threads Senior Member
    The other advantage of home equity loans for those whose kids go to college that requires profile and counts home equity in assets, is that as you deplete than number each year, you bump up your financial aid eligibility. Particularly useful for areas where the home values go up a lot. If you are on the tail end of being eligible for financial aid, or have another kid coming up for college as well, dipping into home equity reduces your assets when assessing your need. And remember that you can take PLUS loans retroactively.
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