<p>We are tryig to decide what is the best option for paying for college.
Let’s suppose that we need to borrow $10K per year ($40K/four years) to pay for the college.<br>
Our options are
(1) Borrow from home home equity
(2) Take a parent plus loan</p>
<p>Which one of those two is the best option interms of tax benifits?
We are comfortable borrowing from homeequity , but just wondering if there are any tax advantages on taking aprent plus loan. </p>
<p>Appreicate any input</p>
<p>Have you run the numbers through a tax calculation program like TurboTax? That would probably be less painful than doing it on paper by hand.</p>
<p>What would be the tax advantage of taking a Parent Plus loan?</p>
<p>I am not sure much about parent plus loans and tryng to find out.
My inital thought was that if we take a parent plus loan it would be separate.
I am just toying with ideas. I am just wondering whether others had consider these options.</p>
<p>I just checked the Turbo Tax and couldn’t find anything on parent plus loans under Education loans in deductions and tax credits section.</p>
<p>The Parent Plus loan is like any other consumer loan. There is no tax advantage to taking it. At least with a home equity loan, the interest paid is deductible if you itemize your taxes.</p>
<p>Honestly, I don’t know any tax advantage to consumer loans…and that is what the Parent Plus Loan is. Perhaps that is why you didn’t find anything on Turbotax referencing it for educational purposes.</p>
<p>According to turbotax you can claim a deduction for interest paid on a student loan that was for you, your spouse, or someone who was your dependent at the time you took out the loan. I can’t copy and paste the little blurb but if you go to your turbo tax and go to deductions and credits and down to education expenses there is a ‘student loan interest paid’ option and a ‘learn more’ thing to click on. Wouldn’t a plus loan qualify here?</p>
<p>Oh here is some blurb about it at finaid.org
[FinAid</a> | Loans | Loan Tradeoffs - Public vs. Private](<a href=“http://www.finaid.org/loans/loantradeoffs.phtml]FinAid”>http://www.finaid.org/loans/loantradeoffs.phtml)</p>
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<p>Yes…that is true. It’s for the interest you pay only…and the deduction doesn’t amount to much. Also, it only applies once you have PAID the interest. There is no tax benefit for TAKING the loan.</p>
<p>Thanks swimcatsmom, I saw the blurb. By reading Finaid, perhaps parent loans may be better. According to finaid.org parent plus loans have a lower interest rate (it is fixed) than the home equity loans. My D’s FA package had 7.75% interest for paren plus loans. </p>
<p>Thumper, I was thinking about overall tax benifit part for interest paid in both cases. I wanted to find out which option would cost less for me more at the end of the day.</p>
<p>You have to be careful about double-dipping, particularly the impact of a HELOC on your ability to claim Hope/Lifetime credit. I would do mock taxes for next year with both scenarios and see which way you come out ahead.</p>
<p>As far as I am aware neither a home equity loan nor plus loans will impact your ability to claim the Hope or lifetime learning credits. </p>
<p>You can still claim the Hope and lifetime credits if tuition and fees are paid with the proceeds of a loan.</p>
<p>The ‘double dipping’ rules do apply to other education tax benefits - for instance you cannot use the same qualified education expense to calculate the non taxable portion of scholarships and grants and then again for the Hope tax credit or for a tuition and fees deduction. But you can pay tuition and fees with loan proceeds and still claim the hope tax credit.</p>
<p>This is the way I would look at it.</p>
<ol>
<li><p>If you take out a Parent Plus loan you can take an above the line student loan interest deduction (line 33). If we based this on a full first year of $10K you would have a deduction of about $700-800. This deduction caps at $2500 per year, so by the 4th year (a loan omount of 40K) you may not be able to take the full deduction. </p></li>
<li><p>If you itemize (qualified deductions of $10,700 or more) you can take this deduction under home mortgage interest and points on schedule A. Now technically, this deduction is only if the money was used for home improvements, but I think you would have a tough time finding anyone that doesn’t just deduct it anyway. </p></li>
<li><p>At this point, your tax liability is pretty much the same either way. But clearly if you do not itemize you should take the Parent Plus. </p></li>
</ol>
<p>NEXT I would look at the impact each of these has on your financial aid eligibility.</p>
<ol>
<li><p>Because the student loan interest deduction is “above the line”, it will reduce you AGI. Will a deduction of 700 the first year, 1400 the next etc. make a difference in your federal EFC?? </p></li>
<li><p>The home equity loan will reduce the equity you have in your home. Is your school a CSS profile school? Based on my son’s financial aid offer from his profile school , it was clear that they expected a contribution of 5% from home equity. In this scenario, every $10K that the home equity is reduced results in $500 in more aid. By the last year, that could mean $2k.</p></li>
<li><p>Of course I am assuming that your income and assets place you in a position where you have some financial aid eligibility. Also, if it’s only a fasfa school you would probably be better off reducing your AGI and taking the Parent Plus.</p></li>
<li><p>If you have financial aid eligibility I would play with the numbers on the EFC calculator to see the impact of each. If it’s a profile school use the institutional methodology. </p></li>
</ol>
<p>As other posters have mentioned, either way will not affect your ability to take the HOPE or the lifetime learning credits.</p>
<p>Thanks JJcddg, Your points are very helpful
We are considering a FAFSA school.</p>
<ol>
<li>If you take out a Parent Plus loan you can take an above the line student loan interest deduction (line 33). If we based this on a full first year of $10K you would have a deduction of about $700-800. This deduction caps at $2500 per year, so by the 4th year (a loan omount of 40K) you may not be able to take the full deduction. </li>
</ol>
<p>Dumb question perhaps, but is the student loan interest deduction only if you paid interest, as in loan repayment or also if you accrue interest. I did my DDs taxes on TurboTax and said no, she did not pay interest on a loan, as in my mind she took out the loan, but won’t pay until later. If she paid deductible interest by accruing, should there be some sort of form showing that?</p>
<p>No you cannot take the deduction for interest accrued during the tax year - only for interest actually paid in that tax year. </p>
<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a>
page 27</p>
<p>But I *think *from reading the above you can claim a deduction for it when you start repaying it. So if you capitalize interest of $800 in 2008 but make no payments in 2008 you cannot claim it. But if you start making payments in 2009 and $50 of that payment is for the $800 that was capitalized you can claim the $50 in 2009. I think. How you work that out - someone here has hopefully done this and can advise.</p>