<p>I have a dear friend who has a very driven daughter who was accepted into the Colorado School of Mines. She did get a substantial scholarship, but there is still about $12,000 a year in expected financial contribution. There are five children in the family of which 3 have gone the route of army/school/veteran’s benefits to pay for college. The daughter doesn’t want to go this route and is willing to pay back loans. Money is tight, but the family is willing to work together to help this very bright and driven daughter. </p>
<p>I’m asking your opinion. Wouldn’t it be better to take a second mortgage on their home for the four-year total of $50,000 and put it in an account earmarked for her schooling than to take out a Parent Plus Loan at a much higher rate?</p>
<p>If you met this girl, you would “bet the farm” that she would be a great success as an adult. Is there any other option?</p>
<p>Only if you can predict the future (job and interest rates unless it’s fixed) and KNOW that you will be able to pay that loan. Stop payments and lose the house. Payments would start immediately upon taking the $ from the bank.</p>
<p>The advantage of taking a second mortgage is that it maybe tax deductible. It is not free however to get one (origination costs, appraisal, etc.), but some of the fees can be amortized over the life of the loan (and deducted).</p>
<p>Correct me if I am wrong, but at certain income levels student loan interest is also tax deductible. Also, at certain income levels the interest on students loans is deferred, so there is no need to start paying off those loans until daughter graduates, while you have to start paying you second mortgage (I suggest command line of credit instead) as soon as you withdraw the money.</p>
<p>At minimum the parents should run the numbers to analyze what is going to give them the cheapest option. And the poster above me is right - once the parents take the mortgage on the house, they are on the hook for it regardless of success or failure of the daughter (or her willingness to pay back the loans that are in her parents name).</p>
Can the parents contribute anything beyond taking out a 2nd mortgage?</p>
<p>The student can take a $5500 stafford, work 10 hours or so a week during the school year ($2500), and work during the summer ($4000+), which covers the $12,000. In addition, the student could take a couple of co-op assignments and make some decent money.</p>
<p>It might not be a bad idea for the parents to set up a home equity line of credit (HELOC) if they can, as a backup if something comes up short. I don’t think I’ve ever paid anything to get a HELOC - no fees, no appraisal, no closing costs. They can then just write checks as needed. HELOCs in my area are running as low as 3% interest.</p>
<p>The loan cost was/is a competition issue in my area.</p>
<p>Currently TDBank is offering HELOCs for only a $99 fee with no other costs. While not free it certainly is pretty minimal. Citizens Bank is offering no application fees and no closing costs, although their rates are higher than TDBank. Another local bank is offering no application fees, no closing costs, no annual fees, and no relationship requirements.</p>
<p>So certainly in my neck of the woods you can get a HELOC for nothing or almost nothing.</p>
<p>Require the daughter to work summers, and to do everything possible to defray costs. There a wide variety of options here - AP credits, job during school, extra credits, part-time semesters with job, housing choice, cooking, etc., kids do all kinds of things. If the $12,000/year is the entire family contribution, it should be possible to reduce that by half easily. Then contribute as much as feasible before borrowing. Finally, take the cheaper rate, of course (the 2nd mortgage).</p>
<p>If money is that tight, will they even qualify for a second mortgage? Equity loan is what I had in mind, but still the house is collateral. No matter how amazing the child is, if a job is lost and the payments can’t be made, the house is at risk. </p>
<p>We might consider using the home equity, but we know we would be able to free up the funds if we had to pay it off under dire circumstances. (things we could liquidate in emergency, but wouldn’t use to pay tuition outright) If we didn’t have long term savings it might be risky.</p>
<p>I just point this out because it sounds like the family might live on the edge financially.</p>
<p>I believe everybody should get a home equity LINE OF CREDIT if/while they qualify and if there is no mandatory draw. It’s handy to have in a pinch and once you lose your job you won’t qualify, so you can’t always wait until you need it.</p>
<p>Thanks for all of the great insights! This girl has done everything possible for success; 2 full years of college transfer credit at our high school academy (though I don’t know how that will pan out with The School of the Mines), 29 ACT, #1 in the class, & 4.0 GPA. She works during the school year and will have a summer job. One difficulty is that she lives in the “middle of nowhere”, and making $4,000 a summer is nearly impossible, due to lack of location. Because she is interested in geological or petroleum engineering, perhaps she could snag a summer internship in the Colorado area while enrolled to boost earnings.</p>