College debt has been on the rise for a long time—in 2013, the average American family took on more than $62,000 in debt to pay for college.1 You might also remember the new legislation passed in August 2013 that affected PLUS loan interest rates.
Loans, when used wisely, can be a great way to pay for your child’s college education. But taking on excessive debt will affect your financial standing, so you need to be careful and work out a plan for how your family will pay for college. In fact, families that have a plan for how to pay for college borrow 48% less in loan money than families without a plan.2
Parents have 5 loan options:
If you have a significant amount of equity in your home, you might want to refinance the entire loan, hopefully at a lower interest rate, and borrow a lump sum beyond the mortgage payoff amount. After the mortgage is paid off, you can then access that lump sum and use it as a college fund. Interest on loans against the home are very low today and (in most cases) provide a tax benefit.
Instead of refinancing a single loan at a larger amount, you could take on a second loan against your home. This would be a new loan with its own terms. Of course, the idea would be to use the money from that second loan as a college fund.
In this arrangement, you establish an amount up to a certain maximum, based on the equity you have in your home, that is available to you to borrow if you need to.
This loan is designed like a checkbook, where you can write a check to the college when needed. The amount you expend from the line of credit then accrues interest. It is not uncommon to pay interest only to the lender on the amount expended, keeping the payments low while your student is in college. When the line of credit, which is often established for 5 years, expires, you can then pay down the principal.
Although borrowing against retirement plan programs could have program-specific rules, the general standard is that you can borrow up to 50% of the value of the account, or $50,000 (whichever is lower).
You are obligated to pay your own account back—on both principal and interest—during a 5-year period. It is important to recognize that you are repaying yourself and replenishing your own account with interest. All of this, if done correctly, can be done with no tax or premature withdrawal penalties.
Be careful if you pursue this option—you don’t want to disrupt your retirement plans.
This parent loan, offered to most families, is a federal program that allows parents to borrow money on behalf of their child(ren) for college. The amount borrowed cannot exceed the difference between the cost of attendance and any amount available in grants and scholarships.
The PLUS has a fixed interest rate of 6.41%, with a cap of 10.5%, and a standard repayment program of 10 years. It is important to note that the PLUS repayment begins right away. Although the PLUS isn’t normally deferred, a deferred payment plan can be worked out.
About the Author
Frank Palmasani has helped families work through the college financial aid system for more than 30 years. He is committed to helping all families create a plan for finding the right colleges, without taking on mountains of debt.
1. “How America Pays for College 2013.” Sallie Mae. July 2013.
2. “How America Pays for College 2012.” Sallie Mae. July 2012.