Federal Direct PLUS or home equity loan for college costs?

by Grace

If you will be borrowing to pay for part of your child’s college costs, is it better to take out a federal Direct PLUS parent loan or a home equity loan?

Of course, there’s no single right answer for everyone because each option offers some advantages.  You should only consider a home equity loan if you have plenty of equity in your home.  Also remember that the window for taking out a PLUS student loan closes when your child finishes college but there is no similar time constraint on a home equity loan.  Here are a few points to keep in mind when deciding which is better for you.

Direct PLUS student loan

Home equity loan or line of credit (HELOC)

  • Lower interest rate, but HELOCs typically have high rate caps
  • Interest may be tax deductible, with some limitations and exceptions (deduction not allowed when using AMT method)
  • May be discharged in bankruptcy
  • Ties up home equity, making it unavailable for other borrowing needs
  • Risk of creating negative equity in home, limiting options to move and causing other problems.
  • Default puts home at risk for foreclosure

More information at these links:
The Federal PLUS Loan vs. Home Equity Loans
Federal Plus Loan vs. Home Equity Loan

%d bloggers like this: