College Loans: When Parents Need to Borrow

Are you a parent looking for a college loan?

Most of the press attention is focused on college loans that students take out, but there are parent loans as well.

In case you missed them, I wrote about federal student loans in my last two college blog posts:

4 Things You Need to Know About Federal Student Loans

Federal Student Loans:  Where Do I Apply?

Today, I’m going to focus on parent college loans. I’m focusing on PLUS Loans and home equity lines and I will write about private loans in my next post.

PLUS Loan

For  parents, the federal government offers PLUS Loans. At first blush, the terms won’t look so great. Beginning July 1, all PLUS Loans will offer an interest rate of 7.9%.

Currently, some parents are paying 8.5% for their PLUS Loans through the FFEL program, which blessedly is about to bite the dust. It’s not worth explaining why the FFEL college loan program was a rip off to taxpayers, but if you’re curious about the history, just click on the link in this sentence. (The federal student aid website still refers to FFEL PLUS loans, but ignore that! I hope the feds update the website soon.)

Here are four potential benefits of the PLUS Loan:

1. The PLUS Loan comes with a fixed interest rate. Okay, sure the 7.9% seems awfully high considering where interest rates are currently. I agree.

It’s my understanding that interest rates on these college loans are higher than you could get, say with a home equity loan, because there is no collateral. If you stop making payments on your mortgage, the lender has your house as collateral. If you stop making payments on your PLUS Loan, trust me bad things will happen, but no one will confiscate your kid’s college diploma.

When you consider how low interest rates are currently, there is little to no room for them to drop further. When interest rates start jumping, parents with a fixed rate loan most likely will be glad they have one. Private college loans have no interest rate ceilings!

2. Just about all parents can get a PLUS Loan. You have to have really messed up your credit to be turned down for a PLUS Loan.

3. Everyone gets the same terms. Everyone borrowing through a PLUS Loan for the upcoming college year will get the 7.9% interest rate. That’s not the case for families using private loans. Private lenders will charge higher interest rates to families with lower FICO scores and will even base interest rate decisions on what schools students are attending.

4. The loan ceilings are higher. Parents can borrow up to the cost of their child’s college expenses minus any financial aid that the family has received. Of course, that doesn’t mean parents should borrow that much. Please read:

College Loans: How Much Should Parents Borrow?

Home Equity Loan

If I ever have to borrow for college, I’m going to tap into my home equity line of credit.  The HELOC is variable, but my loan is one percentage point below prime. It’s at a great rate – 2.25%. Anticipating college costs, I set up the HELOC when my daughter, who is a junior in college, began high school. If I need it, I feel fortunate that the credit line is there.

For many parents, their home equity line is going to offer a better interest rate, but there are three potential problems:

1. If you don’t possess a line of credit, you might not be able to obtain one now because of tighter loan underwriting.

2. You might not have any home equity!

3. The interest rates on these lines are variable. You could be better off with a fixed rate versus a credit line rate of say 6%. See the admonitions above about fixed versus variable rates in this environment.

FYI, I interviewed Tim Ranzetta, a really smart guy, who is founder of Student Lending Analytics, so my next post will be about private college loans.

Lynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller. She also writes a college blog for CBSMoneyWatch. Follow her on Twitter.