Tuesday, August 18, 2009

Should You Use Your Home to Pay for College?

I saw this headline the other day on a bank website, “Home Equity loans have better rates than student loans”. Really? Hey, I think home equity loans and lines of credit are great. They’re useful for all kinds of things, they are usually low-interest and they have nice tax advantages, but I questioned whether home equity rates were really better. I had to check it out, so I paid a visit to SallieMae.

Federal student loan rates dropped in July. Stafford loans—for loans first disbursed July 1, 2009–June 30, 2010, the interest rate is fixed at 5.6%. Plus loans are set at a fixed rate of 8.5%. These rates are adjusted annually and depend on when funds were dispersed. Still, the Stafford loan is not only good, but it's even lower over the next few years.

In comparison to home equity lines of credit (HELOC) the federal rates are not great. Private student loans can be much higher. The Sallie May Smart Option (not federally funded) carries a rate of 11.47%.

But the biggest difference between specific student loans and using your home equity is in the payoff schedule. Home equity loans and lines of credit are paid back monthly as soon as the money is dispersed. You won’t start making payments on student loans until after graduation. That’s also true if you’re a parent and have taken out a Federal Parent Plus loan.

HELOCs also carry tax advantages. Interest on a home equity loan could be fully tax deductible, while interest on student loans allow for a fixed maximum deduction each year on the interest paid. You’ll need to check with a tax expert about your particular situation.

Using a home equity loan or line of credit can be a smart option. Just remember that the reason this loan is lower is because you are using your home as collateral. Be confident that you can pay off the loan or you put your home in jeopardy.

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