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.

Will the Government Pay for Re-education?

Ever wonder if a different degree might land you a better job? That's what my friend Cindy was thinking about. She’s unemployed and thought about studying something in computers and getting a good paying job. The person in the financial aid office told her that she was prime candidate for government grants. Now Cindy was getting excited. She saw her future as promising.

In May the Pell Grant program was extended to the unemployed to help workers gain education that would make them more employable. It’s a rather sweet deal that can provide up to $5,350 for educational costs at community colleges, colleges and universities, and many trade and technical schools.

The grant is need-based is need-based and depends on the total income of your family. But for many unemployed it’s probably not so hard to meet the need requirement. Other criteria are that you must (1) not being in default on a federal student loan, (2) having a high school diploma, General Education Development (GED) equivalency or otherwise demonstrate your ability to benefit from the education or training offered, (3) be a U.S. citizen or eligible non-citizen and (4) Pell Grants are not available to students who have already received a bachelor's degree.

Number 4 is what got my friend. She not only has a bachelor’s degree, she has a master’s degree. Yet, she can’t afford to back to school. Even a low-interest student loan, which she could get, is not something she wants to think about. Taking on more debt is a frightening prospect.

The program doesn’t work for some other people that I know either. Again, they are over educated and unemployed. But I’m sure that there are many other people out there who could benefit from the Pell Grant program. To apply for a Pell Grant or other student financial aid go to FAFSA.

Little Known Education Tax Credits

Every little bit counts especially when it comes to saving on taxes. Here are two education related tax credits that you may not know about. For more specific information check out National Association of Student Financial Aid Administrators (NASFAA).

The Hope Scholarship Tax Credit
This is nonrefundable tax credit, not a scholarship or tax deduction. To receive the Hope tax credit, a family or student must file a federal tax return and owe taxes. Families and students that don't pay taxes cannot receive money are not eligible.

For 2008, the amount of a Hope or Lifetime Learning Credit is phased out for those with a modified adjusted gross income (AGI) between $48,000 and $58,000 ($96,000 and $116,000 for joint returns). Those with a modified AGI of $58,000 or more ($116,000 for joint returns) are not eligible.

Beginning in 2008, the amount of the Hope credit (per eligible student) is the sum of:

• 100% of the first $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for the eligible student, and
• 50% of the next $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for that student.
• The maximum amount of Hope credit in 2008 is $1,800 per student ($3,600 for students in Midwestern disaster areas).

Tuition and Fees Tax Deduction

This tax deduction was set to expire in 2008, but Congress extended it until Dec. 31, 2009 as part of the $700 billion economic stimulus package.

The Tuition and Fees Tax Deduction can reduce taxable income by as much as $4,000 for 2008. This deduction may benefit taxpayers who do not qualify for either the Hope or Lifetime Learning Education Tax Credits.

It is taken as an adjustment to income, which means you can claim this deduction even if you do not itemize deductions on Schedule A of Form 1040.

An eligible taxpayer must file a federal tax return to claim the Tuition and Fees Tax Deduction. The taxpayer must also claim an eligible student (an individual enrolled in one or more courses at an eligible educational institution) as a dependent on the tax return. The deduction may also be for the taxpayer or the taxpayer's spouse.

Lifetime Learning Tax Credit
This tax credit for 2008 is gradually phased out for those with modified AGI between $48,000 and $58,000 ($96,000 and $116,000 for joint returns). The Lifetime Learning Credit is a nonrefundable tax credit available to individuals who file a tax return and owe taxes.

An eligible student may be enrolled in an eligible program leading to an undergraduate or graduate degree at an eligible school during the calendar year OR may be enrolled in any course of instruction at an eligible school to acquire/improve the student's job skills during the calendar year. Students may claim the credit themselves if they are not claimed as a dependent by another taxpayer.