The price of higher education is sky-high these days, which means parents and students alike need help paying off their debts. The only question is: where is the extra money going to come from?
For parents who are considering helping their student with the debt that comes from higher learning, there are two potential avenues to look at: Parents PLUS loans and Home Equity Lines of Credit (HELOC). The only question is: which of these two options is better for you and your situation, and why should you choose that option? Let's consider the benefits of each to get a closer look.
What is a Parents Plus Loan?
A "Parents PLUS loan" refers to federal student aid in which parents borrow on behalf of their children. The upper limit of this loan is up to the full cost of school attendance, though you'll subtract any financial aid that has already gone to your child.
This may sound like a "ceiling" on the amount you can borrow, but as far as student loans go, it's highly flexible. If, for example, your child hasn't received any financial aid yet, a Parents PLUS loan having a ceiling as high as the full cost of school attendance can mean borrowing a lot of money.
A Parents PLUS Loan is also a fixed-rate loan, which means there won't be any unpleasant surprises if interest rates go up. Throughout the life of the loan, you'll pay the same interest rates. This makes it easier to plan for paying off the loan, since every monthly payment will be predictable.
And speaking of repayment, you'll have a few different options for scheduling a repayment plan on a Parents PLUS loan:
Standard: A standard repayment plan works over a duration of 10 years, in which your payments are divided into fixed monthly payments.
Graduated: A "graduated" repayment plan will start with smaller payments which gradually rise over the 10 years you have to pay it back. This can be especially helpful if you anticipate your income going up in the same period of time.
Extended: An extended payment plan can use either a Standard or Graduated plan, but with a period of 25 years rather than the typical 10 years.
Income-Contingent: In this arrangement, you may have to pay 20% of the discretionary income you earn. Alternatively, you'd pay off a 12-year plan. The income-contingent plan would take the lower of these two options. If, depending on your income, you still owe after a period of 25 years, you may then be eligible for forgiveness on the student loan.
Benefits of a Parents Plus Loan
A Parents Plus Loan has the immediate benefit of having parents step in and assist with educational borrowing, which can be especially helpful to students with limited means or poor credit. Let's look at a few of the advantages to handling college education payments this way:
Flexibility. Because a Parents PLUS loan is eligible for the full amount of the cost of attending school, it can be an option to secure full funding for a student who otherwise wouldn't have the means to achieve it. This offers flexibility on the part of the borrowers. Rather than having an upper limit of, say, $5,000 or $10,000, the Parents Plus loan can go higher and higher until it meets your needs.
Fixed-rate terms. Without fixed-rate terms, a loan like this could be scary. You never know what kinds of movements in interest rates are coming down the pike. So rather than take out a loan that depends on changing interest rates in the economy, you can simply borrow at a fixed rate. With standard repayment terms, this would create a simple, easy-to-remember monthly repayment plan that doesn't change throughout the life of the loan. This makes it easy to fit a Parents Plus loan into your financial planning.
Protections. Given the different types of repayment plans (see above), Parents PLUS loans can be more flexible than typical financial aid. Rather than be completely beholden to the repayment plans of other loans, Parents PLUS loans use the credit of the borrowers (in this case, the parents) to offer more flexible protections and terms.
How to use a HELOC for college
Here's the catch with Parents PLUS loans: they depend on a few variables, like having good credit, or paying an origination fee. But there's another option parents can tap into if they want to send a child to college: home equity. By obtaining a Home Equity Line of Credit, or HELOC, parents can borrow against the equity they have in their home to secure a relatively low-rate loan. A HELOC works similar to a credit card—though typically with lower interest rates—in that you don't have to borrow the full amount of the credit extended to you.
And, like a credit card, a HELOC can be incredibly flexible. There's no upfront requirement as to what you have to use the money from the HELOC for. This means you can easily put a HELOC towards debt consolidation, which is a common choice. Or you can simply decide to put that line of credit towards the education of a child.
The terms of a HELOC typically include interest rates lower than that of a credit card because the loan is secured by your home.1 This added security offers an advantage over borrowing against a credit card: the lender won't require sky-high interest rates in return. And because a HELOC is flexible, you only have to borrow as much as you need to borrow—you don't have to take out the full amount unless it's necessary for your child's financial education.
The benefits of using a HELOC for school
Why use a HELOC to help pay for school and higher education? Consider the benefit, lower interest rates. Looking at the benefits above, you might wonder why you wouldn't simply borrow the money from a credit card. The answer is simple: interest. Borrowing $10,000 at 20% interest, for example, creates $2,000 of yearly interest payments. Borrowing $10,000 at 5% interest, on the other hand, only requires paying $500 in interest. And those numbers are even more stark as you borrow more. These days, considering the price of education, every little bit of savings helps.
Figure out your finances
Figure makes it easier than ever to apply for a HELOC without complicated processes and wait times. That can be especially helpful when college is around the corner and you need money as quickly as possible. To help handle student loan debt and financial assistance when sending a student to college, consider a HELOC with Figure.
1 The Figure HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay.