Fund an education Archives

December 21, 2022December 21, 2022

HEIs: A Student Loan Forgiveness Alternative?

With the average cost of a college education at $10,740 and $38,070 per year for public and private institutions respectively, and rising by the year, it’s no surprise that the typical student loan borrower owes $28,950, and more than half of all students from public institutions (55%) have student loans. Currently, national student debt totals $1.75 trillion, with individuals ages 25–34 saddled with the brunt of it; this group owes a collective $500 billion in debt.

Today, the federal student loan program consists of direct subsidized loans, which provide up to $5,500 to undergraduate students in need. For loans that were disbursed on or after July 1, 2022 and before July 1, 2023, the interest rate is 4.99%. There are also direct unsubsidized loans that don’t require financial need and provide undergraduate, graduate, and professional degree students with up to $20,500 in funding. Like the subsidized loans, the interest rate is 4.99% for undergraduate students, but is higher for graduate and professional degree students at 6.54%. In March 2020, the federal government paused student loan payments. That pause has been extended until at least January 2023.

Student Loan Forgiveness Proposed — And Blocked

On August 24, 2022, President Biden announced a planned student loan forgiveness program that cancels up to $20,000 in debt for Pell Grant recipients, which includes those with direct student loans as well as select Perkins and FFEL loans, and up to $10,000 for non-Pell Grant recipients.

There were some established criteria applicants needed to meet in order to qualify for this program, including an adjusted gross income (AGI) of less than $125,000 for individuals, and $250,000 for married couples and head-of-household. This income cap could be based on either 2020 or 2021 federal tax returns. Those who had private student loans would be ineligible. However, only 8% of student loans are private, allowing the vast majority of loan recipients to potentially take advantage of the forgiveness program as long as they met the income requirements.

In mid-October, the Department of Education published the student loan forgiveness application, which was fairly short and didn’t require any additional documents or a Federal Student Aid (FSA) ID, prompting millions of individuals with loans to apply.

However, on November 10, 2022, a federal judge in Texas struck down Biden’s forgiveness program, stating that it was illegal. This was after another legal challenge had also stopped the program in its tracks. While the Justice Department plans to appeal this ruling and hopes to provide the 16 million previously approved borrowers with expedited relief if and when the ruling is overturned, those who are in need of quicker financial assistance might be seeking ways to begin making progress toward eliminating student debt in the meantime — and even after receiving loan forgiveness if they owe more than the $10–20,000. There are also those who don’t meet the income requirements that are still in search of solutions to eliminate their student debt.

An Alternative Option to Pay Down Student Loans

If you’re a homeowner, a home equity investment (HEI) can be an ideal way to get rid of student debt depending on your personal goals and situation. Not only is it a good way to potentially take advantage of the recent record high amounts of home equity, but because there isn’t any interest or monthly payments, you can potentially pay off your own or your child’s loans more quickly than with other options. If the loan forgiveness program pushes through and you still have an outstanding balance beyond the maximum relief cap, a HEI could help pay it off. And there aren’t any restrictions on how the funds are used, so you can accomplish other financial goals like paying off credit card debt or making home repairs.

Plus, the effective period of a Hometap Investment is 10 years, giving you time to handle bigger financial priorities before beginning to pay off loans, or vice versa.

Take our five-minute quiz to see if a Hometap Investment might be a good way for you to begin eliminating student loan debt.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

July 21, 2022July 22, 2022

Fund Your Child’s Tuition without Touching Your Retirement Savings

As the cost of higher education skyrockets, many parents are understandably concerned about how they may be able to cover tuition and fees without using retirement funds to pay for college. A recent report found that 68% of parents would consider pulling from their retirement savings to help pay for their children’s college education. At the same time, 41% of Americans don’t think they’ll have enough money saved to retire, creating a precarious situation for families who are trying to handle day-to-day costs on top of pursuing long-term financial goals.

A recent study found that many of those who do save don’t reach their goals – especially those who aimed to have $30,000 or more stashed away for higher education.

If at all possible, you should avoid making a 401K withdrawal for education or using a 401k to pay for student loans. Not only will you pay extra taxes if you withdraw before age 59 ½, but you’ll also face a 10% penalty. Most importantly, it will chip away at the funds you’ve worked to save for your future.

Fortunately, there are solutions for paying for your child’s education that don’t involve drawing from your hard-earned retirement savings — or even taking out a loan. We explain some of the most common ones below, so you can determine the best way forward for your family.

529 Plans

A 529 plan is an investment account that’s specifically designated for education savings and provides tax benefits for those in certain states. There are two different 529 plans. Prepaid tuition plans let the account holder buy units or credits at select colleges or universities (usually in-state or public schools) for tuition only, though there are more than 250 private colleges which offer a plan through the Private College 529 Plan. The second kind of 529 plan is an education savings plan, which provides a bit more flexibility by allowing the borrower to put away money for tuition, fees, and room and board. Both of these plan types work very similarly to a Roth IRA, which we’ll discuss below.

IRAs

You may not have known that you can use an IRA withdrawal for college funding, but it’s possible if you keep certain restrictions in mind.

When it comes to IRA distributions for education, whether you’re pulling from a Roth IRA or traditional IRA matters. Since a Roth IRA is funded by post-tax dollars and a traditional IRA is funded by pretax dollars, you can take out the full amount of contributions from your Roth IRA without any penalties or fees (but not earnings).

In order to bypass the standard 10% early withdrawal penalty that is attached to a traditional IRA, you must provide proof to the IRS that the student you’re paying for is currently attending an eligible institution; you can’t use the funds after graduation to pay off loans. It’s also important to note that the amount of the withdrawal cannot exceed the qualifying expenses you’re seeking.

Student Loans

Of course, there are traditional student loans, including federal loans, private loans, and refinance loans. Federal loans, which are generally the easiest to qualify for and available to nearly every high school graduate, consist of direct subsidized loans, direct unsubsidized loans, PLUS loans (which we’ll explain a specific type of below), and direct consolidation loans. Private loans are typically more difficult to obtain due to credit requirements and come with more restrictions, so they’re often a second choice behind federal loans. Finally, a refinance loan can be used after a student graduates to replace an existing loan and secure a lower interest rate.

Parent PLUS Loans

These loans are federal student loans issued directly to parents and they’re intended to supplement school, state, or federal financial aid. To be eligible for one of these loans, you must be the biological or adoptive parent of a dependent undergraduate student enrolled at least half of the year. The maximum amount you can borrow is dependent on the school, as you can typically qualify for coverage of the total cost of attendance provided that you meet some minimum credit criteria and the student meets financial aid requirements.

Home Equity Options

If you’re a homeowner, you might also have the ability to access your home equity to cover your child’s college expenses. There are traditional home equity student loans, which have the reliability of a fixed interest rate and predictable monthly payments. However, they involve taking out another loan on your home, which may be less than ideal depending on your specific situation.

You might also consider a home equity line of credit (HELOC), which provides flexibility in terms of access to cash and how frequently you can borrow. However, its variable interest rate means that your monthly payments will be unpredictable, and the lender can freeze the HELOC at any time in the case of a drop in home value or credit score.

Finally, a home equity investment can give you cash you need to partially or completely fund your child’s college tuition without the stress of debt. You receive cash in exchange for a share of your home’s future value and have 10 years to put it toward whatever you’d like — and there aren’t any monthly payments or interest to worry about.

Take our five-minute quiz to find out if a Hometap Investment might be a good way for you to help fund your child’s college education without dipping into your retirement fund.

YOU SHOULD KNOW…

The above information is for general awareness and education purposes only, and does not pertain specifically to the homeowners insurance needs of those seeking a Hometap Investment. We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

May 21, 2020March 22, 2023

Private Student Loans vs. Federal Student Loans and Your Alternatives

Unless you’re one of the 0.1% of people with the skills to grant you a full ride scholarship, college is expensive.

In the decade between the 2006–07 and 2016–17 academic years, tuition, fees, and room and board rose 24% at private nonprofit colleges and universities and 31% at public institutions as reported by the U.S. Department of Education, National Center for Education Statistics (numbers adjusted for inflation).

According to CollegeBoard, annual tuition costs $32,410 on average for a private four-year college and $9,410 for a public four-year college for in-state students.

These published prices are referred to as the “sticker” price, and most students end up paying less due to financial aid. But that price doesn’t take into account room and board, transportation costs, food, books, or other supplies. And financial aid often comes in the form of loans.

As of the end of 2019, student loan debt topped a collective $1.6 trillion among more than 44 million Americans. The average student loan debt is $32,000, but over three million students have an excess of $100,000 in debt.

A bachelor degree earns someone an average of $1,198 per week versus an average of $730 for those with a high school diploma, according to the U.S. Bureau of Labor Statistics. But that doesn’t mean those that went that the higher education route are able to easily pay off those debts. As the numbers previously mentioned indicate, the student debt crisis is alive and well.

The first step to a strategic approach to funding higher education is to understand the different types of loans available—and your alternatives.

Are Federal or Private Student Loans Better?

The main way students and their families cover the costs of college is via loans. However, federal and private loans come with extremely different terms and conditions.

A federal student loan is a loan administered by the federal government. To get federal loans, you must fill out the Free Application for Federal Student Aid (FAFSA) form.

There are several types of federal student loans, such as Direct Subsidized Loans for undergraduate students with financial need (you are not responsible for interest while attending college, among other periods) and Direct Unsubsidized Loans for undergraduate, graduate, or professional students regardless of financial need (you are responsible for interest).

Federal student loans are usually preferable to private student loans because they often have lower, fixed interest rates and more favorable terms for students, such as income-driven repayment plans and loan forgiveness programs. With the exception of the Federal PLUS Loans for graduate and professional students or parents, federal loans do not require a credit check.

A private student loan is a loan administered by private lenders, such as banks, credit unions, or the school you’re attending.

Private student loans are almost always unsubsidized and vary greatly based on the lender. For example, a Sallie Mae loan has fixed interest rates that vary from 4.74% to 11.85% and variable interest rates from 2% to 10.01%. Borrowers with better credit scores can secure lower interest rates, but if you opt for a fixed interest rate or deferred repayment program, your interest rate will be higher.

Beware: The Dangers of Deferment and Forbearance

Many federal and private loans offer the option for deferment or forbearance. Both offer the option to suspend payments for a length of time, but you must request them.

Deferment is generally tied to a specific event, such as attending school or enrolling in the military or Peace Corps service. The length of deferment depends on the specific qualification and your lender must grant you deferment if you meet the qualifications.

You can request forbearance for general reasons, such as financial difficulty, but your lender can decide whether or not to grant it. Or you can request it for mandatory reasons, such as serving in AmeriCorps. Forbearance lasts for one year (though you may be able to request forbearance again).

Many students, because they’re focused on studying while in school and choose not to work simultaneously, opt to defer payments until after graduation. But for private loans and most federal loans, you’re still accruing interest and responsible for paying it during deferment. You’re responsible for interest on all loans during forbearance. This interest is usually capitalized—or added—to your principal balance at the end of the deferment or forbearance period. Interest is then calculated based on this higher principal balance, increasing the amount you pay over the course of your loan.

While it’s tempting to put off payments, particularly while attending college, it may not provide the lasting relief you want. Instead, as interest piles up, you may find the student loan debt hole widening, making it more difficult to get out.

Your Student Loan Alternatives

If you’re a homeowner preparing to send your children to school, you have the option of using the equity you’ve built in your home to fund their education. In fact, the roughly 200 schools that require a CSS profile in addition to the FAFSA form take into account your home equity when calculating financial aid.

Read “How Your Home Equity Impacts Financial Aid For College” for more details.

That’s because your property is an asset that you can use to help cover the costs of college, or, at the very least, reduce the amount of loans you need to take out (and the amount of debt that comes with it). But if your goal is avoiding debt, you may feel taking out a home equity loan is simply swapping one type of debt for another with the added stress of needing to make payments to avoid risk of foreclosure.

But there are multiple options for accessing your home equity and not all of them are loans. A home equity investment allows you to access a portion of your home equity now in exchange for a share of the future value of your home. Since it’s an investment, not a loan, there are no monthly payments or interest. This can help families alleviate some, if not all, of the debt burden.

If college days are far behind you, but the debt is still being paid off, you can use your home equity to reduce or eliminate your student debt, too.

See all your options for accessing your home equity

Read why John M. chose Hometap to help fund his child’s education

The best way to finance your education or a family member’s education depends on your specific financial situation. You may find a combination of tapping into your home equity and borrowing loans is the best approach, or that using your home equity can cover all your costs. Explore all your options, including what interest rates you can secure for various types of loans and how much funding you may get from a home equity investment, to see what makes the most financial sense.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

December 20, 2019June 23, 2022

How Your Home Equity Impacts Financial Aid For College

So your child got into their dream school. Congrats! They’re happy, you’re happy, years of hard work have finally paid off. Then you review the financial aid package and—cue cold sweat—they expect you to pay how much?

With the cost of college rising faster than financial aid awards, many parents and students are facing the seemingly impossible choice of taking on massive debt or forgoing a dream school for a lower-cost option. And, as it turns out, your home equity could be a factor.

What does my 3-bedroom have to do with a degree?

First the good news: not all schools take your home equity into account when calculating aid. If your child chose a school that only requires the FAFSA form, your equity won’t count against you. But, if they hope to attend one of the roughly 200 schools that also require the CSS profile, it’s almost certain some percentage of your home equity will be factored into financial aid.

Exactly how much is hard to say. Some schools take 100% of your equity into account, while others cap it based on income. Either way, it could lower your aid package.

Let’s say you have $100,000 in equity. Parent assets are assessed at 5% in the CSS profile, so that would raise your expected contribution by about $5,000.

Okay. But cashing in on my home equity isn’t so simple.

This practice assumes parents are tapping into their home equity to help fund college tuition—which isn’t always the case.

One reason for this is lingering anxiety over the recession. Home Equity Lines of Credit (HELOCs), a once-popular type of loan used to fund education, have fallen by almost half in the past decade despite overall equity growth. Families are reluctant to borrow against their home value—and for good reason. If you default on a HELOC, you could lose your home.

Selling is another option, but for most families it’s not a realistic one. After all, you need a place to live (and we’re pretty sure your child won’t appreciate it if you move into the dorm with them).

So, what CAN I do?

Short of withdrawing your child’s application from schools that require the CSS profile, there’s not much you can do about your home equity being factored into financial aid. But there are ways to turn your home’s equity into cash—without risking the loss of your home.

Some parents opt for a cash-out refinancing—when you take out a mortgage for a larger amount than the existing loan in order to get cash back. Today’s comparatively low interest rates make this more attractive than HELOCs, though, naturally, this increases your debt.

Another option is a home equity investment. An investor provides cash in exchange for a share of the future value of your home. This allows you to tap into your equity without any debt or monthly payments. And when the time finally comes to drop your new college student off at the dorm, do it knowing you’ve made the best financial decision for you and your family.

See if you prequalify for a Hometap investment in less than 30 seconds.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

April 29, 2019June 23, 2022

Getting Out of Student Loan Hell: Should You Use Your Home Equity?

The equity in your home, when used correctly, can be a powerful tool in reaching your financial goals. As a homeowner with student loans, that equity can possibly help you lower your monthly payments and interest rates while finally getting out of student loan hell. (And remember: There isn’t any real tax benefit of carrying student loans.)

However, before you commit to using your home equity to pay off student loans, start by comparing your various options for tapping into your home equity. The last thing you want to do is trade one loan for another—potentially with worse interest rates or monthly payments that don’t work with your current financial situation.

Lower Your Home Interest Rate and Get Cash

Cash-Out Refinance

According to Zillow, a cash-out refinance is great for paying off high-interest debts. However, you’ll want to make sure you can find lower interest rates. If much of your student debt is from high-interest private education loans, you may find the math works in your favor.

See how your student loan balance compares to homeowners like you in our 2021 Homeowner Report.

Interest rates for cash-out refinancing are generally lower than home equity loans and HELOCs, but don’t be fooled into thinking it’s the best option based on that one number. Factor in closing costs, how much interest you’ll pay over the term of the loan, private mortgage insurance, and any other fees that may come with a cash-out refinance to find the true cost. Calculate whether a cash-out refinance will lower your interest rate and, if it won’t, consider other ways to access your home equity.

Cash-Out Refinance vs. Home Equity Loan: What’s the Difference?

Get One Lump Sum of Cash

Home Equity Loan

If you can’t find lower interest rates via a cash-out refinance, a home equity loan can give you access to cash without refinancing your home. This loan is separate from your mortgage and gives you access to the equity you’ve built in your home in one large lump sum.

With an average 5.5% interest rate for a 10-year fixed term, home equity loans may allow you to consolidate your student loan debt in one single payment at a lower interest rate. For a $100,000, 10-year loan, you can expect a monthly payment around $1,500, depending on your credit score. Estimate how much your monthly payments would be based on your home value, credit score, and other factors. If you can’t keep up with the monthly payments, you may want to forgo a home equity loan so you don’t risk losing your home.

HELOCs & Home Equity Loans: What’s the Difference and Is Either Right for You?

Use Your Equity Like a Credit Card

HELOC

If you don’t need money in one lump sum and want to withdraw it as you need it (up to a certain amount), a HELOC may be your best option. For Josh and his wife Lauren, bloggers at Money Life Wax, a HELOC offered a way to break through interest of student loans and start paying off the principal. “Instead of paying $325 in interest each month, we are paying closer to $80.”

However, HELOCS often have variable rate interest, meaning rates may go up and you can’t be certain about how much interest you’ll pay over the course of the term. As with a home equity loan, you want to estimate your payments based on your situation and, if the payments are too much, reconsider so you don’t risk foreclosure.

Access Equity Without Monthly Payments

Hometap

If you have equity built up in your home that you want to access but don’t like the idea of taking on additional debt or monthly payments (plus interest), a Hometap Investment can be a smart alternative. “This was a great choice instead of a second mortgage!” says John C., a homeowner who used Hometap to pay off education loans.

However, if you know you want to stay in your house for more than 10 years, Hometap may not be the best option for you as investments have a 10-year term. That means you have to sell your home, refinance, or buy back the investment within 10 years.

When you use your home’s equity as a tool, you have an opportunity to better your financial situation. But remember: Everyone’s motives and methods around financial decisions are personal; there’s no “right” answer besides the one that works for you.

Before you pay off your student loans using home equity or any other means, consult a financial advisor. A financial advisor can help you do all the math to see which options may provide you with the biggest benefits and offer you professional guidance as to what makes sense for you, taking into account advantages you may lose like federal student loan benefits.

See if you prequalify for a Hometap investment in less than 30 seconds.

YOU SHOULD KNOW…

April 9, 2019June 17, 2022

5 Unexpected Ways to Pay Your Child’s College Tuition

If you’re a parent of a soon-to-be college student, paying for tuition (not to mention room and board, textbooks, and fees) is top of mind. You’ve read the headlines, but to emphasize that you’re not exaggerating things: Over the past 20 years, the cost to attend college has skyrocketed. Recent statistics show that the 2016—17 cost for tuition and fees averaged $34,740 for private colleges and $9,970 for public colleges. And to make things even trickier, college attendance costs have been rising faster than financial aid awards. No wonder many families find themselves struggling to keep up. You’re not alone in having sticker shock.

When it comes to paying college tuition, it’s about getting creative to determine affordability and maximize ways to save. After all, a college degree can be one way to invest in your child’s future—but you’ll also want to safeguard your own. In short, you’ll want to minimize debt while simultaneously protecting your investments.

Here are five unexpected ways to find money for college without having to dip into your own retirement savings, emergency fund, or other assets.

1. Strategize Your Child’s Course Load for an Early Graduation

Being efficient saves time and money—and this applies to college too. If your child is planning to attend a school with flat-rate tuition (e.g., tuition is charged for full-time enrollment per semester, rather than per credit hour), consider maxing out the number of credits available each term. This strategy may enable your student to frontload their credits and graduate early.

Advance prep can start as early as high school. If your child has access to advanced placement classes, she can get a jump on graduation requirements before even stepping foot on campus. (But do your due diligence: Make sure each class applies toward graduation requirements for their specific school—and ensure your child can handle the more aggressive course load.)

2. Consider Community College

Community colleges can be a cost-effective way to get a bachelor’s degree, especially if your child plans to transfer to a four-year college after receiving their community college associate’s (or equivalent) degree. Because community colleges are typically less expensive than traditional colleges, this “2+2 program” strategy can save thousands off tuition while still providing access to prestigious universities and a degree from the name-recognized institution.

3. Have Your Student Work Part-Time

If your child has enough flexibility in his schedule, working part-time can be a great way to start paying off college expenses while still enrolled. (This cuts down on student loan interest, too!) Even better: Some companies, such as Starbucks, UPS, and Verizon, offer tuition reimbursements for eligible employees, so choosing the right employer may garner even more money for college.

4. See if Your Student Can Be an RA or Live Off-Campus

If your child isn’t necessarily sold on the dorm life experience, seeking alternative housing—or working as an on-campus resident assistant (RA)—may be a great way to cut back on college costs. As an RA, your child may qualify for a free room, a reduced-cost meal plan, and/or tuition discounts—while also earning a salary. If being an RA doesn’t appeal, do some research and see whether off-campus housing, such as an apartment or homestay, may be a more cost-effective option than living on campus.

5. Find the Schools that Will Woo Your Child

If your child has a strong academic profile, as well as a specific skill set—math prodigy, star athlete, talented musician—look for schools that want her in their student body and will offer money to make her matriculation possible. Speak to your high school’s guidance counselor or attend college fairs to identify the schools that want students like your child as well as those schools that offer generous grants, scholarships, and tuition discount programs for students like her. Be open to schools you may not have heard of. You may be surprised to find one that’s both desirable and affordable.

Finally, remember to include your child in the discussions about paying for college. Research prices and financial aid awards together using tools like the U.S. Department of Education’s Net Price Calculator and the College Scorecard. By approaching college financing as a team, you’ll all be active investors in making sound decisions for each other, now and in the years to come.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

March 18, 2019June 17, 2022

Paying Student Loans vs. Investing: Where to Put Your Money First

When you graduate from college you can expect to leave with two things: a diploma and an average of $39,351 in debt. That’s before interest. While student loan debt averages vary based on a number of factors, about one in four Americans has some form of student loans.

If you have student loans, you know chipping away at the interest is frustrating. It’s tempting to invest your money so it can grow versus throwing all your extra income toward your loans. A LendEDU study examined the expected debt-to-income (DTI) ratios of nearly 10,000 student loan borrowers at time of graduation, concluding that 16 percent of those borrowers will have a DTI over 20 percent solely from student loans.

To pay down loans and build wealth in a way that makes sense for your financial situation, take these factors into consideration.

Time for Math

When paying off debt, including student loans, you need to put all your debts on the table. Some may make financial sense to pay off as quickly as possible. Other debts may not be as pressing.

To figure out how to prioritize which loans to pay off as well as where investing fits in, you need to compare your after-tax cost of debts (based on any tax breaks you may get from debts) against your after-tax expected return on investments. Remember, your expected returns will vary greatly depend on where you’re investing money and your investment strategy.

Use the Student Loan Hero Student Loan Payoff vs. Invest Calculator to make the math a little easier.

When to Pay Your Loans First

If interest from any one of your loans or other debts is higher than the amount you expect to earn from an investment, it makes sense to pay that debt first. But there are also other factors you’ll want to take into consideration beyond the math.

If the mere existence of your loans stresses you out, it’s worth working toward becoming debt-free before investing. It’s also worth reducing debt if you like a guaranteed ROI. As The Motley Fool explains, paying off your loan sooner saves you on interest. You know exactly how much money you’re saving in interest whereas investing comes with no guarantee.

When to Put Your Money Elsewhere

If you have credit card debt with high interest rates, you’ll want to focus on paying that off first. Most credit cards have higher interest rates than student loans. If you still have extra money after paying credit cards, consider investing if you expect to earn more than the amount of your student loan interest. This will also help you diversify your wealth and ensure you’re planning for your future, not just trying to keep up with your past.

MarketWatch points out that the problem with paying student loan debt is you may keep interest from piling up but you’re not building any equity. This significantly impacts your ability to grow wealth as you’re missing out on time you can’t get back. Lifehack created a chart that shows how you can earn significantly more money by starting early, even if you invest less money than someone who starts investing later in life.

See how your student loan balance compares to homeowners like you in our 2021 Homeowner Report.

For loans that are particularly large, Money Under 30 urges you to “get on with the rest of your financial life.” The same applies if you’re early in your career. You may find paying down debt and investing, especially to receive an employer 401(k) match, makes the most sense.

Funding Your Needs

Revisit your strategy often as your circumstances change, you pay off loans, and take on new debt—or your rate of return isn’t as high as you anticipated. You can always change your mix of where you’re putting your money. Of course, you always want to make the minimum payments so you don’t get whacked with fees (aka even more debt) or hurt your credit score.

As a homeowner, you also have the opportunity to tap into your home’s built-in wealth to fund today’s needs like paying off student loans while also diversifying your portfolio.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

February 25, 2019June 22, 2022

Parent PLUS Loan vs. Home Equity Loan: What’s the Best Way to Fund College?

Over the past 20 years, the cost to attend college has skyrocketed. And to make things even trickier, wages aren’t rising at the same pace to offset costs. If you or your child want to pursue a degree but you have no idea how to afford it, you’re not alone.

However, there are a multitude of payment options to help fund education. If you’re a homeowner, you have the added option of tapping into your home’s equity via a HELOC or home equity loan. For many, this is more affordable than high-interest student loans. If you have less-than-perfect credit (anything under 700), you can look to private loan options like a Parent PLUS Loan. You also have a third option that involves no interest or monthly payments: equity sharing.

Before deciding on an option, however, weigh the pros and cons of each as they relate to your financial situation.

Parent PLUS Loan

Best if you have a low credit score

A Parent PLUS Loan is a federal student loan available to biological, adoptive, or stepparents of dependent undergraduate students.

These loans don’t take into account your credit score (though you’ll want to make sure you don’t have an adverse credit history). However, there are several downsides:

You must use the funds for educational purposes.
You don’t have the option for income-based repayment plans.
Defaulting isn’t an option; the Department of Education can sue you.

Interest rates are also significantly higher compared with rates for undergraduate students. Current rates for Parent PLUS Loans are 7.6% compared to 5.05% for federal loans taken on by undergraduate students. That means for a loan of $65,000 you will pay $30,000 in interest over the loan’s 10-year term.

Home Equity Loan or HELOC for College

Best option if you have enough home equity

As a homeowner, you have the option of accessing the equity built up in your home via a HELOC or a home equity loan. You can likely secure lower interest rates with home equity loans and HELOCs than a Parent PLUS Loan. However, rates will depend on your credit score and HELOCs often have variable rates, meaning interest rates may go up.

HELOCs & Home Equity Loans: What’s the Difference and Is Either Right for You?

Unlike a Parent PLUS Loan, you can use the funds however you want—not just on education. For a HELOC of $100,000 with a 10-year draw period followed by a 20-year repayment period, your monthly payments will likely be lower than a Parent PLUS Loan.

Hometap Investment

Best if you don’t want to take on debt

Giving the gift of college to your child doesn’t have to come with the burden of interest-heavy student loans. With no debt, interest, or monthly payments, a Hometap Investment allows you to access your home’s equity in exchange for a share of your home’s future value. It can fund higher education—without having to sacrifice your financial goals (or your child’s).

As a parent, you want to give your child the gift of education and keep them out of debt. However, that doesn’t mean you have to put yourself in more debt. Before making a quick decision that could get you the cash you need, consider your options that will help you fund your goals now and in the future.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.