Several years ago, my wife and I wanted to plan for our son’s college tuitions. In those days the totals were much smaller, but we felt if we could put back “X” amount of dollars per paycheck, he would have a nice junk of money when he graduated from high school. Unfortunately like most families, when the time came to start visiting colleges and making a decision on where he would go, the expense was extremely overwhelming.
We had to start looking into various loans (which took months by the way) and find a way to fill the financial gaps. Here is what we found:
Home Equity Line of Credit
Several homeowners with eventual college students will borrow against their home equity. However, you have to have the right interest rate attached to it. In 2015, the average variable rate is around 4.75%. Taking this approach could also cost you anywhere from $300-$500 upfront. It’s definitely an option, but one that could come with higher interest rates down the road.
Unless you plan on paying off the balance quickly, you should really try to find a lender that will offer a fixed loan. The average today is a little higher than variable rates (around 6%), but it will leave you with a line-of-credit if it’s needed in the future.
Find a Private Lender
Take the time to visit your financial institution and see what form of private lending they can offer. If you are able to secure a private student loan, the variable rate will depend on your credit. Those with good credit could see as low as 3%. Again, we still recommend a fixed loan if it will take years to pay off, as long as you find a good one (great credit can hit as low as 4.5%).
Federal Parent Plus Loan
The easiest way to gain more money is by utilizing a federal parent PLUS loan. This option is ideal for families who are not concerned with the initial interest rates (now at 6.8%). Keep in mind; this loan also comes with an origination fee (4% or more).
The benefit to this option is your credit doesn’t have to be 700 or better. In fact, the amount of money your household makes and your credit scores will not make a difference. Think of this has creating another mortgage for the household, because it is very similar.
The amount of time you have to pay off the PLUS loan can be anywhere from ten years to thirty years. Unfortunately, drawn out payments could leave a family feeling stressed over their financial situation for many years to come.
We recommend learning more about each one of these options and find out what works best for you. There are advantages and disadvantages to each one, but with the right approach, you will find the necessary money to send your child to college.