Parent Loans

The federal government offers not just student loans, but also loans to parents through the PLUS program. PLUS loans incur interest immediately, but parents of undergraduates can defer all payments until six months after their child graduates. The interest rate is 7% for loans disbursed during the 12 months through June 30, 2018. You can borrow up to the cost of your child’s college, minus any other financial aid received. To borrow through the PLUS program, parents are subject to a fairly lenient credit check, and you have to file the Free Application for Federal Student Aid.

Instead of a PLUS loan, you could borrow through a home equity line of credit, which may charge a lower interest rate. The interest on both PLUS loans and second mortgages is potentially tax-deductible. If you opt to borrow against your home, favor a home equity line of credit, which you can draw on as needed, rather than a home equity loan. The latter involves borrowing a lump sum, which will then show up as additional money in your regular taxable account—and possibly hurt you when you next apply for financial aid.

You might also borrow from your 401(k) plan. Such loans are typically limited to half your account balance, with the amount borrowed capped at $50,000. Some folks are attracted to 401(k) loans because the interest you pay ends up in your account, so you’re effectively paying interest to yourself. Nonetheless, there is a real cost. The money borrowed is removed from your account, so the true price of these loans is the investment gains the money could have earned.

Finally, you might investigate taking out an education loan from a bank. If you have an excellent credit score, the interest rate may be below the 6.31% charged for PLUS loans. But if your credit score isn’t so good, you would likely be better off with the federal PLUS program.

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