Q. My daughter was accepted to several colleges and she enrolled in the most expensive one. She’s not going to get any merit scholarships — I think she’s come close to that — and we won’t have enough in our 529 plans to cover the bills over the years. Should we have him take out loans, use a Parent Plus loan, or should we get a HELOC? I know interest rates are rising, so I don’t know what the best course of action is.
A. Congratulations to you and your daughter.
Tuition fees are ridiculously high, especially for some private universities. We’ll leave the question of whether a more expensive education is worth it for another day.
Instead, let’s talk through the different financing options you mentioned.
Your daughter has several options from a student loan perspective, said Ken Van Leeuwen, certified financial planner at Van Leeuwen & Company in Princeton.
He said she can explore both the federal government and private student loans.
Key differences between the two include costs and the use of credit scores to determine eligibility and interest rates, he said.
“Undergraduate students will not have their credit checked when applying for federal loans, however, credit checks are a major factor when applying for private loans,” he said.
There is a big difference between the two types of loans.
“Where federal loans have fixed and fixed interest rates, private student loans can be fixed or variable and will depend on the applicant’s credit score,” he said. “Federal loans also offer flexible repayment options and loan forgiveness programs, as well as the possibility of substantial forgiveness based on discussions in Congress — although that remains to be seen.”
On the other hand, private student loans, in general, have fewer repayment options, no loan forgiveness programs, and would likely not be included for forgiveness in any federal legislation, Van Leeuwen said.
These are all things to consider if you plan on having your daughter take out the loans in her name.
Parent PLUS Loans tend to be the most expensive type of federal loan with the highest interest rate, currently at 6.28%, he said.
“While this is an option, and if you are comfortable being responsible for paying your daughter’s loan, it may make more sense to consider a private loan in this case,” said he declared. “Depending on your credit score and certain other factors, you may be able to receive a private parent loan with a more favorable interest rate.”
But with this option, and the option of a home equity line of credit (HELOC), it’s important to understand that you will be financially responsible for repaying that debt, unlike your daughter taking out loans in her name, he said.
HELOCs generally have variable interest rates.
“This presents a unique risk, especially in the current environment, where we are seeing rising interest rates,” he said. “As interest rates rise, your monthly payment will also rise.”
Without a full understanding of your financial situation, it’s difficult to recommend a concrete strategy, but you should consider all of these factors before making a decision on any of these options for funding your daughter’s college education.
Good luck to you.
Send your questions to [email protected].
Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. To find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.