Too rich to get college aid for your kid, but too poor to pay out of pocket? Here's what to do.
All parents want to pay for their kids鈥� college, but many families find themselves too wealthy to qualify for financial aid, yet too strapped to pay out of pocket.
If that鈥檚 the case for you, financial advisors agree you should prioritize retirement savings over paying for college. After all, your kid can take out federal student loans, but your nest egg won鈥檛 grow itself.
Still, if you鈥檙e set on covering your child鈥檚 tuition, you have two options: Get a student loan for parents or tap your home鈥檚 equity, if you have any.
Which is best? There鈥檚 no easy answer when your kids鈥� education, your own financial future and your home are at stake. Think through the factors below to help you decide what to do.
Take out a federal student loan for parents
听with a听. To apply, submit the Free Application for Federal Student Aid, or听. The form will also make your child eligible for grants, scholarships, work study and federal student loans.
| PROS OF PLUS LOANS | CONS OF PLUS LOANS |
|---|---|
| Option to defer payments while the student is in school. | 6.31% fixed interest rate. |
| Flexible repayment plans. | 4.28% loan fee. |
| Loans are discharged upon death of the parent or child. | $2,500 annual tax deduction limit for student loans. |
Private lenders also offer parent loans. Going the private route may be best if you have excellent credit. A high credit score may qualify you for a lower interest rate than you鈥檇 get with a federal parent loan.
However, private loans don鈥檛 offer all of the benefits that federal loans do. Families should turn to private loans only if they鈥檙e in a strong financial position and have a large emergency fund, says Betsy Mayotte, director of consumer outreach and compliance at American Student Assistance, a Boston-based nonprofit.
Consider tapping your home equity
With home values high and听听low, it鈥檚 a great time to use your home equity, says Kevin McKinley, a financial planner and principal/owner of McKinley Money LLC in Eau Claire, Wisconsin.
There are three ways to unlock your equity:
- A home equity line of credit, or HELOC.
- A home equity loan, often referred to as a 鈥渟econd mortgage.鈥�
- A cash-out mortgage refinance.
Depending on how you tap your equity, there are pros and cons to consider. For instance, you鈥檒l have to pay closing costs if you refinance your mortgage.
| PROS OF TAPPING HOME EQUITY | CONS OF TAPPING HOME EQUITY |
|---|---|
| Low interest rates. | Increased risk of foreclosure if home values drop or you can鈥檛 make payments. |
| Get a tax deduction for all the interest you pay, in most cases. | Could count against future financial aid eligibility. |
Tapping your home equity is risky because you鈥檙e putting one of your most valuable assets on the line. If you can鈥檛 make the payments or your home鈥檚 value declines, you could lose it.
鈥淵ou don鈥檛 want to take out equity to the point where if the housing market drops, all of the sudden you鈥檙e underwater,鈥� Mayotte says.
Despite the risks, tapping your equity may be a better deal than a student loan 鈥渨hen it comes to just straight dollars and cents,鈥� McKinley says. But he also acknowledges an emotional component involved with using home equity.
鈥淪ome people are uncomfortable with the notion of mortgaging their home,鈥� he says. 鈥淚f that鈥檚 the case, they should just get student loans.鈥�
Next steps
This decision is weighty enough that it鈥檚 worth consulting a financial advisor. Feeling confident about the way your family pays for tuition will help you keep calm as you face one of the biggest transitions as a parent: sending your kid off to college.
Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email:听teddy@nerdwallet.com.听Twitter:听.
This article was written by and was originally published by听.
听
