Which option is best for borrowing for tuition: home equity line of credit or student loan?

Question

My husband wants to go to an evening mba program, while he continues to work full time. The program lasts 18mo, and costs about $50K for the entire program. We are supposed to pay in 6 installments. We have more than enough equity in our home to take out a line of credit. I'm wondering which is a better choice, doing a federal student loan, or using a line of credit. I'm thinking that the line of credit is a good choice, because we don't have to borrow all the money at once. Drawing from it every 3 months, for 18 months. We hope to pay the loan off within 5-7 years after graduation.

I don't have any experience with federal student loans, so would like to know how the two options compare.

thanks.

I understand that the federal loans have a limit. There is no way that a single loan would cover the approx. 25K/year we would need for 2 years.

Answer 1

Usually on Federal Student Loans you do not have to start repaying the debt until after school is complete. In fact, there is a grace period of six months that you don't have to start repaying it. Also, the student loans have a lower interest rate than home equity loans.

Answer 2

At present, the interest rates are pretty comparable, so you will need to compare the added benefits of each....

1. Student loans can be forgiven and deferred in some cases. If you borrow student loans and then fall on hard times, you can contact your lender to request a deferment or forbearance (i.e. a period of time in which you are not required to pay and, in some cases, during which interest will not accrue).
2. Some student loans (such as the Federal Subsidized Stafford Loan and Federal Perkins Loan) are interest-free while the student is in school and during the "grace" period that your husband will receive after he graduates. [Perkins borrowers receive a 9-month grace; Stafford borrowers receive 6 months]
3. Student loan interest is deductible on your tax return -- but only if your AGI is less than $65,000 a year and only up to $2,500 per person. Home equity loan interest, on the other hand, is always deductible.
4. If your credit is bad, it is sometimes a lot simpler to obtain a student loan than a home loan. (Stafford and Perkins loans require no credit check at all, so applying for them won't have an affect on your credit report.) When you apply for the equity loan, compare the rates to those of the three major federal student loans:
Stafford rate = 6.8% fixed
Perkins rate = 5% fixed
PLUS rate = 8.5% fixed
(Keep in mind that Stafford and Perkins alone will not cover the cost of your husband's tuition, so the choice will ultimately be between the PLUS loan interest rate and your home loan rate.)

If I were in your situation I would probably apply for Federal Student Aid using the FAFSA (http://www.fafsa.ed.gov). If I was offered a Subsidized Stafford Loan or a Perkins loan, I would take it and benefit from the interest subsidy as long as possible. I would then apply for a home equity loan to cover the remainder of my tuition.

You can apply for a home equity loan anytime but you can only apply for a student loan while you're a student -- so you might want to take the student loan now and, if you regret the decision down the road, you can always obtain a home equity loan and use the proceeds to pay off the student loan. You can't really do the reverse since your "window of opportunity" for borrowing the student loan will have passed. Make sense?

Answer 3

This is a pretty standard question. Without spending too much time in a financial aid office, there is plenty you can do get the process started. It costs you nothing to find out what you are eligible for. Just compare the apr of your line of credit versus the apr of student loans.
Start by going to http://www.fafsa.ed.gov/ and filling out the online form for federal student aid. After finding out what you are eligible for in terms of subsidized stafford loans, you can figure out if that is enough to finance your tuition and expenses. In most cases, it isn't. If you find that you need more money then you are offered, you may want to try a private student loan.
The best thing to do is compare the different private lenders out there, which can be done at http://www.finaid.org/loans/privatestudentloans.phtml
Most of the rates are very similar but do a little research and pick one that you think is best. I would suggest Think Financial. The application process is very quick and easy, and the check is sent directly to you so you can use the money for whatever you want. The limits are much higher with private student loans, up to $40,000 per year. You can find out more information about a Think loan at http://www.thinkfinancial.com . Good Luck.

Answer 4

Well it depends on how much interest you are willing to pay. With a home equity line doesn't the interest depend on the prime rate plus what ever at that time. With a student loan you would get a fixed interest rate with up to 20 years to pay it back without a prepayment penalty. Now if you want to have the line to use it for what ever in the future once school is paid off you will still have it. So it really depends on the use of the funds and what you are willing to pay back.

Answer 5

Student loans will typically have a lower interest rate and you don't have to start paying them until 6mos after graduation. Save the equity for something else.

Answer 6

Interest paid on the home equity line would be tax deductable. But then again, so would some of the student loan interst.

You should also chack for garnst & scholarships. regardless of his age, he may qualify for something. Try these free databases you can search. You will receive advertisements if you sign up.
www.fastweb.com
www.scholarships.com (I think, the best.)
www.collegeboard.com
www.fastaid.com
www.wiredscholar.com

Answer 7

In my experience I would say that the student loan would be the way to go, being that you don't have to even blink at a payment until at least 6 months after the schooling is finished. Also, they are easier to obtain than HELOCs...believe me I was a broker...

Answer 8

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Answer 9

Why are all the answers so dull and short these days?