Home Equity Loan for College? Consider Your Other Options!

Q: Should I take out a home equity loan to pay college costs for my child?

A: A home equity loan is one option to pay for college, but all parents should also consider the Federal PLUS Loan for Parents.

This federal loan can help parents borrow up to 100 percent of remaining education costs for a dependent child. And unlike a home equity loan, the interest rate is fixed for the life of the loan and no collateral is put at risk.

Better yet, you can qualify regardless of your income, assets, or credit score. Even millionaires can qualify! 

Below is some more information that every student should know about the PLUS Loan:

Federal PLUS Loans for Parents
Parents can borrow a PLUS Loan to help pay your education expenses if you are a dependent undergraduate student enrolled at least half time in an eligible program at an eligible school. PLUS Loans are available through the Direct Loan Program. Your parents can get either loan, but not both, for you during the same enrollment period. They also must have an acceptable credit history.

How do my parents get a loan?
For a Direct PLUS Loan, your parents must complete a Direct PLUS Loan application and promissory note, contained in a single form that you get from your financial aid office.

Also, your parents generally will be required to pass a credit check. If your parents Do not pass the credit check, they might still be able to receive a loan if someone, such as a relative or friend who is able to pass the credit check, agrees to endorse the loan. An endorser promises to repay the loan if your parents fail to do so. Your parents might also qualify for a loan without passing the credit check if they can demonstrate that extenuating circumstances exist. You and your parents must also meet other general eligibility requirements for federal student financial aid.

How much can my parents borrow?
The yearly limit on a PLUS Loan is equal to your cost of attendance minus any other financial aid you receive. If your cost of attendance is $6,000, for example, and you receive $4,000 in other financial aid, your parents can borrow up to $2,000.

Who gets the loan money?
The U.S. Department of Education will send the loan funds to your school. Your school might require your parents to endorse a disbursement check and send it back to the school. In most cases, the loan will be disbursed in at least two installments, and no installment will be greater than half the loan amount. The funds will first be applied to your tuition, fees, room and board, and other school charges. If any loan funds remain, your parents will receive the amount as a check or in cash, unless they authorize the amount to be released to you or to be put into your school account. Any remaining loan funds must be used for your education expenses.

What is the interest rate?
The interest rate is fixed and is determined each year on July 1. This rate stays fixed for the life of each loan.

Other than interest, is there a charge to get a PLUS Loan?
Your parents will pay a fee of up to 4 percent of the loan, deducted proportionately each time a loan disbursement is made. For the Direct PLUS Loan, the entire fee goes to the government to help reduce the cost of the loans. Also, your parents may be charged collection costs and late fees if they do not make their loan payments when scheduled.

When do my parents begin repaying the loan?
For PLUS loans made to parents that are first disbursed on or after July 1, 2008, the borrower has the option of beginning repayment on the PLUS loan either 60 days after the loan is fully disbursed or wait until six months after the dependent student on whose behalf the parent borrowed ceases to be enrolled on at least a half-time basis.

How do my parents pay back these loans?
They will repay their Direct PLUS Loan to the U.S. Department of Education Direct Loan Servicing Center.

Is it ever possible to postpone repayment of a PLUS Loan?
Yes, under certain circumstances, your parents can receive a deferment on their loans.

If they temporarily cannot meet the repayment schedule, they can also receive forbearance on their loan, as long as it is not in default. During forbearance, their payments are postponed or reduced.

Generally, the conditions for eligibility and procedures for requesting a deferment or forbearance apply to both Stafford Loans and PLUS Loans. However, since all PLUS Loans are unsubsidized, your parents will be charged interest during periods of deferment or forbearance. If they do not pay the interest as it accrues, it will be capitalized (that is, added to the principal amount of the loan, and additional interest will be based on that higher amount).

Can a PLUS Loan be discharged (canceled)?
Yes, under certain conditions. A discharge (cancellation) releases your parents from all obligation to repay the loan.

Your PLUS Loan cannot be canceled for these reasons: You did not complete your program of study at your school (unless you could not complete the program for a valid reason—because the school closed, for example), you did not like the school or the program of study, or you did not obtain employment after completing the program of study.

For more information about loan discharge or repayment: If your parents have a Direct PLUS Loan, they should contact the Direct Loan Servicing Center at 1-800-848-0979, or go to studentaid.ed.gov.