Borrowing for College With a Home Equity Loan

We’re approaching the peak of the student loan season. Parents and students are struggling with the prospects of paying for all their college costs.

The best loan for students is the federal Direct Stafford Loan. Earlier this month, I wrote a post that provides lots of links to my past advice on student loans, as well as education loans  for parents.  If you missed it, here it is:

What is the Best Student Loan? Here’s the Answer

Today, however, I want to share another way for parents to borrow – a home equity line of credit.

Home Equity Line of Credit

For parents, a home equity line of credit will often be the best bet for college borrowing.

I got my line of credit expanded about 1 1/2  years before my daughter Caitlin (now a college senior) graduated from high school. I wanted it available in case I needed to borrow for college.  Last time I checked, I had a 2.5% interest rate on my line of credit. I received the line  from Charles Schwab at prime rate minus 1 percentage point of interest. It was a sweet deal.

If you itemize, the interest on these lines of credit may be fully deductible on your income tax return.

The reason why the interest rates on home equity loans are usually lower than many education loans is because your house serves as collateral for the loan. There is no collateral for federal or private student loans.

If you don’t have a line of credit and your children are in high school, you might want to shop for home equity lines. When contacting financial institutions, don’t forget about credit unions. Check out this guide on how to shop for home equity lines from the Federal Reserve Board.

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