By Reyna Gobel
With the August start of the school season right around the corner, parents of college-bound kids may have one more financial hurdle to clear: finding a loan to fill the gap between the savings you’ve earmarked for college, your child’s financial aid and student loans, and the big bill that’s coming up fast.
The most popular options are federal parent PLUS loans, private student loans, and a home-equity line of credit. The best one for you comes down to several factors, including how long you need to pay off the loan and your credit history. Here’s how to weigh your choices.
For Flexibility, Pick a PLUS
A federal parent PLUS loan has, well, pluses and minuses. The current interest rate, 6.8%, is high compared to other options, and you’ll owe an origination fee of more than 4%. If you plan to retire the debt in less than a year, the more than $400 you’d pay to take out a $10,000 loan would essentially raise your rate to 11%.
Still, the application process is simple, and the credit requirements are looser than for other loans—your income and credit score aren’t factors. You can take up to 30 years to pay back the loan (though 10 years is standard), and you automatically qualify for repayment breaks if you run into a financial hardship, like a lost job.
For a Low Rate, Go Private
With a private student loan from a bank or credit union, you can beat a PLUS loan’s high rate and avoid origination fees. Traditionally your student takes out this loan, with you as a co-signer. But increasingly many banks, including Wells Fargo and Citizens, are offering private loans directly to parents. Lender SoFi has a borrowing program for parents of students attending one of 2,200 schools.
Variable rates on private loans run from 3% to more than 10%, depending on your creditworthiness, while fixed rates range from 4.5% to double digits. You can deduct up to $2,500 in student loan interest a year on your taxes, as long as your income is below the cap ($160,000 for a married couple filing jointly in 2015).
For Ready Cash, Tap Your Home
Another way to get a low rate is to borrow against your home equity. On average you’ll pay a 4.75% variable rate on a HELOC today, reports Bankrate.com, and just a few hundred dollars upfront.
Trouble is, you’ll pay more for your HELOC once the Federal Reserve starts hiking interest rates. That makes them best if you can pay off the loan quickly. Or lock in. With many lenders, you can convert the outstanding portion of your HELOC to a fixed loan (rates average 6%), leaving the rest of your line available for future costs.
Finally, trust your instincts. “What keeps parents up at night varies,” says Leonard Wright, a California certified public accountant and personal financial specialist. “For some a HELOC takes away the peace of mind of having a paid-off or nearly paid-off home loan. For others there’s peace of mind in having the guaranteed options for payment breaks from a federal loan.”