18 May My daughter chose an expensive college. How should we pay?
Q. My daughter was accepted into several colleges and she committed to the one that happened to be the most expensive. She won’t get any merit scholarships — I think she got in by a hair — and we won’t have enough in our 529 plans to cover the bills over the years. Should we have her take loans, use a Parent Plus loan or should we get a HELOC? I know interest rates are rising so I’m not sure the best course of action.
A. Congratulations to you and your daughter.
College costs are ridiculously high, especially for some private universities. We’ll leave the talk of whether a more costly education is worth the money for another day.
Instead, let’s talk through the different funding options you mentioned.
Your daughter has several options from a student loan perspective, said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.
He said she can explore both federal and private student loans.
The major differences between the two include the costs, and the use of credit scores to determine eligibility and interest rates, he said.
“Undergraduate students will not have their credit checked when applying for federal loans, however, credit checks are a major factor when applying for private loans,” he said.
There’s a big difference between the two kinds of loans.
“Where federal loans have fixed, set interest rates, private student loans can be fixed or variable, and will depend on the credit score of the applicant,” he said. “Federal loans also offer flexible repayment options and loan forgiveness programs, as well as the possibility for some substantial forgiveness based on discussions in Congress — although this remains to be seen.”
Private student loans on the other hand, in general, have fewer repayment options, no loan forgiveness programs, and likely would not be included for forgiveness in any potential federal legislation, Van Leeuwen said.
These are all things to consider if you plan to have your daughter take the loans out in her name.
Parent PLUS loans tend to be the most expensive type of federal loan with the highest interest rate, currently at 6.28%, he said.
“While this is an option, and if you are comfortable with being responsible for paying your daughter’s loan, it may make more sense to consider a private loan in this case,” he said. “Depending on your credit score and some other factors, you may be able to receive a private parent loan with a more favorable interest rate.”
But with this option, and the option of a home equity line of credit (HELOC), it’s important to understand that you will be responsible financially for paying off this debt, unlike having your daughter take loans in her name, he said.
HELOCs generally have variable interest rates.
“This presents a unique risk, especially in the current environment, where we are seeing interest rates increase,” he said. “As interest rates increase, your monthly payment will increase as well.”
Without a full understanding of your financial picture, it is difficult to recommend a concrete strategy, but you should consider all these factors before making a decision on any of these options to fund your daughter’s college education.
Good luck to you.
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This story was originally published on May 18, 2022.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.