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FINANCING
Bringing home the costs of smartest tuition
plan
By Marilyn Kennedy
Melia
Special to the
Tribune
Published August 7,
2005
Parents sending a child to college
may discover there's no place like home.
That's the
prediction of some college financing experts, who say that
home-equity borrowing is a more attractive way to pay tuition, given
that the interest rate on the other popular alternative, Parent
Loans for Undergraduate Students (PLUS loans), has jumped
recently.
Many students receive a grant, scholarship or
financial aid, but once that money is doled out, families are left
with tuition, room and board expenses. And if they don't have
savings, families borrow to foot the college bills.
Students
can take out federal Stafford loans, but the amount they can borrow
is limited, notes Wade Mezey, vice president of financial services
for the College Partnership, a Lakewood, Colo., college consulting
firm.
When parents consider alternatives for borrowing, it's
usually between PLUS loans and home equity loans or lines, says K.C.
Dempster, a consultant with College Money, Marlton, N.J.
On
July 1, rates on new PLUS loans rose about 2 points, to 6.1 percent.
The federal government adjusts the rate annually based on the rate
on Treasury bills at the end of May, notes Erin Korsvall,
spokeswoman for student loan agency Sallie Mae.
Previously,
when PLUS rates were in the 4 percent range, many parents were
attracted to them "because you could get money cheap without
touching your house," says Brian Greenberg, a Marlton, N.J.,
certified college planning specialist. Typically, about 5 to 10
percent of parents finance education by borrowing against equity,
Mezey says.
Because many families have more home equity
thanks to the escalation in prices and PLUS loan rates are higher,
home equity borrowing may gain favor, Mezey says.
Still,
choosing financing is "not purely an interest rate issue," says Mark
La Spisa, a South Barrington financial planner. Some parents do not
tap home equity because they want to have their home paid off by the
time they retire, La Spisa says.
Before he recommends any
type of financing, Greenberg says he assesses a client's situation.
He focuses on their monthly cash flow to determine how they will pay
back any loan.
A key part of examining how a loan will be
repaid is determining the true cost of the debt after the tax
deductibility of interest is considered, Greenberg says. He says
that because interest on equity debt is usually deductible when
parents file their income tax returns, that may make it the most
affordable option. To make it easier to pay the equity loan bill,
parents may want to adjust the amount they have withheld from their
paycheck, to reflect the lower tax bill they'll have after deducting
equity interest.
The interest on PLUS loans is deductible
only if parents' income falls under certain limits, Dempster says.
For instance, married couples who file jointly can earn $100,000 or
less.
The interest is fully deductible, with partial
deductions up to $130,000 in income.
Each family has unique
circumstances, and it's impossible to make general recommendation on
college financing, says Joe Russo, director of student financial
services at the University of Notre Dame, and co-author of "How To
Save For College" (Princeton Review-Random House, 2004).
The
options can be as complicated as a college course. For instance, the
interest rate on home equity lines may adjust monthly, tied to the
prime rate. A rate that looks cheap today may become expensive.
Families who think they'll be paying off college debt for a long
period may want to select a fixed-rate equity loan in which the rate
is higher initially but is locked in.
Moreover, the amount of
home equity a family holds may affect financial aid offers. Though
many schools use a federal formula known as the FAFSA, which does
not consider equity in determining how needy a family is, some
private schools do consider it. By borrowing against equity, a
family may bolster its position for future aid, say college
advisers.
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Address questions to Financing,
Chicago Tribune, Real Estate section, 435 N. Michigan Ave., 4th
Floor, Chicago, IL 60611. You may also e-mail
realestate@tribune.com.
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Copyright © 2005, Chicago Tribune
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