The Daily Deduction

Parent PLUS Loan, Private Loan, or Other? Parents Options For Paying For College

Pencils, notebooks, planners, and binders are making their way into the seasonal “Back-to-School” section of retail stores as you read this. The collegiate academic calendar kicks off in just a few short weeks with the start of the fall semester. For students, that means getting back into the routine of class, study sessions, campus dining hall hours, and homework. For some parents, the deadline is approaching to make the first payment on tuition for the 2014-2015 school year.

While the importance of children earning a college degree is important for most parents, recent articles have sparked questions about whether or not parents should pay for college. Some contend that it is the parents’ responsibility to pay for college so that children do not start adulthood with crippling debt. Others argue that teaching the keys to financial success begins with teaching children to pay for their own college expenses. The decision on whether or not parents should pay for college begins with evaluating needs, looking at financial options, and exploring the benefits and opportunities of each education payment option for parents.

Start By Finding Out How Much College Costs

How much does it really cost to get an education? The first step in deciding whether or not to pay for student loans as a parent is to evaluate borrowing needs. The financial aid office at the college or University is a great place to find out this information. If the student doesn’t already have a FAFSA filled out, it is important to file one so that the any remaining federal aid can be used to accurately calculate how much is needed. Openly discuss the state of financial need with the college or university’s financial aid office directly to see if there are any additional funds or scholarships that the institution offers outside of federal aid.

  • Add up estimated tuition, books, housing (either on campus, off-campus, or living at home), food, and entertainment.
  • Subtract any federal aid. This could be in the form of grants or loans issued to the student, not to the parent.
  • Subtract scholarships, grants, or wages from anticipated work-study programs.

After you discover the remaining amount, it’s time to look at financing options.

The most common way parents pay for college is by taking out a Parent PLUS Loan. These are specific loans from Federal programs that are taken out in the parent’s name, making the parent 100% responsible for the debt.

Additionally, parents may go to a bank or financial institution and apply for a private student loan as well. As with the Parent PLUS Loan, this loan is in the parent’s name and the parent is held responsible for the entire debt.

One higher risk way that parents fund a college education for their children is to take out a home equity loans.

Tax and Financial Benefits of Each Type of Education Loan

Parent PLUS Loans typically come at lower or comparable interest rates than private loans. Because home equity loans are secured against your home and interest rates are currently low, they may offer a better interest rate than the Parent PLUS or private loans for the short-term.

If parents take out either a Parent PLUS Loan or a private loan, the parent can deduct up to $2,500 of interest paid. This tax benefit can only be claimed if payments on the principal and interest are made to pay back the loan(it cannot be taken without making payments), making this a long-term benefit of a Parent PLUS loan or private education loan.

Interest on a Home Equity loan is tax deductible as regular mortgage interest for those who itemize their deductions. Eligibility for these deductions has certain restrictions and limitations. Before securing a home equity loan to pay for college, it’s important to talk with a tax professionalto explore your eligibility for benefits.

Each option has its own short and long-term benefits, but it is also important to consider the many caveats of each option.

Caveats to Education Financing Options

The biggest downside to parents taking out loans to pay for their child’s education is repayment. For most lenders, parents are only eligible to pay back the loan through standard repayment plans. If parents borrow student loans, they won’t get any relief from any of the federal student loan forgiveness options. They also do not have the option for budget-friendly repayment plans like the income-based or pay-as-you-earn programs that students are eligible for. They won’t have very much flexibility outside of their lender’s standard repayment terms.

Home Equity Loans are even less flexible and higher risk. The debt is attached to the house, which may further complicate matters if the parents decide to sell the home With no deferment or grace period,  there is no chance to wait until the student graduates or attends school less than full-time.

What Alternatives Do Parents Have to Financing Their Child’s Education?

Students can take out student loans in their own names to get better repayment options and even work toward student loan forgiveness. That way, students are 100% responsible for their education loan debts as far as credit goes.

Students can also take a look at more affordable higher education options. One of these options is to attend Community College (which typically offer more affordable rates) to complete general education requirements (and a few courses related to their desired field) and then transfer to a 4-year college or university. Some schools have Guaranteed Admissions Agreements between community colleges and universities. In Virginia, if a student graduates from any one of Virginia’s 23 community colleges with an Associate’s Degree and meets a certain grade point average requirement, he or she will be guaranteed admission into a Virginia College or University. Select schools in California, Connecticut, and Washington offer various Transfer Agreement options similar to the ones in Virginia. Contact the schools in your area to see if this option is offered.

To fulfill the need to offer assistance with their child's education, parents can also offer to help pay for some of those payments on a monthly basis. One parent in the eSmart Tax Community even suggested using financial help as an incentive for students to get good grades. For example, if Dorothy graduated within 4 years with a 3.6 GPA or better, Dorothy’s mother would pay 50% of Dorothy’s student loans over ten years.

However you decide to handle your child’s education expenses this upcoming August, maximize your tax benefits by making smart money moves. For more information on how eSmart Tax can help you make smart decisions about your finances every day, visit our tax resources page, like us on Facebook, or follow us on Twitter.

Disclaimer: The Daily Deduction is a knowledge source for industry news and related tax topics. We take every effort to provide you with accurate tax information, but this information should not be a substitute for professional tax advice. Find a Liberty Tax Service office near you to consult with a certified tax advisor.

Posted To: The Daily Deduction By: Lauryn on 7/17/2014 10:21:48 AM
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