Home Equity/Lines of Credit
If parents are willing to help but don't have the resources available, a Home Equity Loan or Line of Credit may be an option. Home Equity Loans have become more attractive for families in an income bracket that is beyond the interest deductions established for the PLUS loan.
- A Home Equity Loan is a lump sum one-time payment.
- A Home Equity Line of Credit allows families to borrow what they need when they need it, with a cap that may not be exceeded.
- Interest on most home equity loans is fully tax-deductible, as opposed to other types of consumer debt.
- The income tax deduction cap for home equity debt is $100,000 beyond the original mortgage loan.
Most borrowers who intend to use the funds for college education choose the line of credit. A line of credit allows more flexibility and delays the cost until it is necessary. Most lines of credit are typically divided into two phases. The "draw" period, when a parent can borrow as needed, and a repayment period.
Today it is best to shop around. Lenders are competing for business and offer many perks. Some lines of credit may offer interest-only payments for a number of years, zero closing costs, or the option of switching from a variable to a fixed interest rate if the prime rate increases.
Federal Trade Commission (FTC) Warnings
As home equity becomes a more popular tool for financing college costs, more and more consumers are falling victim to lending fraud. The FTC has put out the following guidelines for identifying parents who may be the victim of fraud. Some of the warning signs include:
- if a family isn't sure if they have a loan or a line of credit;
- if the family says they were told to borrow more than they wanted to;
- if they don't know how they'll make the high monthly payments; or
- they don't know the terms of their loan because either they signed blank forms, or were refused a copy of the documents they signed.
Target populations for this type of fraud include:
- older parents;
- low income families who own their own home; and
- parents with adverse credit who haven't been able to get other consumer products.