If you know what a FAFSA* is, then you’ve either had a child go to college or you will soon. Next to buying a home, paying for college may be the biggest expense you’ll have.

Although most students don’t have much cash to contribute, they can help by applying for merit and need-based scholarships and grants. The federal government also offers a variety of low-interest student loans that can be applied for by completing the Free Application for Federal Student Aid or FAFSA. Still, if you’re planning to contribute, you may be looking for loan opportunities.

On the PLUS Side

Parent Loans for Undergraduate Students, or Parent PLUS loans, are a federal student loan that allows qualified parents to borrow up to the full amount of a child’s college education. Unlike student loans, which are based on family income and assets, PLUS loans are based on the parents’ credit history.

For PLUS loans made after 07/01/08, the borrower has the option to defer repayment until 6 months after the student graduates or drops below halftime status. There are no set borrowing limits the borrower can borrow up to the cost of education less any financial aid received.  Interest rates are fixed at 8.5%. Legislation has been passed in 2008/2009 that allows new Graduate/Professional students to take a PLUS loan, referred to as Grad PLUS loan. The same PLUS loan terms apply to Grad PLUS loans

Private Student Loans

Private Student Loans, also known as Alternative Education Loans or Private Education Loans, help bridge the gap between the actual cost of your education and the savings/grants/aid along with the limited amount the government allows you to borrow in its programs. Private loans are offered by private lenders and there are no federal forms to complete. Eligibility for private student loans often depends on your credit worthiness (usually based on your credit score) and/or the credit worthiness of a co-signer.

Private Student Loans tend to cost more than the education loans offered by the federal government, but are less expensive than credit card debt. The federal education loans offer fixed interest rates that are lower than the variable rates offered by most private student loans. Federal education loans also offer better repayment and forgiveness options. Since federal education loans are less expensive than and offer better terms than private student loans, you should exhaust your eligibility for federal student loans before applying for private student loans.

The interest rates on Private Student Loans are typically higher than a mortgage loan or and auto loan, but generally cheaper than a credit card loan.  A reason why the private student loan typically has a higher rate than mortgage/auto is that those loans have collateral for the bank to pursue in the event that a borrower defaults on the loan.  So, a lender’s risk is not always to full amount of the loan, but rather the difference between the amount of the loan and the value of the asset (e.g. home/auto).  In private student loans, there is no collateral, like a house or auto, to offset potential losses.  So, in order for a lender to compensate for the additional risk of a loan loss amount (since there is no collateral to mitigate a loss), the interest rate charged is typically higher.

Private student loans typically have variable interest rates, with the interest rate pegged to an index, such as LIBOR or PRIME, plus a margin. The LIBOR index is the London Interbank Offered Rate and represents what it costs a lender to borrow money. The Prime Lending Rate is the interest rate lenders offer to their most creditworthy customers.

Home Sweet Equity

Borrowing against your home’s equity — the difference between how much you owe on your home and how much you could sell it for — is another possible source of cash for college. In most cases, the interest on loans of up to $100,000 is tax deductible. Any downside? Yes. As with your mortgage, if you can’t repay the loan, you could lose your home.

This Is Your Life

You can also borrow against the cash value of any whole life insurance policies you and/or your spouse have. The rate may be attractive and the loan easy to obtain. But keep in mind that the death benefit will be reduced by any unpaid amount.

The Last Resort

Barring another alternative, you might consider raiding your retirement savings. Most 401(k) plans allow participant loans, and you can withdraw money from individual retirement accounts to pay for college without penalty. However, doing so could jeopardize your future financial security.

*Free Application for Federal Student Aid

MFN-1009-1D13

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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