Here’s a news flash you probably didn’t need: College, trade, career, and technical school is very, very expensive. Not only that, it gets more so every year; inflating at a pace many times the rate of the economy as a whole. Gone are the days when a student could cover a nice portion of tuition, or room and board just by working during the summers and holding down a part-time job during school.
We are left, instead, with individuals and families struggling to cover the ever-increasing cost of a secondary education. What can be done to address this situation in your life?
Before undertaking any education journey, it is essential that you fill out your Free Application for Federal Student Aid (FAFSA). The FAFSA is your gateway to financial aid and student loans. You’ll want to explore every avenue possible to help fund education.
As described by the office of the U.S. Department of Education, “PLUS loans are federal loans that graduate or professional students and parents of dependent undergraduate students can use to help pay for college or career school.” In order to apply, a FAFSA form must be completed. As with any loan, you must not have a history of bad credit. The interest rate is fixed for the life of the loan at the time the loan is initiated and does not include the loan fees that are also charged.
To find out more about PLUS Loans, visit their website.
Direct Subsidized Loans vs. Direct Unsubsidized Loans
The two types of loans the government provides for students attending two- or four-year colleges, trade, career, or technical schools are either of the direct subsidized or unsubsidized variety.
Direct Subsidized: These are available to undergraduate students with financial need. The student’s school determines the amount that can be borrowed, and the amount may not exceed the financial need. The subsidy comes through the U.S. Department of Education paying the interest on the loan.
Direct Unsubsidized: Basically, the same as a subsidized loan except that the student is responsible for paying the interest. If the student chooses not to pay while still in school or during the grace, deferment or forbearance periods, the interest will accrue and be added to the amount of the loan.
The Home Equity Solution
Another way to finance a college education (or to help supplement the methods listed above) is to take out a Home Equity Loan (HEL) or Home Equity Line of Credit (HELOC). Because you are putting your house up for collateral, you will find that you’ll be getting the best possible interest rate. Texas law allows for a total mortgage debt – which includes the home equity loan – of up to 80 percent of the fair market value of the home. So, depending on how much equity you’ve accumulated, it’s a great way to come up with a lot of money at one time. Use this calculator to figure out what the equity is in your home at www.goamplify.com/calculatenow.
Many people looking to finance an education choose a HELOC because of the segmented nature of paying for school. In this way, the money is available to you on an as-needed basis rather than in a lump sum, as it would be with an HEL. Some things about a HELOC you should know:
Variable Interest Rates: Unlike the HEL, the rates on your HELOC are subject to change, depending on the presiding prime lending rate. The rate you are paying at the outset could be higher further into the loan -- on the other hand, it could also be lower!
Interest Paid: You are only obligated to pay interest on the money you have withdrawn, not on the entire agreed-upon amount.
Draw Period and Repayment: A HELOC allows for a 10-year draw period, during which time the borrower can choose to make interest-only payments or to regularly pay off the balance without penalty. Any balance not paid by the end of the agreement can be refinanced into another HELOC or subjected to regular installment payments.
Meanwhile, the Home Equity Loan has a fixed rate, which will not change for the duration of the loan. You may sign on for terms of 5, 10, 15 or 20 years.
Understand the Upside and Downside
As was mentioned, you’re not going to find a loan with a lower interest rate than an HEL or HELOC. You should also keep in mind that they can be tax deductible1 - please contact your tax advisor. They are not without risks, however. Not making timely payments will damage your credit score and defaulting on such a loan arrangement could cause you to lose your home. Always be sure you know the full picture before committing to any loan.
1. Home Equity: APR is Annual Percentage Rate. Loans Subject to approval. Combined Loan-to-Value (CLTV) cannot exceed 80% of your home’s value. Additional terms, conditions, and restrictions may apply. Amplify Membership and Property Insurance required.
HELOC: The home equity line of credit Annual Percentage Rate (APR) is variable and is based on the highest Prime Rate published each month-end in The Wall Street Journal Money Rates Table (the "Index"), plus a margin. The current Index is 3.50%. Maximum APR is 17.90%. This Account has a Draw Period of 10 years, after which you will be required to repay any amounts within a 10-year term. Interest on your HELOC may be tax-deductible – please consult your tax advisor for details. Property Insurance, including flood insurance as needed, is required. Loans Subject to approval. Additional terms, conditions, and restrictions may apply. Amplify Membership required. Consult the CFPB's Home Equity Line of Credit booklet as well as the Early HELOC Disclosure for more information.
Under Texas law, the maximum you can borrow with a HELOC is 50% of the fair market value of your home, as long as the combined loan-to-value does not exceed 80% in cases where there is an existing first lien mortgage on the home. A minimum draw amount of $4000 is required for each advance after the initial $10,000 advance at origination.