A Choice: Guaranteed Student Loan or Second Mortgage?
Need money for college? Thinking about a guaranteed student loan or a second mortgage? You may be tempted to call your loan officer, but give it a minute. Put down the HELOC check book, and think about these pros and cons.
Let’s look at both sides and see how they stack up. Much of this will be focused in guaranteed student loans, but Grad-Plus loans and private student loans will act very similarly in most cases.
1. Interest rates
Mortgage interest rates are at a low and may not be here again for a long time, you say. Yeah, but…
Did you know student loans, especially guaranteed student loans, have very low rates? Often under 5%?
Granted, private loans may be higher, but even then, you should think twice. The guaranteed part of a GSL is that the government backs it up, and pays part of the interest to the lender – yes, it’s a subsidy to get people to go to college.
Lately, I have seen second mortgage interest or HELOC rates much higher than 5%. I would say student loans win on this measure.
2. Sell house, erase loan
Good point. If you sell your house, your second mortgage goes away. While I understand you can move to pay it off, that doesn’t sound like a great plan to help you or your kids to get an education.
Do you really want to move? Check the value of your house first – always a good precaution.
With a guaranteed student loan, you don’t need to plan a move to go to college. But if you do decide to move anyway, guess what? If you make a bunch of money on the sale, you can still pay off the student loan if you want to!
Talk about the best of both worlds.
3. I want to pay for my baby to go to college
Yeah, those apron strings can be strong. Let me tell you a bit about my story.
My parents helped me part of the way. It was great. But then one day they tell me, you have to pay for your fall tuition next year on your own. It wasn’t a big shock – they had some financial problems, so I understood.
I worked, I used some loans, and luckily, I went to an inexpensive but good school.
Know what? I think I value my degree more than someone who had theirs all paid for – except for by scholarships. You have to work for those, too.
Even better, get them saving for school in advance.
Now if you don’t think junior will finish without a financial bailout, that’s another story. But you can still use a Grad-PLUS loan if the degree is undergrad (BS/BA/AA/AS).
Read on – the guaranteed student loan versus 2nd mortgage comparison continues.
4. Payments: In-school, grace period, deferment
Let’s say you whip out a HELOC check for tuition and another for room and board.
You get a nice, “Thanks, Mom,” or “Thanks, Daddy” in return, and time goes by.
When do you have to pay for that? I think you have to start paying next month, right? And if you go through th hassle of a whole new second mortgage, you definitely have to pay in the next 60 days.
What if your child gets a loan?No payments during school, that’s what. Junior, or Juniora, won’t pay until 6 months after they stop registering for full time status at their school their grace period.
Get this. With the PLUS program, where you get a student loan for them, you can choose to either start payments in 60 days, or wait for the above to happen, 6 months after full time status ends.
Also, if your child has a problem repaying, a GSL offers deferment while they find work or things improve. While PLUS doesn’t offer this, a HELOC and a second on your house definitely won’t wait that long.
All right, I’m nearly finished.
Just a little benefit of the student loan program. As a student, you can consolidate those loans into one usually lower payment.
6. Refinance the first
I see how it is. You see that low interest rate on GSL’s, and think I can refinance the first and get a killer rate. I’ll pay for my own or my kid’s college that way!
While that may work, realize that you just turned your student loan into a 30 year mortgage. You might want to rethink it. You won’t get those nice benefits in #4 above.
But the rate will be killer, that’s true.
7. Multiple Children
So let’s say instead of just one, you have 3 or 4 little versions of you – more kids who want a free ride at college. Perhaps this gravy train will run out of gravy…
I recommend helping you kids find a way to pay for it themselves. Maybe you can offer to pay for the first year – which is probably the hardest, since kids haven’t been out on their own and may not have had to work and go to school.
Then, you can help the kids find jobs, grants, and so on to get through.
Either that, or you can just refinance all four of your houses, right? ;o)
Ultimately, you will have to decide how to handle this quandary. Going to school without debt is best, so check out all of the grant programs and scholarships you can. And if you need a guaranteed student loan, or your child does, I suggest you don’t refinance the family estate. You can still do that later if you change your mind.
And if you disagree, at least you know your options. Be sure to finish that degree.