Borrowing for college

RETHINKING HOME EQUITY TO PAY FOR TUITION BILLS

By Marilyn Kennedy Melia CTW FEATURES

This school year, parents borrowing for college tuition need a new textbook on their options.

Rising rates and the tax law overhaul have altered the calculus on whether to borrow against home equity, or use a federal Parent PLUS loan.

Here, two experts — Keith Gumbinger of mortgage data site HSH. com, and Mark Kantrowitz, publisher of Savingforcollege.com — provide a primer.

1. The loss of deductibility on equity lines favors PLUS loans

While interest charges on home equity borrowing to fund tuition was deductible until last year, now it isn’t. PLUS loan interest up to $2,500 annually is deductible, taken right off pretax income. You can claim the deduction even if you don’t itemize.

2. Equity rates vs. the PLUS rate

Interest charges on home equity lines (these allow the borrower to write checks up to a specified limit) and loans (an upfront sum) vary by lender offers.

In mid-July, owners with a credit score of 740 and who still have at least 20 percent equity in their home after borrowing (equity is figured by subtracting the principal amounts of mortgage and equity borrowing from the current home value) might find a rate around 6 to 7 percent. Equity loans, which aren’t widely offered, are in the 6 to 8 percent range.

Each July 1, the rate on PLUS loans is reset; the 2018-2019 rate is 7.595 percent.

3. The after-tax calculation

If you borrow $10,000 in a PLUS loan this year, you’ll pay a total of $735.65 in interest for the year. Take your tax bracket — let’s assume it’s 22 percent — and you can reduce that annual interest by 22 percent and you effectively pay $573.81.

A lender can tell you the total you’d pay in equity line interest at the rate you qualify for. The rate on both PLUS loans and equity lines is reset each year, rising with market conditions. For those who fear higher rates ahead, it may be worthwhile to hunt for an equity loan.