The rising cost of college tuition has left many families struggling to come up with the funds to pay for higher education. Student loans are an option, but they can be a massive burden that forces a young person to start out their adult life in debt. Many parents trying to give their child every possible advantage sometimes take on some or all of the financial burden of college. Recently, more parents have looked into a second mortgage to fund college, but this may not always be a good choice. If you’re considering whether you should get a second mortgage to pay for college, here are the items you should consider.
If you need assistance in organizing your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs!
If you don’t have the funds available to cover the cost of college, you have three main options; student loans, Parent PLUS loans, or a second mortgage. The interest rate on a mortgage is often one of the biggest draws of taking out a second mortgage as opposed to taking out student loans or a Parent PLUS loan.
The interest rate of a mortgage will vary depending on your credit score, but the national average for a 15-year home equity loan (HELOC) is between five and six percent. In comparison, the interest rate for a Parent PLUS loan is 7.08%. For federal undergraduate students, the rate is 4.53%, and for graduate loans, the rate is 6.08%. Though interest rates are an important factor in a loan, there are also other factors that affect your total cost, such as loan origination fees and the length of the loan.
New Tax Rules
Previously, parents may have considered a second mortgage in part due to the tax benefits of a mortgage. Prior to the 2017 Tax Cuts and Jobs Act, you could take out a second mortgage, use it to pay for college expenses, and receive a tax deduction on the interest of the loan. However, this is no longer the case. Now, you can only receive a tax deduction on the interest on your mortgage if the mortgage is used to cover the cost of your property.
If you’re looking for a tax deduction option, Parent PLUS loans and student loans are now the better option. Interest on student loans and Parent PLUS loans are both tax deductible, up to $2,500. For Parent PLUS loans, though, your annual household income must be under $165,000 for those married and filing jointly, or $80,000 if you’re single.
Planning for Unexpected Events
When making any large financial decision, it’s important to take into consideration what will happen to your loved ones if anything happens to you. If you come under times of heavy financial stress, federal student loans and Parent PLUS loans have options to defer or forbear payments. This is not always the case with a mortgage. If you were ever to have to file for bankruptcy, Parent PLUS loans and a second mortgage can be discharged through bankruptcy, while student loans cannot. If you die or if you or the child the loan is for become disabled, a Parent PLUS loan can be forgiven. In contrast, if you were to pass away before paying off a second mortgage, your spouse or child may then be forced to take on the responsibility of the loan.
Other Financial Goals
Every parent wants to help their child succeed, but it’s important not to lose sight of your own financial goals and needs. If you have a child attending college, you are likely also approaching retirement. Spending money you had earmarked for retirement, or paying for college instead of saving for retirement, is not a strategy that will serve you well in the long-term. You’ll need to balance your financial needs as well as those of your child.
Whatever you end up deciding, make sure to include your child in the decision. Take the time to discuss with your children how their college is being funded, what expectations you have of them, and how it will affect them. If your child is taking out student loans, they should understand when they begin making payments, how much those payments are likely to be, and how long they will be making payments.
Consider Working with a Professional Financial Advisor
College can be a major expense. If you’re asking yourself whether you should get a second mortgage to pay for college, remember that it’s worth taking the time to consider all of your options. This will better help you determine what the best long-term approach is for you and your child. If you find yourself struggling to create a plan that helps your child pay for college while also preparing for your financial future, it may be worth working with a financial advisor. An advisor from Good Life Financial Advisors of Mount Pleasant can help you create a comprehensive plan that takes into account all your different financial goals. Contact us today.