What if you have a great credit history?
What’s the rate?
Parents who borrow to help out their college-age children can expect to pay 7.6 percent, up from 7 percent, for the federal parent PLUS loans. The same rate applies to the Federal Grad PLUS loans. These are fixed rates for the life of the loan.
The family should maximize the Federal Stafford loan borrowing before the PLUS loan because the Stafford loan has a lower interest rate, Kantrowitz said.
As of July 1, the fixed interest rate on federal student loans increased to 5.045 percent, up from 4.45 percent for undergraduate Stafford loans.
Some lenders may offer a more competitive rate on private student loans offered to parents who have a credit score of 780 or higher, Kantrowitz said.
College students might get offers for private student loans sent directly to them, but the odds of a student being approved for a private loan on his or her own are slim. Most students need a cosigner.
A private student loan might have an effective rate that’s 1.5 percent lower than a Parent PLUS loan for top-flight borrowers. That’s because a loan fee of around 4.25 percent is charged and deducted from the PLUS loan amount when it is first disbursed. Over a 10-year loan, the fee would translate into an extra 1 percentage point on the rate, Kantrowitz said.
You need to shop around for rates, and keep in mind your credit score. Remember, rates on private student loans are wide-ranging, again, depending on creditworthiness.
For example, PNC’s undergraduate Solution Loan offers two options. There’s a variable rate, which ranges from 5.23 percent to percent and a fixed rate from 6.29 percent to percent. Attractive rates at the low end go to borrowers with the best credit history. There is no application or origination fee and a 0.5 percent discount is offered with automated payments from any savings or checking account.
Many parents have used a home equity line of credit to deal with college bills. Rates lower than that tend to be introductory rates in effect for a limited period of time.
Better rates are available for those with credit scores above 740 and homeowners who have lower loan balances on their homes.
Home equity lines of credit have variable rates and can run in the 5 percent to 7 percent range — reflecting a prime rate at 5 percent
But as the Federal Reserve continues to push up interest rates, the prime rate will go up, and rates on home equity loans will adjust higher, too.
In the past, the housing crisis shut down some borrowing on home equity loans as home values fell in much of the country. Lenders looked harder at credit histories and property appraisals. But now, many home values have risen considerably.
Yet there is another point to consider: The Tax Cuts and Jobs Act of 2017 ended some income tax deductions for home equity lines of credit.
Interest on home equity loans will no longer be deductible beginning in 2018, if the loan was used on things like paying for college tuition, taking a vacation or buying a new car.
The interest on that home equity loan would still be deductible if the money goes toward building, acquiring or substantially improving the home.
If parents don’t get a tax break any longer, tapping into home equity would become a less attractive way to pay for college.
Between rising interest rates and the loss of tax deductibility, home equity lines aren’t the low cost source of capital they had been,» said Greg McBride, chief financial analyst for Bankrate.