Comparing Parent PLUS Loans and Home Equity Loans for College Funding

Paying for college can be challenging for many families. Even those who diligently save may still fall short after utilizing savings, scholarships, grants, and federal direct student loans. In such cases, parents often explore additional loan options such as private student loans, the federal Parent PLUS loan, or a home equity loan to bridge the gap.

A home equity loan allows homeowners to borrow against the value of their home, beyond what they owe on their mortgage. Unlike a cash-out refinance, a home equity loan doesn’t replace your current mortgage and lets you borrow only the amount needed for college expenses, sometimes without incurring closing costs.

With property values rising in many markets, more homeowners are in a position to consider this financing option.

At the same time, higher interest rates on Parent PLUS loans have made alternative options like private student loans or home equity loans more appealing to many families.

The U.S. Department of Education recently raised the Parent PLUS loan interest rate to 6.28% for loans first disbursed between July 1, 2021, and July 1, 2022, up from 5.3% the prior year. Meanwhile, home equity loan rates typically range from about 3% to 12%, depending on the lender, loan amount, and the borrower’s creditworthiness.

Here are some pros and cons of using a home equity loan instead of a Parent PLUS loan to pay for college.

Pros of a Home Equity Loan for College Funding

Creditworthy homeowners may secure lower interest rates with a home equity loan compared to a Parent PLUS loan, which has a fixed rate for all borrowers regardless of credit history. A lower interest rate can reduce monthly payments and lead to long-term savings as the loan is repaid.

For instance, the average Parent PLUS loan borrower in 2021 owed about $29,000. With an origination fee of 4.228% and an interest rate of 6.28%, monthly payments on a 10-year repayment plan would be around $326, with $10,126 in interest paid over time. Adding the $1,226 in origination fees brings the total cost of the loan to about $40,350.

In contrast, a home equity loan for the same $29,000 at a 5% interest rate would result in monthly payments of about $308 over 10 years, with no origination fees. The total cost of the loan would be $36,960—over $3,000 less than the Parent PLUS loan.

Home equity loans may also offer tax advantages. Parents can deduct up to $375,000 in interest annually for qualifying home equity loans ($750,000 for joint filers), compared to a maximum deduction of only $2,500 for Parent PLUS loans.

Risks of a Home Equity Loan for College Funding

While home equity loans may offer savings, they come with significant risks. Borrowing against your home means using it as collateral. If the loan isn’t repaid, your home could be repossessed.

Additionally, if property values decline, you could find yourself “upside down,” owing more on the home than it’s worth.

Other Loan Considerations for Parents

Neither a home equity loan nor a Parent PLUS loan is typically eligible for income-driven repayment plans available with federal direct student loans. During the pandemic, Parent PLUS loans were temporarily paused under the CARES Act, but this suspension may not be extended.

Families with strong credit may also find lower interest rates on private student loans, which typically do not use homes as collateral. Many private loans are made in the student’s name, with a parent as a co-signer, reducing the financial burden on parents as they approach retirement.

Despite the rising cost of college, it remains one of the best investments in a family’s future. To explore loan options, your college’s financial aid office is an excellent resource for guidance on available loans and how to apply.