Private Loans vs. Home Equity Loan for Students

As I said, I do not like the federal student loans that were presented to me, not a bit.  But what does not work for me may work for you, so just to present a full pictures, In this article I discuss are some other alternatives. 

Going to college makes it possible for you to earn more over your lifetime, and reach heights that you might not be able to reach otherwise. While college definitely can provide you with some benefits, it’s not cheap. Paying for college is one of the biggest challenges that students and parents have. If you’re having a hard time coming up with the money for college, both private loans and home-equity loans might be good consideration.

What Are Private Student Loans?

Private student loans are loans that are issued by lenders for the purpose of paying for college and related expenses. These loans are not backed by the government and they are made by regular banks and other types of lenders. With this type of loan, the student simply borrows money and then pays it back once they are done with school.

Advantages

  • Don’t require collateral
  • Can supplement federal student loans
  • Available from many different lenders
  • Can defer interest and principal payments until after school is done

Disadvantages

  • Issued based on credit and income guidelines
  • Harder to qualify for than federal student loans
  • Have higher interest rates than federal student loans

Home-Equity Loans

Another option to consider is the home-equity loan. A home-equity loan is a type of loan where a homeowner borrows against the difference between what his home is worth and how much he owes against it. This means that most students will have to get their parents to take out a home-equity loan in order to get these funds. Otherwise, they have to rely on private or federal student loans. Home-equity loans can sometimes have really attractive interest rates. These rates are determined by the rate that is set by the Federal Reserve and then by the market. This means that the interest rates can be very low in some cases. The loans also have longer terms than some forms of student loan.

Advantages

  • The interest paid is tax deductible
  • These loans can have low interest rates
  • Payments can be low because of longer repayment terms

Drawbacks

  • Requires home equity
  • Most students will need parents help
  • Rates can sometimes be higher than student loans
  • Funds are limited by equity in the home

Conclusion

In reality, both of these options can be attractive, depending on your situation. If you are thinking about which one of these to pursue, there are a few factors that you have to consider. First of all, do you own a home? If not, do your parents own a home? If your parents do a have a home, are they willing to borrow against it to help you go to college? If your parents do have equity in their house and they’re willing to borrow against it, then you can compare the two loan types and see which one works best for you. Otherwise, a home-equity loan isn’t even an option and you’d have to turn to student loans.

If you can borrow money through federal student loans, these are often more attractive than private student loans. They carry lower interest rates and they are not dependent on your credit or your income. They’re easier to get approved for and they are more flexible when it comes to repaying them.

Once you’ve maxed out your federal student loans, then it’s time to look at these other options. At that point, weigh the pros and cons of each one before making a decision.  

For myself, I am pondering selling some rental homes completely. 

 

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