| Loan Type: |
Advantages |
Disadvantages |
| Parent Loan for Undergraduate Students
(PLUS) |
- loans are guaranteed by federal government
- parents of all income levels can apply
- low interest rate of 8.5%
- loans can be consolidated
- deferment and forbearance may be available
- cancellation provisions
|
- without annual or aggregate borrowing maximums, parents
must be careful not to borrow more than they can afford to repay
- immediate repayment; no “in-school” deferment
- guarantee fees are 3% of principal
- lenders’ policies may vary in credit review
|
|
| Private Alternative Loan |
- generally there is no collateral required
- parents are limited to borrowing what they can afford to pay
— responsible debt is incurred
- may be financially competitive with PLUS depending on APR
- interest is deductible
|
- a good credit record and generally a debt to income ratio of
less than 40% to qualify
- repayment usually begins immediately
- no cancellation provisions unless parent/borrower purchases
such an option
- no deferments or forbearances in most cases
- limits on amounts that parents may borrow
|
|
| Home Equity Loan |
- interest is tax deductible IF borrower itemizes deductions on
tax return
|
- may be fees (title, research, appraisal) associated with
obtaining loan
- accumulating paperwork and loan processing can take as long as
three (3) months, based on lender’s volume
- family home involved in long-term debt at time when many
people, facing retirement, want their home debt-free
|
|
| Borrowing from Life Insurance |
- easy to obtain funds
- low fixed rate on borrowing likely
- depending on dividends/cash value, interest may never have to
be repaid
- loan automatically repaid at death
|
- interest expense is generally nondeductible
- death benefits are reduced
- some policies have major changes to dividends, cash
value build-up or death benefits as a result of borrowing
- does not change financial aid qualification factors but does
reduce family cash flow
|
|
| Withdrawals from Qualified Retirement
Plans |
- significant sums may be available
- Pre-1987 after-tax contributions are available contributions
tax-free
|
- contributions after 1987 and all before-tax will cause
imposition of income tax and excise tax
- 401(k) funds are available only for “hardship”
- may reduce a major source of retirement funds
|
|
| Borrowing from 401(k) Plan |
- interest expenses may be at a reasonable rate
- interest may be paid to your own individual account
- relative ease of obtaining funds
|
- interest is generally not tax deductible
- amount available and terms of loan set by IRS regulations
- does not influence financial aid calculations but does
increase family expenses
|
|
| IRA Withdrawals |
|
- withdrawals subject to income and excise tax
- reduction of retirement funds
- income is included in financial aid calculations (i.e., family
income is increased)
|
|
| Overlooked Assets and/or Investments |
- convenience
- selective timing can reduce disadvantages
|
- creates an income tax event
- income is counted in financial aid calculations (i.e.,
family income is increased)
|
|
|
|
|
