Private Loans vs. Home Equity Loan for Students
For both parents and students alike, paying for college can be the toughest part of working toward a degree, but this doesn't have to be the case. There is a new strategy to paying off student debt on the rise that could possibly offer better advantages over standard private student loans.
Private Student Loan: What is it?
Simply put, private student loan is a loan designed to pay for student debts provided through a private lender as opposed to a federal source. Many financial institutions like banks offer these kinds of loans to consumers. These kinds of loans are best for emergency loans when financial aid is not otherwise available, though the interest rate is often less favorable than federal loans.
Private loans have their pros and cons. Some of these include:
- Ability to loan up to 100 percent of tuition
- Interest rate can be favorable
- Does not require FAFSA
- Requires credit check
- May not defer
- Can increase interest rate over loan life
Students receive awards for financial aid, which includes grants and scholarships along with federal loans. Learning more about private student loans requires speaking with the specific lender that would grant the loan. Some banks also have a relationship with some schools and would be recommended to speak with them for a particular application, but students are not required to do this at all as they can pick funding from elsewhere.
The lender can either disburse the private loan to the school to pay for tuition or directly to the student depending on the loan terms. Parents can also be the ones to take out the loans on behalf of the student. Again, the terms of the loan generally have unfavorable rates in comparison to federal loans, but students can immediately start to repay the loans rather than it being deferred until after they graduate.
Applying for a private loan requires that the student send in documents that prove they are worth the risk of lending money. This can include income numbers, proof of enrollment in a school and credit history along with additional information. With this information, the lender will review the application to see whether it should be granted and what the terms should be.
If students do not believe that what financial aid has to offer is good enough to support what they require for college, then it is best to appeal the award prior to applying for a private student loan.
Home Equity Loans: Are they a good choice?
If the terms of private student loans do not appeal, then students should certainly consider using home equity loans to refinance these loans.
- Better interest rates
- Easier to obtain
- More security
For starters, it is easy to find a home equity loan with terms that are much more appealing than what the private student loans have to offer. Banks have a tendency to offer more for a loan and a better interest rate when secured with real property equity. Private student loans generally have no more security to offer than a borrower's personal guarantee and someone else signing the dotted line.
In addition, getting a home equity loan is generally possible having a fixed rate of interest rather than one that varies the longer the life of the loan as is the case with private student loans. This is often the most appealing part of this option since most students want to avoid sudden interest increases in the future. Remember to consider the costs up front of refinancing a loan, however.
If using a home equity loan for refinancing, then it is also important to consider the consequences as far as income tax is concerned. It is possible to claim a deduction on federal tax in up to $2,500 in student loan interest, though by a certain income level it will phase out somewhat.
Of course, there is a downside of a home equity loan; should the finances go wrong somehow, then a student can lose his home when unable to pay for the loan; this is not a threat with having a private student loan.
Brentt Taylor writes for MortgageLoan.com, a site that has been providing news and articles for consumers for almost 18 years.