Student loan or home equity financing?

Caroline

That is the question. And a lot of parents are asking it. In fact, one parent—Nate—recently asked it on this blog:

"So could you maybe tell me which way is the better way to go to finance my daughter's college. She is a freshman and I'm not sure if I should do a Home Equity loan or try to get her a loan through her school's student loan program. She's going to Ol' Miss!"

The short answer is: It depends. There are several key differences to consider between these types of financing.

Generally, before considering any other type of financing, students should fill out the Free Application for Federal Student Aid (FAFSA) first, to see what they qualify for in financial aid. With the information from the FAFSA, the school can put together a financial aid package that may include grants and scholarships that your student doesn’t want to pass up.

Your student’s financial aid package will also show what he or she qualifies for in Federal Stafford Loans. The Federal Stafford Loan is one of the most affordable options for financing college today, with a fixed interest rate of 6.80%, so if you’re planning to borrow money for college, students should look to that loan first.

Assuming the Federal Stafford Loan does not cover all college expenses, there are three common choices to consider for financing to bridge the gap: the Federal PLUS Loan for parents, home equity financing, and private student loans.

Take a closer look at these options by reading this comparison chart(PDF).

Ultimately, you’ll want to choose the option that makes the most sense for your individual financial situation. It’s not a "one size fits all" approach. The financing that works for Nate and his daughter at the University of Mississippi  may not work for you at all schools.

For example, maybe you don’t want to mess with the FAFSA and would like to bypass federal loans altogether, so you choose a home equity line of credit. Or maybe you don’t want to use the equity in your home for education because you know you’ll need a new roof soon, so you apply for a Federal PLUS Loan or cosign a private loan for your student.

Parents, tell us: When it comes to borrowing for education, what has worked best for you?