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Question:


I have an active home equity line of credit, and I’m eligible to take out a Stafford loan for my son’s college tuition. As interest on the home equity line is tax deductible (and has a lower rate), isn’t that the obvious loan to use?
-Albus


Answer:


Not necessarily. There are two kinds of Stafford loans. One, for students that can demonstrate greater financial need, is federally subsidized and carries a lower interest rate than the other, which is for students in less straitened circumstances. Another difference is that payments and the accumulation of interest are deferred on the first kind of Stafford loan until six months after the student graduates or otherwise leaves school. The deferment exists on the other type of loan, but interest continues to accrue and is tacked on to what the student owes. Between the low rate, the deferment and the forgiveness of interest, you probably would be better off taking the first kind of Stafford loan if you’re eligible for it. If you’re not, and I suspect that’s the case given your access to other sources of credit and what you said about the interest rate, you probably would be better off tapping the home equity line. Just remember that by doing that, you’re responsible for the payments and will be depending on your son’s ability and willingness to pay you back.

-Conrad de Aenlle



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