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Home Equity

Parent PLUS Loan vs. HELOC: Which Is Better?

Federal student loans can be an affordable way for your child to pay for the cost of attending college, especially during their undergraduate years. If you’d like to help them financially but don’t have the savings or income, a handful of options are available—including Parent PLUS loans and home equity lines credit (HELOCs).

As you compare a Parent PLUS loan vs. a HELOC, it’s important to understand how they work and the advantages and disadvantages that both options may present for your situation. Here’s everything you need to know.

What is a home equity line of credit (HELOC)? 

A home equity line of credit is a type of second mortgage you can use to access some of the equity in your home. You can use a HELOC for anything, including college expenses, home improvements, debt consolidation, and more. 

Unlike a traditional loan, a HELOC provides a revolving line of credit similar to a credit card. You can take draws from your credit line—up to your account’s credit limit—for a period of up to 10 years. 

During that time, you’ll typically make interest-only payments on the amount you borrow. But you can also pay down your balance and reuse the credit line repeatedly. 

After the draw period ends, you’ll enter a repayment period, during which you’ll pay off your full balance over up to 20 years. 

HELOC terms and costs

HELOCs can range anywhere from $10,000 to $2 million, depending on the lender. However, the amount of your credit limit will depend on how much equity you have in your home. Lenders typically allow you to borrow up to 80% and 90% of your home’s value between your primary mortgage and the second mortgage. 

HELOC interest rates are variable, meaning they can fluctuate over time, and are determined based on your creditworthiness. 

Depending on the lender, you may have to pay closing costs of up to 5% of your desired credit limit, though some lenders don’t charge closing costs at all. Other costs associated with HELOCs include annual fees and prepayment penalties if you close your account early. 

HELOC pros and cons

There are several benefits to consider with a HELOC, particularly if you want to leverage your home equity for more than just college costs. There are also some drawbacks to consider.

Pros

  • Manageable monthly payments 

    You only have to pay accrued interest on your borrowed amount during your draw period. This arrangement can give you some breathing room if your budget is tight.

  • Use only what you need

    While colleges display the cost of attendance for students, you can still borrow more than your child needs with a Parent PLUS loan, increasing your total costs. A HELOC can be worthwhile if you want to ensure that you incur debt for only necessary expenses.

  • More flexibility

    While Parent PLUS loans are designed to be used only for qualified education expenses, you can tap your HELOC for college costs and anything else you need. You can even qualify for a tax deduction using HELOC funds to buy, build, or substantially improve your home.

Cons

  • Your home is at risk

    If you fail to keep up with monthly payments on your HELOC, the lender can foreclose on your home, forcing you to move out.

  • You don’t benefit from federal protections

    Parent PLUS loans don’t have as many relief options as student-oriented federal student loan programs, but they still offer some programs that can be useful if you face financial hardship.

  • Can be more expensive

    Depending on current interest rates, getting a HELOC with a lower rate than a Parent PLUS loan is possible. But over time, your HELOC rate can fluctuate; if market rates rise, so will yours, increasing your costs. What’s more, if your credit score isn’t in near-perfect shape, you may have a hard time qualifying for a low interest rate to begin with.

What is a Parent PLUS loan?

Parent PLUS loans are federal loans that parents can use to help their children pay for college. Loan proceeds are disbursed directly to your child’s school as a lump sum, after which they’ll receive any remaining funds for other qualified expenses. 

Instead of having ongoing access to a credit line, you’ll apply for new loans each school year by having your child fill out the Free Application for Federal Student Aid (FAFSA) and then completing a separate application for a Parent PLUS loan.

You don’t need a minimum credit score to qualify, but you may be denied if you have major derogatory marks on your credit reports, such as a recent bankruptcy, repossession, or foreclosure. 

Parent PLUS loan terms and costs

With a Parent PLUS loan, you can borrow up to the total cost of attendance for your child, minus any other financial aid they receive. Parent PLUS loans default to a standard 10-year repayment term, which begins after the loans are disbursed. 

However, you can request a deferment until six months after your child graduates, leaves school, or falls below half-time enrollment. While you won’t need to make payments during this time, interest will continue to accrue. You can also sometimes extend your repayment term to up to 30 years. 

Interest rates are fixed and standardized, meaning everyone who qualifies gets the same rate; Congress sets the interest rate each year. Parent PLUS loans also come with an upfront fee—4.228% of the loan amount—deducted from the loan disbursement. 

Parent PLUS loan pros and cons

As you compare a Parent PLUS loan vs. a HELOC, here are some features that give the former an advantage. There are also some downsides to consider:

Pros

  • Provides certain protections

    In addition to deferment options, the federal government offers flexible repayment options, including an income-contingent repayment plan, which can reduce your monthly payment based on your household income. You’ll also have access to generous forbearance options.

  • Lower credit requirements

    You may not be able to get approved if you have some major credit issues. But unlike HELOCs, there’s no minimum credit score requirement, and you don’t have to worry about being punished with a higher interest rate. You also don’t need to put up collateral to get approved, so you’re not risking your house.

  • Fixed interest rates

    When you take out a Parent PLUS loan, the interest rate you get will stay the same for the life of the loan, giving you more predictability with your budget. 

Cons

  • Inflexible loan uses

    You can only use Parent PLUS loan funds to pay for qualified education expenses like tuition, fees, room and board, and supplies.

  • Interest may be capitalized

    If you choose to defer your monthly payments until your child leaves school, the loan servicer will capitalize the interest that accrued in the meantime—meaning it adds the unpaid interest to your principal balance, effectively increasing it.

  • More expensive than other student loans

    Parent PLUS loans charge any federal student loan program’s highest interest rates and loan fees. If your child can qualify for federal loans independently, it’ll save money, even if you agree to take over payments.

Ask the expert

Catherine Valega

CFP®

I do believe the loans should be taken in the student’s name, not the parents. College kids should also understand the future impact of that loan payment. Upon graduation and the onset of the necessary loan payments, will they have an income that will allow them the freedom from living in their parents’ basement while paying off loans? Parents are typically saving for their own retirement, possibly caregiving for their own parents, and simultaneously sending their children to college. I believe parents should help as much as possible, but this does not include taking out loans for them.

HELOC vs. Parent Plus loan rates and terms

DetailHELOCParent Plus loan
Interest rates7.50% – 21% variable8.05% fixed
Repayment termsDraw period: 5 – 10  years
Repayment period: 10 – 20 years
10 – 30 years
EligibilityCredit score of 620 or higherNo adverse credit history
FeesClosing costs, annual fee, prepayment penaltyUpfront loan fee
UsesNo restrictionsQualified education expenses

Parent Plus loan vs. HELOC: Eligibility differences

As you compare Parent PLUS loans and HELOCs, eligibility requirements are crucial because, depending on your situation, you may not qualify for one of them—or even both.

In general, it’s easier to get a Parent PLUS loan than a HELOC, but there are still some criteria that could disqualify you. While HELOC requirements can vary by lender, here are some general guidelines to keep in mind as you determine the right fit:

  • Enrollment status: To qualify for a Parent PLUS loan, you must be a dependent undergraduate student’s biological or adoptive parent enrolled at least half-time at an eligible educational institution. With a HELOC, however, there’s no enrollment requirement at all.
  • Credit score: There’s no minimum credit score for a Parent PLUS loan, but you may be denied if you have serious negative items on your credit reports. In contrast, you typically need a credit score of 620 or higher to get approved for a HELOC. Even if you meet that threshold, you may be subject to higher interest rates and fees.
  • Debt-to-income ratio: The federal government doesn’t use your debt-to-income ratio (DTI)—the percentage of your gross monthly income that goes toward debt payments—to determine your eligibility. In contrast, a HELOC lender typically requires a DTI of 43% or lower, though some will go as high as 50%.
  • Collateral: Federal student loans don’t require collateral in any form. With a HELOC, however, you’ll need to use your home’s equity as collateral. This means that you’ll not only need to have sufficient equity in your home to qualify for a second mortgage, but you can also lose your home if you stop making payments.
  • Loan use: If you apply for a Parent PLUS loan, your child can only use those funds for qualified education expenses—meaning you can’t use them for yourself. With a HELOC, on the other hand, you can use your line of credit for anything you want.
  • Payment relief: If you’re having trouble keeping up with Parent PLUS loan payments, you can request relief through an income-contingent repayment plan, deferment, or forbearance. HELOC lenders may also offer relief through a lower payment or deferment. However, options and terms can vary greatly depending on the lender.

How to decide between a Parent Plus loan and HELOC

As you consider your options, it’s important to look at how both choices might impact your financial well-being in the short term and the long run. With that in mind, here are some situations where a Parent PLUS loan or a HELOC may be a clear winner:

If you  HELOC or Parent Plus loan?
Don’t own a home or have insufficient equityParent PLUS loan
Want flexibility with how you can use your loan proceedsHELOC
Prefer a loan with relief optionsParent PLUS loan
Have less-than-stellar creditParent PLUS loan
Want ongoing access to a credit line you can use for several yearsHELOC
Prefer a fixed interest rateParent PLUS loan

To determine which option is better for you, evaluate your current situation and see if you can get prequalified for a HELOC to get an idea of your terms. Consider interest rates, fees, monthly payment amounts, repayment terms, flexibility, and any other important factors.

Also, consider the potential risks of each option, both in terms of your budget and the consequences if you can’t repay what you borrow.

Long-term effects of HELOC vs. Parent Plus loan

Whether you choose a HELOC or a Parent PLUS loan, borrowing money to help your child pay for college will have long-term effects on your financial situation. As a result, it’s generally best to encourage your child to take out lower-cost student loans on their own to limit your contribution. 

With that said, here’s how a HELOC and a Parent PLUS loan can affect you in the long run.

Monthly payments

A HELOC allows for low interest-only payments during your draw period, while Parent PLUS loan payments can be deferred completely until your child leaves school. 

However, once repayment begins, the monthly payment could impact your budget and force you to adjust how you spend and save your money.

Interest charges

Parent PLUS loan interest rates are fixed, so you don’t have to worry about your payments fluctuating over time. However, if you defer Parent PLUS loan payments, the interest that accrues while your child is enrolled will be capitalized once repayment begins, increasing your loan balance and monthly payments.

Conversely, HELOCs only charge interest on the amount you borrow, which could keep your costs low upfront. But, because HELOC interest rates are variable, your rate and monthly payment will fluctuate over time.

Tax benefits

The IRS allows student loan borrowers to deduct up to $2,500 student loan interest on their tax returns, though high-income earners may not qualify due to income limits that are updated annually.

HELOC borrowers can also deduct the interest they pay on their lines of credit, but only to the extent that they use the money to buy, build, or substantially improve the home used as collateral. In other words, you can’t deduct interest paid on money borrowed for college costs.

Financial goals 

In both cases, monthly payments will impact your future financial goals, including retirement. 

Before you take out a HELOC or Parent PLUS loan to help your child pay for college, assess your current situation and consider how monthly payments will impact your ability to save, pay down debt, and achieve other goals that are important to you.

While it’s honorable to want to help your child, it may not be worth it if it puts your financial future in peril.

Ask the expert

Catherine Valega

CFP®

The financial aid formula for parents of multiple children just changed and made it worse for these families. My advice is to only go to the school where the child is offered financial or merit aid for most of the costs and avoid those schools where parents would be required to take on Parent PLUS loans.

Frequently asked questions

What credit score do I need for a Parent Plus loan or HELOC?

There’s no credit score requirement for Parent PLUS loans. However, the U.S. Department of Education will review your credit reports for any adverse credit history and may reject your application based on that.

With HELOCs, the minimum credit score requirement is generally 620, though some lenders may have higher standards.

How quickly can I get approved for a Parent Plus loan or HELOC?

It generally takes two to six weeks to close on a HELOC after submitting your application. With Parent PLUS loans, the process can take up to four weeks. However, Parent PLUS loans also require your child to fill out the FAFSA, which could delay the process.

Do Parent Plus loans offer income-driven repayment plans?

Yes. While there are four total income-driven repayment plans, parents only have access to one: the income-contingent repayment plan. 

This plan reduces your monthly payment to the lesser of 20% of your discretionary income or the amount you’d pay on a repayment plan if payments were fixed over 12 years and adjusted to your income.

Can I refinance a HELOC or Parent Plus loan?

Yes, you can refinance both loan types. Remember, though, that refinancing a Parent PLUS loan with a private lender will cause you to lose access to federal loan protections and relief options.

What are the application processes like for both options?

With a HELOC, you’ll submit an application directly to one or more lenders to gauge your approval odds, potential interest rates, and other terms. 

You’ll need to provide some personal information and documentation for your income, mortgage loan, property taxes, and homeowners insurance. You may also need a home appraisal, so the lender can determine how much you can borrow.

With a Parent PLUS loan, you’ll start by having your child fill out the FAFSA, which gives them access to all forms of federal student aid. Then, you’ll submit a separate application for a Parent PLUS loan, which requires some basic information about yourself, your child, and their school.

How does either option affect my credit score?

In both cases, making on-time payments can help improve your credit score over time. However, if you miss a payment by 30 days or more, it can damage your credit score. 

But because a HELOC is secured by your home, your FICO credit score won’t consider it when calculating your credit utilization rate—the percentage of available credit you use on your credit cards.

How does the economic environment affect HELOC interest rates or Parent Plus loan terms?

Economic conditions affect HELOCs and Parent PLUS loans, albeit in different ways. With a HELOC, for instance, lenders typically base interest rates on the Wall Street Journal prime rate, which is directly influenced by the Federal Reserve’s federal funds rate. 

When the Federal Reserve increases the federal funds rate to combat inflation, expect your HELOC interest rate to increase. Your HELOC rate will likely decrease when the fed rate is cut. 

Parent PLUS loan interest rates, on the other hand, are determined each year by Congress based on a 10-year Treasury note auction that the U.S. Department of Treasury holds in May. Treasury yields can increase when investors are concerned about an economic downturn and decrease when economic confidence is high.