And oftentimes, Walker said, when looking for the most cash-flow-efficient option, a Parent PLUS Loan may be ranked third, fourth or fifth. That’s because it has a 10-year amortization schedule and a 4% origination fee, and it’s pretty high-interest at 7% or 8%, depending on the rate and the year.
“So that can really be a high hurdle from a cash-flow perspective. It’s like buying a luxury vehicle every year for four years,” she said.
The more efficient financing option might be a home equity line of credit, Walker explained. “It’s an interest-only loan, and when the kids are out school, you continue to pay on your first mortgage, so your equity continues to go up because you are paying down that primary mortgage and then you are renting the cash flow only at interest,” she said.
So from a cash-flow perspective, that’s a more attractive financing option, she said.
Another attractive financing option is tapping into a whole life insurance policy, Walker said. “Families may have [a long time ago] bought a whole life insurance policy, and they may not realize that they can also get interest-only loans by collateralizing the cash value in their life-insurance policies,” she said, noting that this option is even more flexible than a home equity line of credit because you already qualified when you put the contract in place.
Walker said that if she had to rank financing options, permanent life insurance would be at the top, followed by the home equity line of credit. The Parent PLUS Loan, she said, might be ranked third since a borrower has 10 years to pay it back whereas a 401(k) allows for only a five-year payback.
As for a private loan, Walker said it’s worth canvassing the marketplace for one. But she noted that Parent PLUS Loans have some benefits that private loans don’t—for instance, if the parent dies or becomes disabled, the PLUS loan debt would be discharged.
Walker said that since college is a six-figure investment, parents should be thinking about three things: financing most of the cost themselves; finding the most cost-effective financing options available; and knowing how to use their entire financial picture to create the cash flow for this very short-term period.
Financial advisors, too, should get these points across to parents. “Every financial advisor should act like a mortgage broker when it comes to financing college, because if you are going to finance it, let’s make sure that you can repay the loan,” she said.
“You should know where the money is coming from and what that’s going to cost you and make sure you are in a position to handle those payments until the last kid is out of college,” Walker said.