How to Pay for College Using Your Home’s Equity

If you’re a parent, you may find that as the school year gets closer, figuring out a game plan to pay for college gets more overwhelming by the day. For most, funding education from savings alone is not an option.

According to a 2018 report put out by Sallie Mae, only about 44% of people have a plan to pay for all four years of college in the first semester and 57% of those people said they ended up borrowing from more than one source. Wouldn’t it be nice to know you have all four years planned out ahead of time? Spare last minute or costly decisions by planning.

According to Sallie Mae, Americans spent an average of $26,226 on college for academic year 2018—2019. School tuition, books, and other fees can add up quickly! Not all the options are a good fit for everyone so here is another option you may not have considered yet—use your home equity to help cover all or part of the cost by taking out a home equity line of credit (HELOC).

What is a HELOC?

A HELOC is a form of revolving credit, like a credit card. The difference is that your home serves as collateral for the debt, so the interest rate is much lower than credit card rates. This type of credit line can be used to pay for a variety of large purchases and is often used to cover education costs.

HELOCs are variable rate loans and are usually tied to the prime interest rate. In other words, as interest rates rise, so does your HELOC rate. This is important to keep in mind because you cannot assume that you will pay today’s interest rates on the money you borrow tomorrow.

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What are the advantages of using a HELOC for college expenses?

1. HELOCs may have lower rates than other loans especially when compared to Parent PLUS Loan or Stafford Loan options. As noted above, using your home as collateral reduces the interest rate of the loan because your bank is taking much less of a chance by loaning you the money.
2. HELOCs allow you easy and immediate access to your funds. This is a great feature, but it means that you need to be careful with how you use the funds. For example, you shouldn’t use a HELOC to fund your daily living expenses.
3. If you have your HELOC set up in advance, you can simply write a check from the account to pay necessary college costs.
4. There are loan limits on traditional federal loans, which may not provide adequate borrowing power. If you have enough equity in your home, you may be able to pay all education expenses from one easy-to-manage HELOC.
5. The interest on your HELOC may be tax deductible.* Do your research before borrowing to find out if this will be true in your case.

A HELOC can be a very powerful tool. Having access to a HELOC while maintaining a zero balance can have a positive impact on your credit score. Most importantly, it can serve as an additional cushion against emergency situations.

*consult a tax advisor regarding the deductibility of interest.

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About Alicia White

Alicia White has over 14 years of lending experience and specializes in home equity loans and home equity lines of credit. She lives a “simply great” life in Danville with her husband, son, two dogs, chickens, and bees. NMLS ID# 204489; VSECU NMLS ID# 416195

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