With the cost of college continuing to skyrocket, parents are now looking under every rock and hard place to try and find resources to pay for their student’s college education.
One of these available options could be the equity in your home. Some parents, especially those who realize their child will probably not receive need-based financial aid, consider tapping into their home equity to mitigate or completely eliminate the need for student loans.
It’s a Tool, Not a Strategy
If you have built equity in your home, this option may be another “tool in the tool kit” that you may use to pay for college.
Many parents are starting to understand that there is no silver bullet to pay for college; in fact, most families will have to rely on a blended strategy that encompasses many financial vehicles and tools.
Whether it’s home equity, a 529 Plan, a Roth IRA, cash value life insurance, a brokerage account, student loans, scholarships, or a little bit of all of these, many parents have to resort to a strategy of combining financial tools in the most effective and efficient way to tackle the high cost of college. This is especially the case if they have two, three, or four kids that they want to send to college.
As always, wisdom, research, and working with a competent financial professional—who has expertise in college funding—is always advised.
It is difficult to explain the “how-to” for utilizing home equity because every family is unique, and this strategy heavily depends on time and circumstance. Therefore, this post is less of a “how-to” and more of a broadcast for another potential tool to help parents pay for college.
Exploring the Pros and Cons of Using Home Equity for College
Now, a quick word of caution: like any financial tool that you may wish to use to pay for your child’s college education, there are inevitably pros and cons.
In many cases, a home equity loan or a home equity line-of-credit can be the cheapest money that you can borrow. Why? The loan is secured by the collateral of your home.
The biggest risk: if you default on the loan you could lose the house.
Please make an informed decision and consider all the factors you can think of – interest rates, fees, the weight of risk, estimated time of retirement, repayment flexibility, etc.
Measure the pros and cons before you sign your name on the dotted line and consult with your financial professional to inquire if this strategy may be right for you.
Pros of Using Home Equity to Pay for College
The three major advantages when using home equity to pay for college are the following:
1) The interest rate may be lower than a federal student loan, a private student loan, and/or a personal loan.
2) You have the ability to repay your loan over a long period of time. For example, a HELOC, or home equity line of credit, often allows you 10 years to draw money and 20 years to pay it back.
3) You can often access way more money at lower rates than through the student loan process.
A prudent reminder: Even though this is low-interest debt that you can payback longer, it is still debt!
Kicking the “debt can” down the road just means that you’ll have to deal with it later and for longer. So again, you need to comprehensively weigh all your options.
Cons of Using Home Equity to Pay for College
Some of the disadvantages of using home equity are absolutely worth noting carefully—and I mean very carefully!
The big one: You are putting your home at risk if you default on the loan.
Many parents are understandably timid about utilizing their home equity for college expenses. Remember all those people whose home foreclosed in 2007-2008, after they took tons of equity out of their home in 2004 and 2005? There is inherent risk here.
Some other disadvantages include the following:
- Limited repayment options
- No tax deduction on interest
- Variable interest rates
- Prepayment penalties (for some)
- No flexibility during financial hardships. You could end up “underwater.”
- If you think you may qualify for financial aid, tapping into your home equity may hurt your eligibility.
Always perform your due diligence by doing thorough research and consulting your financial advisor to see if this tool is right for you. This doesn’t work for everyone, but if it fits within your financial framework, it could be a game-changer!
A home equity loan or line of credit should not be your default option to pay for college.
First, ensure that you exhaust all the cheaper and safer options. Look for all forms of financial aid. If you are not going to qualify for need-based aid, look at colleges that offer lots of merit aid and/or have lower sticker prices. Encourage your child to be consistent and relentless in applying for private scholarships. Consider community college. Educate yourself on the student loans industry and look out for possible pitfalls and hidden fees.
Ultimately, home equity can be a useful way to avoid student loans or costly Parent-Plus loans depending on the family’s situation.
Again, I need to stress the risk. If your child can’t pay off their student loans, their credit takes a hit, and they face an uphill climb. If you can’t pay off your home equity loan or line of credit, you might lose your home. Always be cognizant of this fact.
Everyone’s Situation is Unique
I realize some of you are reading this and thinking “What’s the deal? He keeps saying it’s a useful tool but then he emphasizes the risks and implies that maybe it’s not such a good idea.”
I have a very clear answer for you. Unless we, as financial advisors, understand your situation, we cannot help you formulate a tailored financial plan that encompasses college and fits your needs.
There is no one-size-fits-all financial plan.
Therefore, we recommend meeting with a trusted financial advisor if you are not sure how to incorporate home equity into your college funding plan—or whether you should use it in the first place.
We are in a weird and volatile time right now, so if you are feeling concerned or overwhelmed about the college funding process, feel free to reach out to us for a free college preparedness consultation.
Alternatively, you can sign up for one of our webinars that cover many different topics within the college funding space. Our flagship webinar/workshop is called “Little Known Secrets of Paying for College.”