Should You Use Your Home’s Equity to Pay for College?

Should You Use Your Home’s Equity to Pay for College?
  • Opening Intro -

    Tuition and fees for an in-state student at a public college or university average over $30,000 a year and for private schools, the total bill can be $60,000 or more.

    For many parents, the solution to making these payments lies in their home's equity.

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The cost of college has risen over 300% since 1990 and even if you have been saving, it’s been hard to keep pace. Tuition and fees for an in-state student at a public college or university average over $30,000 a year and for private schools, the total bill can be $60,000 or more.

For many parents, the solution to making these payments lies in their home’s equity. Home equity loans and home equity lines of credit (HELOCs) are loans based on the value of your house. The difference between the two is that with a loan, the borrower receives a single lump sum of money, while with a HELOC, the borrower qualifies for a set amount, to be used and re-paid as needed, such as when a tuition bill is due.

Tuition costs are so high, they will almost certainly exceed the amount of equity in your home, so it’s unrealistic to expect a HELOC to cover the complete cost of college. Think of home equity as an option to be used after any scholarships, grants or financial aid, and savings such as a 529 plan are applied toward tuition. Everyone’s situation will be different, so use the following information to decide what is right for you.

The Pros of a HELOC

HELOCs are easy to obtain. If you own a home, you will almost automatically qualify.

In general, a HELOC offers a low interest rate, these days somewhere around 5%, and there are typically little or no application or annual fees. Student loans will be slightly more costly. For example, the Federal PLUS loan rate for 2015-2016 is 6.84%.

Many HELOCs allow for borrowers to pay back only the interest for a fixed period of time, normally 5 to 10 years.

Just as you deduct your current mortgage interest at tax time, you may deduct the interest on a HELOC.
Click here for more information: http://www.interest.com/home-equity/news/helocs-still-a-good-choice-for-college-bills/

The Cons of a HELOC

While interest rates on HELOCs can be low at first, they are often variable rate loans, and you may be stuck paying back more than you expected if rates rise.

If you are subject to the alternative minimum tax (AMT), you may NOT deduct home equity loan or HELOC interest.

A HELOC must be re-paid, while a student loan re-payment can be deferred and sometime even forgiven depending upon the student’s choice of study and career.

Your home is the loan’s collateral. The lender may cut off a HELOC if the home’s value drops, and you risk foreclosure if the loan cannot be repaid.

For more information: http://www.investopedia.com/articles/mortgages-real-estate/11/helocs-can-hurt-you.asp

Funding college can be a stressful,complex process that is unique to almost every family. Share this article with your friends and family on Facebook and other social media to help them make decisions that will turn the dream of college education into a reality.

Consumer Financing reference:

turn your home into a bank

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