Because your home is used by banking institutions as collateral, home equity loans and home equity lines of credit (HELOCs) usually offer interest rates that are lower than personal loans as well as private student loans. Depending upon how much equity you have in your home, you can likely get a larger amount of money, particularly as compared with federal student loans. Here are the pros of using home equity for education costs.
What is a Home Equity?
Home equity is basically the difference between the value of your property and your mortgage balance. In other words, it’s the portion of your house that you own outright.
What is a Home Equity Loan?
This type of loan, often called second mortgage loans, provides a lump sum of cash at a fixed rate.
What is a HELOC?
While a home equity line of credit is a second mortgage as well, it functions more like a credit card. Rather than receiving a single large loan, you withdraw money as needed, paying variable rates on the sum borrowed.
Pros and Cons of Using Home Equity Loans vs. Student Loans for College
Your home’s equity can be used for any reason. On the other hand, student loans must be used exclusively for education costs. There and advantages and drawbacks to both.
Student Loans
Pros:
- Rates can be lower than HELOCs and home equity loans.
- Payment forgiveness may apply to certain borrowers.
- You can deduct up to $2,500 in interest annually.
Cons:
- With private options, you may pay significantly high rates.
- Your child may take on a big debt load.
- Only certain borrowers can avail themselves of an income-based repayment option.
HELOCs/Home Equity Loans
Here’s a look at a home equity line of credit vs home equity loans. When it comes to paying for education, there are pros and cons.
Pros:
- The parent takes on the debt, sparing the child/
- There is a range of repayment options from which you can choose.
- You may borrow funds as you wish with a HELOC and owe interest only on the amount you use.
Con:
- Your home serves as a collateral. You could lose your home if you default on payments.
- If your loan is used to pay for college, interest is ineligible for tax deduction.
- The amount of your loan is limited to the amount of equity you have available for tapping.
Other Ways to Pay for College
If using the equity you have in your home isn’t right for you, there are other ways to get the college funds you need:
- Financial aid. This kind of assistance isn’t exclusively available to those with very low incomes.
- Grants and scholarships. Here, too, do not assume that this kind of help is just for low-income students.
- Work-study programs. Students who are eligible for financial assistance can often participate in college work-study programs.
- College payment plans. Some colleges offer monthly payment plans that may be more manageable than forking over a large amount at the start of the semester.
- 529 plans. These tax-advantaged savings accounts are solely for education costs. After-tax account contributions grow tax-deferred, and funds can be withdrawn tax-free.
In Summary
Yes, you can use your home’s equity to pay for college. In many cases, it can be a smart move. However, you have other options as well. Be certain to look into all of them before using equity, because your home is on the line if, for some reason, repayment is imperiled.
