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A home equity line of credit (HELOC) can be a useful alternative for paying for college
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A home equity line of credit (HELOC) can be a useful alternative for paying for college

Determining how to pay for college is incredibly stressful. You want your child (or yourself) to get the best education possible and to live out their dreams. At the same time, the cost of attending college has more than tripled in the last 50 years when adjusting for inflation. A home equity line of credit (HELOC) is one of many financing options for college. Read on to understand how and whether you should use a HELOC to pay for college. 

Key Points

  • A home equity line of credit (HELOC) is one of many financing options available to pay for university tuition and expenses

  • A HELOC is secured by your home, and therefore often has a lower interest rate than other types of personal loans

  • Parents and students should explore all financing options, including federal student loans, private student loans, work-study, and home equity solutions

  • Parents and students should also explore alternative, less expensive universities, off-campus housing with family members, part-time jobs, and scholarships to reduce the overall debt load of education

Can you use a HELOC to pay college expenses and tuition?

Yes, a home equity line of credit, or HELOC, can be used to pay for college tuition and related expenses. A HELOC can be an intelligent alternative to private student loans, personal loans, and credit cards when it comes to expenses such as books, housing, living, and tuition for college and university. If you are a parent or a student, it is crucial to explore all financing options for university costs before embarking on an educational journey. Weigh the pros and cons, fees, interest rates, and loan terms to determine the best way to fund college. 

How student loans work

There are several types of student loans, and depending on your financial need, the university, and your degree level (undergraduate, diploma, or graduate) you may be eligible for different loans. There are federal subsidized loans, federal unsubsidized loans, and private student loans. With all student loans, how much interest you will be charged, when you will start being charged interest, and how long you have to pay the loan back will vary. 

Subsidized loans are federal loans for students who need financial help for college. You can get them if your cost of attendance minus financial aid and family contribution shows you need it. If you have a Subsidized Loan, you don't have to worry about interest while you're in school or during deferment. So, it's a good option for those who need it.

Unsubsidized loans are federal loans that are not based on financial need for both undergrad and grad students. Your eligibility is determined by subtracting other financial aid from your cost of attendance. Interest accumulates during in-school, deferment, and grace periods. Unlike a subsidized loan, you're on the hook for interest from the moment the unsubsidized loan is disbursed until it's fully paid off.

Private loans come from private organizations like banks, credit unions, and state-affiliated groups. The lender sets the terms and conditions for these loans. Private student loans usually come with higher interest rates than federal student loans.

How HELOCs Work

A home equity line of credit (HELOC) is a loan that uses your home as collateral. When you take out a HELOC, you’re essentially borrowing against the value of your property. The lender provides you with a maximum amount you can borrow up to, and then you can draw on it as needed. There are no restrictions on how you can use HELOC funds, so they could be used for tuition, living expenses, or other education-related needs.

Interest rates on HELOCs can be fixed or variable, but currently are slightly higher than federal student loans and somewhat lower to those of private student loans. Federal loans, because they are offered by the US government, are able to provide lower interest rates and more favorable terms. 

A HELOC is typically broken down into two periods: the draw period, during which you can withdraw funds up to your maximum credit limit, and the repayment period, during which you can no longer withdraw funds. During the draw period, you are usually only required to make payments on the interest on your loan, while during the repayment period, you must make payments on both interest and the outstanding balance until the loan is paid back. 

Should I use a HELOC to pay for college?

Deciding whether you should use a HELOC to pay for college expenses and tuition is a personal decision, based on your current financial situation and your earning potential after graduation. If you are considering a HELOC to pay for your child's education, it is important to consider if and how this will affect your long-term retirement plan and your current lifestyle. 

Pros

The benefits of using a home equity line for college are straightforward.

  1. No principal payments are required until after your student leaves school, making it more affordable than private student loans

  2. Interest rates on home equity loans and HELOCs are often lower than those on private student loans, including Parent PLUS loans

  3. The amounts borrowed don’t typically count against borrowing limits for other types of federal aid

  4. They are easier to qualify for because they are secured by your home

  5. You can access larger amounts of capital than you may be able to with a private student loan

All in all, using your home's built-up equity in this way could help boost your college savings while keeping costs down and maintaining eligibility for additional forms of financial aid.

Cons

Each financing option comes with benefits and drawbacks. 

  1. The main risk is that if you fail to repay on a HELOC, you could lose your home to foreclosure

  2. You are using the funds to invest in your child, not yourself, therefore you aren't improving your own personal earning potential or net worth

  3. HELOC repayment options don't include the types of deferment or loan forgiveness available with federal student loans

Compare your student loan offer with your HELOC offer

When deciding how to pay for college for yourself or your child, start by exploring all funding options until you narrow down your choices to make the best personal decision. This means starting by submitting the Federal Application for Student Financial Aid (FAFSA). The financial aid department should send you a financial aid offer, which will explain any subsidized loans, unsubsidized loans, and work-study you/your child are eligible for. 

Based on that amount, you will need to determine how much the remaining cost of attendance and living will be. The university can connect you with private student loan officers who can make offers for parent PLUs or graduate PLUS loans. At the same time, apply for HELOC to see what terms you qualify for.

Based on interest rates and loan terms, it is up to you to make an ultimate decision on how to pay for college expenses. It will likely come from a combination of loans. The most important factor to consider is how you will repay the loan, and make sure that you don't overextend yourself to the point that you could lose your home. 

How to lower college expenses 

Before taking out a HELOC or any other loan to pay for college, there are other ways to reduce your expenses. Scholarships and grants can reduce the cost of tuition and living expenses. You should also explore cheaper schools and living with relatives if possible. Working part-time while in college can also help to cover costs, as can taking summer classes to graduate early. All of these strategies should lower the overall cost of attending and college, and improve your quality of living in the long term.

The takeaway 

Home equity loans can be a great option for those who are looking to pay for college since they may have lower interest rates than many student loans. However, it is important to remember that such loans have risks, so careful consideration should be taken before committing. If you cannot manage your payments on the home equity line of credit or home equity loan, then there is the possibility of foreclosure and severe financial consequences. Before opting for this type of loan it is important to look into other options like saving ahead of time for college, exploring scholarships, and attending cheaper schools. Being proactive in researching other payment plans will help ensure a positive experience when taking out a loan and aid in making an educated decision that is best suited for you.

 

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