If you’re preparing to send your child to college, the costs can seem daunting. A home equity line of credit (HELOC) or home equity loan can help pay for the costs, but you’ll need to weigh some considerations before leveraging your homeownership in this way. Here’s a crash course on the pros and cons of using your home to pay for college tuition and other education expenses.
How can I use the equity in my home to pay for my children’s college expenses?
Homeowners can tap into that equity and use it for a variety of big expenses, including major home improvement projects, expensive medical bills, debt consolidation, and of course, higher education costs.
Home equity represents the portion of your home that you own outright. It’s equal to your initial down payment and any subsequent mortgage payments you’ve made. Another way to think of it is the difference between what your home is worth and how much you still owe on your mortgage.
However, your home equity isn’t just a theoretical amount of money: It can be converted into cash, as advertised. Technically, it can serve as collateral for a cash loan. There are two basic ways to borrow against your home equity: a home equity loan and a HELOC.
A home equity loan is a type of second mortgage that gives you a lump sum payment at a fixed interest rate. A home equity line of credit (HELOC) is also a type of second mortgage, but it works like a credit card: instead of getting one large loan, you pay a variable interest rate on the amount you borrow and withdraw funds as needed.
For example, if you have $170,000 left to pay on your mortgage and your home is worth $400,000, you’ll have $230,000 in home equity. Because lenders typically require you to keep some equity in the home and that your total debt is much less than the home’s value, you’ll be able to pull about $150,000 of this equity, which could go a long way toward helping you with your college fund.
Home Loan Advantages and Disadvantages Paying for college
The benefits of using a mortgage to pay for college
- Potentially cheaper: Home equity loans, or HELOCs, typically have lower interest rates than personal loans or private student loans because the debt is secured by your home.
- Large borrowing capacity: Depending on the equity in your home, you can often borrow a larger amount, especially compared to federal student loans.
- Pay as you go: A HELOC allows you to withdraw funds when you need them, paying interest only on the amount you actually withdraw, and it also allows you to pay off the principal over time rather than being saddled with a large debt after you graduate.
- Your child will not owe you any money: Paying for college with a mortgage means your child can start life after graduation without the burden of student loan debt, improving their financial prospects from the start.
The downsides of using a mortgage to pay for college
- Debt is increasing: Increasing debt can put a strain on your finances and cause stress, and you want to be able to sleep easy at night knowing that your monthly payments will be larger. A variable interest rate on a HELOC also means higher monthly payments.
- Your home is at risk: Unlike credit card debt or personal loans, when you take out a mortgage, your property is used as collateral. If you fall into financial difficulty and can’t make payments, the lender can foreclose.
- Property values may decrease: While a fall in home prices may not seem likely at this point, that doesn’t mean they’ll continue to rise as rapidly as they have in recent years. In fact, the real estate market in some areas is already softening. If home prices fall significantly, you may find yourself struggling to pay off your mortgage, meaning you owe more than your home is worth.
16%
According to Bankrate’s Home Equity Insights Survey, 30% of current homeowners believe paying for tuition or other education expenses is a valid reason to tap into their home equity.
16%
According to Bankrate’s Home Equity Insights Survey, 30% of current homeowners believe paying for tuition or other education expenses is a valid reason to tap into their home equity.
Mortgage and student loans for college
While the equity in your home can be used for any purpose, a student loan is only meant to cover the costs associated with earning your degree. It is an unsecured loan and has no collateral.
Student loans can be federally or privately obtained. Private loans can have very high (or variable) interest rates, while federal loan programs offer lower fixed rates. Private student loans are issued by banks or companies such as Sallie Mae. A credit check is required, and some lenders require a cosigner.
In contrast, HELOCs and home equity loans are secured loans issued by private lenders. Using a home equity loan to pay off student loans or fund your education places the financial responsibility directly on the parent who owns the home backing the debt. In contrast, student loans can be taken out in either the student’s or parent’s name.
Both have advantages and disadvantages.
Strong Points | Cons | |
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Student Loans |
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HELOC/Home Equity Loan |
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Instead of using your home equity to pay for college
If you don’t think tapping into your home equity is the right choice, consider other ways to get the funds you need. These options can even supplement your student loans or parental loans. Before tapping into your home equity, be sure to thoroughly explore all your options. If you can’t make payments, lenders may foreclose on your home.
- Grants and Scholarships – Don’t think that grant and scholarship opportunities are only for low-income students. Many colleges offer merit-based scholarships that reward academic achievement, and there are other places to look for financial aid. Some scholarships are small, as little as $500, but they can add up to cover your entire tuition.
- Financial Aid – Be sure to fill out the FAFSA (Free Application for Federal Student Aid). This application helps students qualify for financial aid based on income. Again, aid isn’t just for people with extremely low incomes. This form is also important for loans (see below).
- Work-study programs – They monitor computer labs, grade papers, and lead campus tours. Many colleges offer work-study positions to students who qualify for financial aid, allowing them to earn at least the federal minimum wage (and sometimes more).
- College Payment Plans – Many lenders now offer their own monthly payment plans, which are easier to manage than handing over a large check at the beginning of the term and may even be better value than paying off your mortgage.
- 529 Plan – A 529 plan is a tax-advantaged savings account designed specifically for education expenses. You contribute after-tax money to the account, which grows tax-deferred and allows you to withdraw funds tax-free to pay for qualified education expenses like tuition and books. In some states, you can even deduct contributions to the plan.
Considerations when using home equity to pay for college
There’s no one-size-fits-all answer to whether leveraging your home equity to cover college costs is the right choice. Ask yourself these key questions to determine if it’s the best choice for you and your family:
What are my student loan options?
If you are going to borrow, you should compare home equity loans and student loan financing. Be sure to look at federal student loans (the traditional option) and private student loan options. Keep in mind that students rarely have good credit, so if your child borrows without you, they may face higher interest rates and have a harder time paying off the debt.
Consider these parent loan options to fund your child’s college education.
- PLUS Loan for Parents: These loans, part of the federal government’s Direct Loan Program, are borrowed by parents to pay for their dependents’ undergraduate or professional school fees. To qualify for these loans, parents must have a good credit history. The interest rate on Direct PLUS loans disbursed between July 1, 2024 and July 1, 2025 is fixed at 9.08% for the entire term, slightly higher than the current mortgage average of 8.52%. Parent PLUS loans come with a 4.228% loan fee, a one-time fee that is deducted from the first disbursement of funds.
- FAFSA Application: Parents can fill out the Free Application for Federal Student Aid (FAFSA) to find out if their child is eligible for federal student loans.
- Private parent loans: For those with poor credit, this is a viable option, although interest rates are higher and there is no federal loan protection.
What is the current home equity value?
Mortgage and HELOC rates have historically been competitive with other loans, but they spiked in 2023 as the Federal Reserve raised the federal funds rate to combat inflation. They are expected to stabilize this year and fall further in 2024, but they’re no longer cheap, so run your numbers carefully. With similar loan costs, student loans may make more sense for now, depending on what you or your child can qualify for.
What do you think your future holds?
If you have multiple children attending college at the same time, your mortgage may not provide enough money to cover tuition, room and board for both, unless you own an expensive home and have accumulated a significant amount of equity.
You also need to think about the bigger picture and your long-term lifestyle plans. When do you plan to retire? A large amount of additional debt could impact your ability to save for retirement for several years after. Do you intend to sell your old home after the chicks have left the nest? Like a mortgage, a home equity loan must be paid off in full upon sale. This will cut into your proceeds and could create a financial burden, even if you’re downsizing.
What do you think the future holds for your students?
It may be too early to know, but if your child has already decided on a career path, they may be eligible for student loan forgiveness in the future. Teachers, government employees, and some nonprofit employees may be able to have some of their remaining debt forgiven after a certain period of time. Home loans, on the other hand, must be paid off in full.
How to leverage your home equity pay College
If you think leveraging your home equity is the right decision for you, here’s how to get started.
- Estimate your assets. Your home is worth more than what you paid for it initially. Home prices are on the rise, and have risen at a rapid rate over the past two years. Estimate the value of your home to get an idea of how much equity you actually have available. Remember, if you have a large outstanding mortgage balance, it will reduce your available equity.
- Know your credit score and take steps to improve it if necessary. You can still get a mortgage with bad credit, but you won’t qualify for the lowest interest rates, and most lenders offer the most favorable loan terms to borrowers with a score of 740 or higher. Check your credit score before applying to see if you can improve it.
- Compare lenders. Consider at least three mortgage lenders and compare interest rates, fees, terms, maximum loan amounts, credit requirements, etc. Also consider any other features you may want in the future, such as the ability to convert an adjustable-rate HELOC to a fixed-rate version.
- Decide how you want to raise funds. HELOCs and home equity loans each have their pros and cons. For college funds, a HELOC may be more advantageous because it is better for long-term expenses. You can withdraw money in installments each year or semester, and you only pay interest on the amount you actually borrowed.
