Is It Smart to Use Home Equity for College Costs?
The cost to attend a college on average increases about 8% per year and doubles approximately every nine years. That increase has outpaced the average salary growth by almost a 3:1 ratio. That’s because the typical salary increase is only about 3.3% each year. Although the rise of tuition has slowed with the pandemic in 2020 and 2021, it’s unsure if this slow will continue.
Even if the increases in tuition are slowing, it’s still no surprise that college tuitions are getting harder and harder to afford every year. Does it make sense to use the equity in your home to help pay for college?
Hess, Abigail Johnson. “College Board Report Suggests the Pandemic May Have Paused Rising College Costs.” CNBC, CNBC, 27 Oct. 2020, www.cnbc.com/2020/10/27/rising-college-costs-may-have-paused-due-to-pandemic-says-new-report.html.
Using your home equity for education can have some benefits. Currently, there are loan limits to federal funds available for education loans. Here are the current limits:
- First-year undergrad max loan is $5,500
- Second-year max loan is $6,500
- Third year and beyond is $7,500
Federal Student Aid studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized.
With college costs, you could be looking at yearly expenses many times those numbers. That’s particularly true for out-of-state colleges and room and board.
Let's compare the cost of in-state college tuition vs. out-of-state for the '20 - '21 academic year.
- $9,687 (in-state)
- $21,184 (out-of-state)
As you can see, in-state is about $11,000 less expensive than going out of state. Plus, if the college is close enough to commute, you won't have additional housing expenses.
If you don’t have enough savings, you’ll need to supplement somehow. What about college federal aid? One thing to be aware of is that before providing federal aid, some colleges may review the net value of your home to determine how much financial assistance you can get. That really isn’t a good gauge of whether you can afford college, of course, but it’s something you should be aware of.
Powell, Farran, and Emma Kerr Kerr. "How to Get In-State Tuition at Out-of-State Colleges." U.S. News & World Report, 2 Apr. 2021, www.usnews.com/education/best-colleges/paying-for-college/articles/2018-04-04/how-to-get-in-state-tuition-at-out-of-state-colleges.
Tips on Saving Money on College Tuition
College tuition, even for a local junior college, can be a major expense. And it’s just not the tuition. There are additional fees for lab classes, parking, meals, and of course, books. Here are some ways you can save:
- Start taking college classes while in high school at a reduced rate
- Test out of general ed college classes whenever possible
- Choose a local 2-year public college for the general ed requirements.
- Buy used books, and resell them as soon as you’ve completed the class
- Rent digital books instead of purchasing the hardback or softback versions
- Attend in-state colleges and universities
- Apply for as many scholarships as possible, even small local scholarships
- Commute instead of staying in dorms or off-campus
- Plan to have the military in your future and join an ROTC program
Powell, Farran, and Emma Kerr. “How to Make College Cheaper.” U.S. News & World Report, U.S. News & World Report, 2 Sept. 2020, www.usnews.com/education/best-colleges/paying-for-college/slideshows/how-to-make-college-cheaper.
What Are the Pros and Cons of Using Home Equity for College Expenses?
Home equity is the value of your home minus the outstanding mortgage(s). Here are some of the pros of using home equity for college costs:
- Home equity loans are generally faster than refinances. You can likely get the funds you need quickly.
- You have options. You can use a home equity line of credit (HELOC) or a home equity loan.
- The interest rate from a home equity loan is likely a better choice than pulling from your retirement savings or other loan types.
- A home equity loan offers a fixed rate for the life of the loan. You take the loan funds as a lump sum. Then you pay the same amount each month until the loan is paid off.
- A HELOC allows you to pull from the funds only as you need them. With a HELOC, for example, you could draw money each semester and only pay interest on what you’ve borrowed.
Some of the cons of using home equity for college costs:
- Your house is collateral, and you will be increasing your mortgage loan balance.
- You will need to pay off all loans on the home prior or during the sale of the house.
- There are some closing fees involved, but they are usually less than refinancing.
- Using these funds for college could remove your available emergency funds.
- Increasing the balance of your mortgage could mean it will take longer to pay off.
A Cash-Out Refinance Could be Another Way to Pay for College
The other option to consider is a cash-out refinance. In addition to getting the cash you need – you may also be able to lower your current mortgage interest rate. Take a look at your current debts and see if you could give yourself more room in your budget by refinancing. Some borrowers use their equity to pay off credit cards and take out money for college tuition and expenses. Go over your budget and see what works best for you.
As with most financial advice, it’s wise to do your homework. Understand all of the educational funding options there are for the specific colleges you’re considering. Weigh the costs and the risks. That way, you can determine if using the equity in your home is the right choice to pay for college.
To learn more about home equity loans, review PenFed’s HELOC rates.