September 23, 2020
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 increases by almost a 3:1 ratio, where the typical salary increase is only approximately 3.3% each year. It is 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?
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
- Year two max loan is $6,500
- Year three and beyond is $7,500
With college costs, particularly out of state costs with room and board, you could be looking at yearly costs many times those numbers. 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 aid 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.
What are the pros and cons of using home equity for college costs?
Some of the pros of using home equity for college costs:
- If you have the equity in your home — the outstanding debt on the home subtracted from the current market value of the home — you can likely get the funds you need quickly.
- You have options. You can use a 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, while a HELOC allows you to pull from the funds only as you need them. With a HELOC for example, you could pull 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.
- You will need to pay off all loans on the home prior or during the sale of the house.
- There are closing fees involved.
- Using the funds for college could remove any potential emergency funds in case of emergency.
As with most financial advice, it’s advisable to do your homework. Understand all of the educational funding options there are. Weigh the costs and the risks to 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.