Should You Use Home Equity to Pay for College?

Financial Cost of College

Usually, buyers need a mortgage to finance the cost of a home. Likewise, most families need loans to cover college expenses. Consider the average yearly net price of college. The net price figures the cost of tuition, room, and board after financial aid. According to the College Board, this net price averaged $27,400 at private institutions and $15,400 at public colleges for the 2019-2020 school year.

Advantages of Home Equity Loan

Even though you may qualify for low interest, subsidized federal loans, you may still want to look to your home equity for higher education.

Federal Loans Are Not Enough

You might find yourself with education bills beyond what federal loans can cover. Enter your home equity to help. A home equity loan is a second mortgage based on the value of your home. Any value above what you owe on a first mortgage is equity, and you can borrow against up to 85% of that equity.

You can get a lump sum loan that you pay back with monthly principal and interest payments or a Home Equity Line of Credit (HELOC), which gives you a flexible credit amount. Keep in mind that a loan is a fixed rate, and a HELOC is variable.

Home Equity Loans Are Lower Interest

Even if you qualify for federal loans, you might choose home equity lending due to lower interest rates. Because mortgage lenders leverage your home to guarantee the loan, rates are often significantly lower than even federal loans. Check with your financial institution for current rates.

Home Equity Is Immediate and Flexible

Perhaps you find yourself facing unexpected bills, or you need money right away for the start of a semester. You might not be sure how much money you will need and only want to borrow money off your line of credit when necessary. A HELOC can offer this flexibility without tying you or your student to a loan amount greater than is necessary.



For instance, you take out a $50,000 HELOC but only use $20,000. This is better than preemptively borrowing the larger loan amount. You can incentivize work during college to pay those education bills and end up owing less interest on a loan.

Disadvantages of Home Equity Loans

Although your home equity can offer funds for higher education, weigh the disadvantages when making your decision.

Home Equity Default Consequences

Because your home is the guarantee on the loan, you could lose your property in the event you cannot make payments. Take careful and honest stock of your finances. Defaulting on private loans will damage your credit but lenders cannot repossess your education.

Education Loan Tax Benefits

The Tax Cuts and Jobs Act of 2017 took away the home equity interest deduction from federal income tax. Under current tax law, you will not be able to claim this benefit until at least 2025. The Student Loan Interest Deduction allows you to claim $2,500 of interest paid on federal or private student loans. Home equity loans used for education costs do not qualify for this tax benefit.

If you or your dependents need college aid soon, start looking into your financing options now. If you think using your home equity is the right choice for your financial situation, reach out to us at Secure One Capital for a consultation today.