Americans have a record-high amount of equity in their homes—$9.9 trillion. At the same time, the alarming amount of student loan debt reached $1.747 trillion. A home equity loan for college is a very alluring choice for those without the finances necessary to pay the current skyrocketing cost of tuition. The most desirable option isn’t usually the best one for your entire financial situation, either.
If you or your child plans to apply to college in the coming years, you’ve certainly thought about a variety of funding options. Financial aid will play a significant role in that equation for many families.
According to a survey conducted in 2021 by Sallie Mae and market research firm Ipsos, families paid $26,373 on average throughout the US to pay for college during the 2020–2021 academic year. Under half of that sum (45%) was funded by grants and loans.
There can be additional options available to you when it comes to saving money for college, depending on your specific situation. One of these is the equity in your house that you have access to through a loan or a line of credit for home equity. Either option can provide you access to money that you can use to pay for college.
Benefits and Drawbacks of Home Equity Loans for College Professionals
Home equity loans can have cheaper interest rates than student loans, saving money over the term of the loan. A home equity loan might be your only option if you’re a parent who would like to pay for your child’s education but can’t find the huge lump payment required to cover a semester’s tuition.
If you take on debt to pay another person’s education by using the equity you have in your home, that person may not complete their degree. You might lose your house if your financial status changes in order to pay for a college degree that another person might not even complete.
As a last resort, using home equity to pay for college. Those who have children in college are often in the final stages of accumulating savings and they lack the time to take on further debt before retiring.
Alternatives to Home Equity Loans for College Financing
Paying for college can be challenging, especially with the sky-high prices of today. Starting a 529 plan now and saving as much as you can will help you be better off when the first tuition bill is due if you still have time until you need to start making college payments.
The prospective student may want to think about attending a less expensive university, completing their general education requirements at a less expensive community college beforehand, and applying for all available scholarships.
What is a Home Equity Loan?
A home equity loan is a fixed-amount loan for which the equity in your home serves as collateral. The loan has set monthly payments over a predetermined time period, often with a fixed interest rate. You risk having your home foreclosed upon if you are unable to repay your loan.
Are Loans for Home Equity Expensive?
Because they are secured by utilizing the equity you have in your home as collateral, home equity loans are frequently less expensive than unsecured debt, like a personal loan or credit card.
For the Purposes of the Free Application for Federal Student Aid (FAFSA), are Home Equity Loans Considered Assets?
When you take a home equity loan against the equity in your home, the Free Application for Federal Student Aid (FAFSA) will treat the funds you received as an asset offset by the loan’s debt rather than as a deduction from your income.
Some specific institutions also offer financial aid, and these programs may or may not take your principal residence’s equity into account when determining your eligibility. For specific regulations, check with your institution.
Do You Need to Cosign for Student Loans?
Co-signing for someone else’s student loans is hazardous and ought to be reserved for extreme circumstances. Student loans may be challenging to discharge through bankruptcy under present laws. You will be responsible for any loans that you cosign for someone who later finds themselves unable to pay them back.
In recent years, home equity has risen as education costs have become astronomically unsustainable. It can be tempting to take out a home equity loan to pay for college, but before doing so, weigh the hazards, including the possibility that you could lose your house to foreclosure if you can’t keep up with payments.
Be cautious to explore all alternatives before taking out a home equity loan to pay for college because there are numerous methods to reduce the cost of higher education.
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