Every year, high school seniors spend time analyzing which college or university to attend after they graduate. Deciding to attend college comes with a significant price tag, with various reports finding the average tuition cost for private schools exceeds $32,000 per year. Tuition at public schools is also creeping up, so a public school may not be much cheaper, especially if it is out of state.
On average, families contribute $30,017 to college in a single academic year, but not every parent has that type of money in savings. While there are various funding options available, including state grants, federal student loans and private loans, one option that may be appealing is using a home equity loan or a home equity line of credit.
Taking out a home equity loan is a viable option; however, it is not the right option for every situation. Before you take this route, ask yourself these six questions to know if it is right for you.
Questions to ask before paying for college with home equity
1. Who is paying for college?
If you expect your child to pay for their college education, they should take out their own loans. A home equity loan will be in your name only, meaning you will be 100% responsible for repaying the loan according to the bank. If your child doesn't make the payments, you will still be expected to pay.
2. Do I have the income to make the monthly payments?
When you take out a home equity loan, you are using your house as collateral. This means that if you fail to repay the loan, you can lose your home. If there is a chance you won't repay the loan or if you need more flexibility, unsecured student loans may be better. Your house won't be used as collateral, and some student loans allow you to apply for delayed repayment or forbearance when needed.
3. How much equity do I have in the home?
It may not be worth taking out the loan if there isn't enough equity in the house to cover college expenses. This is especially true if you've lived in your house for less than five years. Equity increases as you pay the mortgage payments over time. To approve a home equity loan, banks typically require 15% equity in your house. It’s helpful to calculate how much equity you can access before assuming you can rely on this option, as you may be surprised to see how much equity is actually available.
4. What is the interest rate?
In most cases, home equity loans have a lower interest rate than traditional student loans. However, these rates are not always fixed and can vary depending on the federal rates. Check with your bank to see if it allows you to lock rates in. It is also important to remember that interest paid on a home equity loan is not tax-deductible like interest paid on student loans.
5. Do I have money set aside for retirement?
If you do not have money set aside for retirement, paying for college tuition with a home equity loan is not recommended. You can't take out a traditional loan to pay for retirement like you can to pay for education. If the only asset you have is the house, it is best to keep that equity for your future.
6. What is my credit score?
Banks check the borrower's credit score before approving a loan, and most banks require a credit score of 620 to approve a home equity loan. If your current score is below that, check with your bank to see if there are alternative options available.
Paying for college tuition is a significant financial endeavor. While these questions are a great starting point, take the time to research all of your options before deciding to take out a home equity loan.
