Sometimes scholarships and grants and even your kid’s Federal Direct Student Loans may not be enough to pay for college. That is why parents look into a variety of ways to finance the rest of college costs. According to Sallie Mae’s 2020 “How America Pays for College” report, 8% of families use home equity to pay for college, despite the fact that most colleges have zero information on this option.
If you are exploring using home equity to pay for college, here are five things you should know.
Interest Rates are Competitive with Other College Financing Options
With interest rates at historic lows, home equity options are an attractive way to pay for college. In March 2021,
ValuePenguin reported that the average 15-year fixed rate home equity loan is 5.82% with a range of 2.99% to 9.03%. Also, an average home equity line of credit (HELOC) was 5.61% with a range of 3.50% to 8.63%. As a point of comparison, the 2021-22 Federal Parent PLUS Loan fixed interest rate is 6.284% with 4.228% loan fee. In general, home equity loans and HELOCs may offer variable interest rates or fixed interest rates.
Ability to Take Out Home Much You Need When You Need It
Lenders will look at the current market value of your home, your existing mortgage balance, and an assessment of your
loan-to-value (LTV) to decide how much credit to approve the loan. When you borrow a home equity loan, you get to decide how much you want to borrow of that equity and get the lump-sum payment. In contrast, a HELOC has a draw period of 5 to 10 years where you can withdraw the available funds in increments based on when you need funds. This allows you to withdraw funds based on tuition bill due dates for each academic period.
You Can Opt for a Longer Repayment
A standard repayment of a Federal Parent PLUS Loan is 10 years, although you may be able to request an extension if you borrow more than $30,000. In contrast, home equity and HELOCs offer a range of repayment length options. Our home equity loans and HELOCs allow borrowers to opt for repayment periods of up to 30 years.
Quick and Easy Process to Apply
With some lender's online application process, applicants typically complete the application in less than 20 minutes. Typically, the application will ask for your and any co-applicant’s contact information, information on property and your existing mortgage provider and balance, your income and employer information as well as any other income you receive, a summary of your other assets and information on your other credit and its history. Also, an application approval process often takes two to four weeks. During this time, the lender will review your credit history and credit score. Plus, they may verify income, asset and debt information. Along the way, lenders may inform you that you have been approved. Once approved, they typically will ask you to sign a promissory note. Then in the case of home equity loans, most borrowers receive their lump-sum payment within a week of receiving the promissory note. In the case of HELOC, your first request for funds can be requested and typically are disbursed in about a week.
Myth of Tax Deduction
Prior to 2018, parents who used home equity to pay for college could be eligible for a tax deduction of interest on that loan. Based on the 2017 Tax Cuts and Jobs Act, home equity borrowers no longer qualify for this tax deduction.
Pro Tip: Get an idea of the home equity financing costs in less than 5 minutes when you use our College Finance Planner. It’s simple to select your top college choice, see how far your savings and cash will stretch to help pay for college, and compare your eligible financing options side-by-side.
Colleen Krumwiede
Co-Founder & Chief Marketing Officer
Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.
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