Paying for College with a Home Equity Line of Credit (HELOC)
According to Gallop, 73% of parents #1 financial concern is how they are going to pay for their kid’s college. Since the average homeowner now has more than $200,000 in home equity in their home, it’s no surprise that many parents consider borrowing against the equity in their home to help pay for college costs with a Home Equity Line of Credit (HELOC). As revolving lines of credit, parents can repeatedly draw down amounts of their HELOC credit for each semester or quarter over the course of their kid’s entire degree.
Pro Tip: Consider a HELOC if you have multiple kids going to college around the same time. With draw periods of up to 10 years, some parents are attracted to securing one loan that can be used year after year for more than one college bound kid. Plus, if you start repaying both interest and principal on a HELOC, the credit line replenishes itself so that you can help pay for the next kid’s college education.
HELOC Eligibility
To calculate your HELOC eligibility, the lender will look at the present market value of your home and any existing debt against your house. Then, the lender will assess a loan-to-value (LTV) to decide how much credit to approve the loan. Often, will only approve up to 80% of the home equity in a home as the credit limit for a HELOC. For example, if your home value is $400,000 and you still owe $200,000, then the 80% LTV equals $160,000.
Lenders also assess a homeowners’ credit score in order to qualify for a HELOC. According to Experian, homeowners typically need at least a 680 credit score to qualify for a HELOC. Also, depending on the lender, they may calculate a homeowner’s debt-to-income ratio (DTI) and may limit the credit line so that the DTI ratio is less than 40% to 43% of your monthly gross income.
HELOC Terms
With interest rates at historic lows, HELOCs are an attractive way to pay for college. In March 2021,
ValuePenguin reported that the average rate for a rate on a HELOC was 5.61% with a range of 3.50%-8.63%. In general, HELOCs may offer
variable interest rates or
fixed interest rates. Currently, many home equity lenders are offering 6 to 12-month introductory interest rates that are low. All lenders will disclose the
Annual Percentage Rate (APR) for the HELOC. In addition, some lenders will offer interest-only payments during the draw period, a fixed period of time when the borrower can withdraw funds from the HELOC that may range from 5 to 10 years.
Some home equity lenders will charge closing costs or loan fees like title or attorneys’ fees, mortgage insurance, lender fees for preparing the loan, appraisal fees and prepayments for property taxes and homeowner's insurance. Unlike student loan options, HELOC APRs do not include closing costs and loan fees in the calculation. The HELOC APR will be the same interest rate as the interest rate itself.
HELOC Drawbacks
You may have heard financial pundits raise red flags for using home equity. Why? Homeowners are using their house, which is typically their primary residence as a form of collateral in order to be eligible for the loan. This means that if you default on your HELOC payments, the homeowner can lose their home. The threat of having your house repossessed makes many parents' stomachs go sour.
Also, HELOCs do not offer the same
repayment flexibilities as Federal Parent PLUS Loans. The federal government has multiple repayment plans for Federal Parent PLUS Loans that can help a borrower extend the repayment beyond 10 years or graduate payments to slowly grow over the repayment period. In addition, Federal Parent PLUS Loan offers some deferment and forbearance options to postpone repayment and death and disability discharges. Finally, some HELOCs may have prepayment penalties if you pay off all or part of a loan early.
Comparing HELOC with College Finance Options
One of the unique ways that Quatromoney helps students and their families compare their eligible financing options is including HELOCs in the mix. When you use
our college finance planner, you can see detailed financing options side-by-side (including a HELOC) in one place helps you make the best financial decision. In a matter of minutes, understand your college costs, see how far your savings and cash will stretch, and compare all of 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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