Should You Use Home Equity to Finance a Child’s College Education?

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For many students and their parents, a college education is a top priority. With education costs continually rising, paying for a degree may seem difficult or impossible. Some parents consider using their homes equity to obtain funds for college but arent sure if that would be a wise move.

Benefits of Using Home Equity for Higher Education
Home equity can be easier to access than a traditional loan. To obtain an educational loan yourself, or for your child to obtain one, a lender would require a lengthy application and credit check. If you already have a mortgage and make payments on time, you may find it much easier to secure a home equity loan. If you already have a home equity line of credit, you can simply write a check to your childs university.

Federal student loan programs limit the amounts that can be borrowed each year. If your child will attend an expensive university, you may not be able to borrow enough to cover the entire cost. Meanwhile, your mortgage lender may allow you to borrow up to 90 percent of your homes equity.

Interest rates on home equity loans are generally lower than rates for loans offered by the federal government or by private lenders. The lower interest rate can make a home equity loan the most attractive option if you need to borrow to finance your childs education.

Danger of Using Home Equity
Using home equity to pay for a childs college education is very risky. If you suffered a financial hardship, such as a job loss or unexpected medical bills, you could have limited options to modify or delay your home equity loan payments. Using your home as collateral means you could lose it if you failed to repay the loan. On the other hand, if your child took out student loans, options such as forbearance, deferment, and loan forgiveness could be available to help in tough financial times.

Other Ways to Pay for College
A variety of grants and scholarships are available from universities, community organizations and businesses to help cover the costs of higher education. Your child could work part-time during the school year and work part-time or full-time during the summer. Another option is for your child to attend a less expensive university, at least for a year or two.

Think Carefully Before Tapping Into Your Homes Equity
Using your home to help cover the cost of college may seem like a good idea. While a home equity loan or line of credit can be easy to obtain and can have favorable interest rates, make sure you fully understand the risks. If you suffered a hardship and couldnt repay the debt, a mortgage lender would be less forgiving than a student loan servicer, and you could lose your home. Think things over carefully and explore other sources of funds, as well as the possibility of your child attending a different institution.

This article is intended for informational purposes only and should not be construed as professional or legal advice.

Published with permission from RISMedia.

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