How To Use A HELOC To Pay For College

Fact Checked Fact Checked Published: Jan 12, 2024, 10:09am Attending college is a major expense, and you may be considering tapping into your home’s equity to help your child cover the costs. A home equity line of credit (HELOC) offers revolving funds you can draw from to pay for tuition, room and board, and other costs as needed.

At the same time, borrowing against your home is risky: If you fall behind on payments, your lender can take possession of your home. Using a HELOC To Pay for College HELOCs often have competitive interest rates, so they can be an affordable way to finance college costs. You can borrow money as needed and typically can make interest only payments during the draw period.

Lenders typically allow you to withdraw up to 85% or so of your available equity, which is the difference between what you owe on your home and its current market value. For example, you owe $100,000 on a $300,000 home. In this case, you hold $200,000 in equity. If your lender limits your HELOC amount to 85% of your available equity, you may qualify for a credit line up to $170,000.

If you’re considering using a HELOC to , here are the steps you may need to take: A that works as a line of credit. You can draw on your HELOC as needed throughout your draw period, which is typically 10 years. HELOCs usually come with variable interest rates, though switching to a fixed rate may be an option.

During your draw period, you can usually make interest only payments on the amount you borrowed. However, you can pay back the amount in full, which will become available for withdrawal again as you pay it back. When your draw period ends, you’ll enter the repayment period on your HELOC, which may span 20 years.

During this period, you’ll pay off the principal amount you borrowed and the associated interest charges. Since you’re drawing on your home’s equity, a HELOC is a type of secured credit that uses your home as collateral. The bank could foreclose on your home if you can’t repay the funds. With a HELOC, you also run the risk of ending up underwater if your home value drops and you owe more on your home than it’s worth.

Using a HELOC to pay for college has advantages and disadvantages. HELOCs can be an affordable financing option due to relatively low interest rates and they’re also very flexible since you can draw from it as needed. However, there are downsides to leveraging your home to pay for college. As mentioned, you risk losing your home if you borrow more than you can afford to pay back.

Plus, HELOCs don’t offer tax benefits when you use the funds to pay for college. By contrast, student loans come with an interest tax deduction of up to $2,500 per year. Student loans also typically come with a grace period, during which you or your child don’t have to make payments for six months after graduation.

Federal student loans also come with low, fixed interest rates, as well as a variety of useful programs. For example, federal student loans are eligible for plans and federal forgiveness programs, such as . Finally, consider whether you want yourself or your child to be responsible for covering college costs.

A HELOC will be in your name alone, whereas student loans will usually fall to your child (the exception would be if you co sign a loan or take out a ). Consider the best way to approach college expenses for your family when deciding between using a HELOC or student loans to pay for college. And don’t forget to have your child apply for scholarships and submit the to access financial aid.

Using a HELOC to pay off student loan debt has the potential to save you money. If you can qualify for a lower interest rate on a HELOC than you have on your student loans, you might save on interest and potentially pay off your student loans faster, too. However, remember to account for potential HELOC closing costs, which could add to your borrowing costs.

You’ll also lose the student loan interest tax deduction. Federal student loans also come with various protections, including IDR, , deferment and forbearance, which you may not want to lose. HELOCs, by contrast, don’t offer the same protections if you want to adjust payments or return to school.

Finally, there’s always some risk when borrowing against your home. HELOCs are secured by your home, so avoid putting your property on the line unless you’re confident you can afford to repay the debt. Compare Student Loan Rates In Minutes Compare rates from participating lenders via Credible.com.