Can I Pay for College With a Home Equity Loan?

How to pay for college expenses using a home equity loan

A student studies on a couch.
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A home equity loan or home equity line of credit (HELOC) can help homeowners access their equity to use for many reasons. Also known as a second mortgage, home equity loans use the equity in your home as collateral to provide you with a set amount of money that you repay over the loan term. With a HELOC, you have access to a line of credit for a set amount of time, then start repayments.

Many homeowners use home equity loans or HELOCs for remodeling or renovations, but you can use them any way you’d like, including funding your child’s education.

Learn more about how using home equity works and how you can use it to help pay for college expenses.

Key Takeaways

  • Home equity loans or HELOCs can be used to cover a variety of expenses, including college tuition.
  • Equity in your home is used as collateral with a home equity loan.
  • Taking out a home equity loan adds to your monthly payment obligations.

Can You Use a Home Equity Loan To Pay for College?

Home equity loans or HELOCs can be used to cover any expense you like, including costs associated with attending college. Like with any other loan, home equity loans and lines of credit you use need to be repaid. Because these financial products are secured by your home, if you default on the loan, your home could be foreclosed upon.

While you can use a home equity loan pr HELOC to pay for college, consider the risk that you could lose your home, as well as other pros and cons.

Pros and Cons of Using Home Equity To Fund College

Like any major financial move, there are both pros and cons worth considering when it comes to using your home equity for loans.

Pros
  • Faster funding timelines

  • Interest rate can be more favorable

  • Fixed interest rates

Cons
  • Your house acts as collateral

  • Must pay off loan before selling the home

  • Can make mortgage payoff take longer

Pros Explained

  • Faster funding timelines: Typically, the process for getting home equity loans and HELOCs is faster than other borrowing options such as refinancing.
  • Interest rates can be more favorable: The interest rates associated with home equity loans and HELOCs are generally lower than other loan options such as personal loans, which can save you money.
  • Fixed interest rates: Home equity loans typically come with a fixed interest rate for the entire life of the loan, so your payments will remain consistent. This can help you plan your budget more easily. (HELOCs usually have adjustable rates.)

Cons Explained

  • Your house acts as collateral: Your home will be used as collateral for the loan, so if you default on payments, you could lose your home. 
  • Must pay off the loan before selling the home: You lose a bit of flexibility when you take out a home equity loan or HELOC. If you decide you want to sell your house, you need to pay off the loan or line of credit you used before you can finalize the sale. 
  • Can make mortgage payoff take longer: When you take out a home equity loan or HELOC, you increase the remaining balance on your mortgage which can make it take longer to pay off.

Other Ways To Pay for College

Using your home equity is not your only option for borrowing money to pay for college. Here are a few others you might consider.

Federal Student Loans

Federal student loans are funded by the federal government and usually have more favorable interest rates than private student loans. Federal student loans can be better choices than a home equity loan since these loans come with helpful protections such as income-driven repayment plans and deferment options.

With a student loan, you won’t put your house at risk by using it as collateral.

Private Student Loans

Private student loans come from private lenders such as banks. In some cases, a home equity loan will have better interest rates than a private student loan, but if you need to borrow large loan amounts, having a private student loan that is not secured by your home may give you some peace of mind.

Personal Loans

Parents or students can take out personal loans for any reason, including to pay for education-related expenses. Whether or not a personal loan is a better fit than a home equity loan depends in part on the interest-rate repayment terms.

Personal loans are often unsecured, so their interest rates are often higher. Your interest rate will also depend on factors such as your income, credit history, and the market value of your home in the case of a home equity loan.

Cash-Out Refinance

When you increase the amount of your current mortgage during a cash-out refinance, you can gain access to the difference between the original loan amount and the new loan amount in cash. Keep in mind this strategy usually entails closing costs.

If you can secure a lower interest rate, you could potentially save money on mortgage payments while gaining access to cash you can use to pay for college. In this way, a cash-out refinance may actually help you save money, whereas a home equity loan would not.

Frequently Asked Questions (FAQs)

Can a home equity loan affect college financial aid?

A home equity loan will not affect financial aid offerings for college students. When completing the FAFSA, students do need to list certain assets, which can affect their aid amounts, but a home equity loan is not one of them.

Can I refinance my home to pay for college?

You can refinance your home to help pay for college. With a cash-out refinance loan, you have the option to increase the amount of your current mortgage loan. When you do this, you can access the difference in cash that is the difference between your original mortgage loan and the new one.

How much should I borrow for college?

How much you need to borrow for college depends on your tuition, school-supply needs, and unique living expenses. Your school’s financial aid office can help you calculate how much you need to borrow for school.

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