Paying for college is a tough proposition these days, as tuition costs rise and financial aid dries up. So here’s an idea. Why not pay for college with a home equity line of credit?
At first glance, the benefits are lower cost, flexibility and availability.
But does a closer look douse that premise with cold water? Let’s take a look:
First, the meat-and-potatoes. A home equity loan, is a loan provided by creditors based on the vale of your house. HELOCs enable you to draw from a fixed amount of money — much like a bank account — when you need the cash. The amount of the loan is essentially your credit limit.
While, home equity loans shouldn’t be the main course on your college payment plan menu, they can be a big help. By and large, HELOCs offer the lowest interest rates, thereby reducing loan payments and giving you more bang for your borrowed buck. (On average, HELOCs charge about 5% interest these days, compared to 8.4% or so for college PLUS loans, according to CollegeLoanGuidelines.com.)
Unlike standard college loans, HELOCs charge little or no annual fees, and there are usually no application fees, either. Contrast that with PLUS loans, which often charge fees of up to 4% or so of the total amount of the loan. Even standard college loans from private lenders and the federal government charge loan fees, and they can be onerous, too. Fees of up to 10% for the least credit-worthy borrowers are not uncommon.
Home equity loans are also easier for borrowers to manage, payment-wise. Most HELOCs allow borrowers to only pay the interest on the loan balance for a fixed period of time (usually five to 10 years), giving you a bit more flexibility than with college loans. With those loans, after the student graduates, you’re paying for principal and interest.
The downside? A home equity line of credit adds to your mortgage amount, making it a longer loan to pay off. It’s also a tougher loan to get these days, as many lenders have significantly reduced how many HELOC loans they grant. Some banks, like Bank of America (Stock Quote: BAC) have shut the spigots off, and frozen current HELOCs even as borrowers continue to pay off the loans.
That said, if you have — or can get — a home equity line of credit, you can easily use it to augment your current college financing plan. That’s especially true if you can’t get approved for the amount of money you’ll need to pay for college.
Think of it as a backstop plan. Because when it comes to planning for college cost, it’s always good to have a plan B.
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