Just curious to see who has chosen to take out home equity loans to partially supplement college payments. Interested in understanding the pros and cons compared to other private loan options. Assuming that there is equity in the house and the additional monthly loan payment can be tolerated.
We debated it, but that was years ago when rates were lower. We chose instead to use a school payment plan and cash flow it. That way, we didnât have to come up with a chunk of money upfront. For us, having our kids choose colleges that didnât require us to borrow was really important.
If you do choose to borrow, home equity May or may not be the best option. It depends on your equity, the market (you donât want to end up underwater) and other borrowing options that may be available to you. Whatever you choose, keep borrowing to a minimum, because interest really adds up.
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This is the approach we took also. We just did not allow our kids to attend universities that would have required debt. Some very good schools just got eliminated by this restriction. One daughter was frustrated by this. After getting her bachelorâs degree and getting a dream job that she could only take because she had no debt, she thanked me for not letting her take on any debt. Both daughters attended affordable universities that were a good fit for them, even if it was not the highest ranked school that they could get accepted to. Both then went on to attend very good graduate programs.
I understand that this is not possible for some families. Sometimes debt is just necessary.
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We had plenty of home equity. We did not use it to fund college for either of our two kids.
I guessâŠsomething you need to think about is the repayment which happens immediately. If you think you can pay an extra $500 or whatever per monthâŠstart doing that immediately and see if itâs sustainable.
Also contact your lending institution. A HELOC is not as easy to get as it once was.
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Knowing your timeframe on staying in the house, having a good handle on the health needs of your family are the two things that many people ignore (in my experience). Not a good plan for a house you arenât planning to stay in for very long- even if youâve got a lot of equity (based on today), home values fluctuate which will all know intellectually but tend to ignore when it comes to our own homes.
I was living in a small city (owned a house) when General Motors announced it was closing a plant about 10 miles out of town. The closing was a 3 year âheads upâ- both for compliance AND to give the employees time to figure out if they wanted to transfer or take a package.
Home values dropped 25% overnight in my neighborhood. And that was across the board- the cute condos, the more spacious townhomes, the âstarterâ homes and the big houses on landscaped lots. 25%, poof. For people who were tied to the neighborhood but who worked somewhere that was NOT leaving town, it was psychologically painful but not financially complicated. Prices go up, prices go down.
But for anyone with a balloon payment (they were very popular back then), an ARM (almost everyone, except for me), HELOC, or who was in the process of selling their house (also me) it was a painful education.
Health- no need to belabor. But if the primary wage earners need to switch, go on disability, or stop working for a while to take care of an ill family member- all your calculations can go up in smoke in a matter of weeks.
So get comfortable on these-- not enough to have equity in the house and be able to pay the extra mortgage. Life happens.
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My Daddy always used to say, âif you canât afford it now, you just plain canât afford it.â (Spoken in Texan drawl) I know it sounds weird, but it makes sense!
The thing is that you never know whatâs going to come up in life because things happen .
Home equity changes and some of those changes are out of your control. Is there another way to fund it?
I have never recommended that families use their home equity to fund their kidsâ college education. The Home is the one secure thing that a family has, so putting itâs equity on the line is scary to me.
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Excellent points I all agree with. Our child got accepted to a âmeet full needâ school and we got a decent aid package, but I think the high equity in our house worked against us (Thanks, CSS). Itâs almost as if the school expects to us tap into it, or possibly sell the house and move into a smaller one.
The school expects nothing. They donât expect you to quit your job for one that pays more, they donât expect a non-working spouse to suddenly get a job as Chief Operating Officer of a large hotel chain, they donât expect you to stop eating meat and substitute legumes for a cheaper food bill.
Their formula has assessed your available assets (and your home is one such asset) and spit out a number that encompasses your current income, your past income (savings) and your future income (borrowing, if you choose to go that route).
Do not assume that the college âexpectsâ you to tap your home equity and therefore, itâs what you need to do. If you can afford your piece of the puzzle (some combo of savings, belt-tightening to increase your cash flow and deferred home maintenance, the federal loans, your kidâs work to cover incidentals) then terrific. And if not, like anything else- you canât afford it. If the HELOC makes sense for your OVERALL financial picture- then terrific. And for some families it does- your company will likely go public in the next two years and as founder, youâve opted for an artificially low salary to keep the cash in the business. You are a great candidate for a HELOC- youâll be in a much stronger cash position in two years than you are today. Or you have an elderly uncle who died two weeks ago. You know nothing about his financial situation except that his lawyer reached out to tell you that you are his only heir and youâre pretty sure that this means you now own a 5 bedroom house in Palo Alto, free and clear.
If not- tread carefully. Prices go up, prices go down.
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This is the interesting part. If the school doesnât expect one to tap into their HE or sell their home, why do they need the detailed equity information of oneâs homestead?
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They asked how much money you make- do they expect you to get a job which pays more? They ask about your investable assets- do they expect you to move out of a money market account and into higher growth investments?
They are getting a more nuanced view of your entire financial picture. Whether or not you agree that the ânuanceâ is helpful or achievable is entirely up to you.
Iâve got a friend with a relatively low (on paper) income whose lament was âThey expect me to sell my beach houseâ. No, they donât âexpectâ you to sell anything. Theyâve determined- via an algorithm-- that your W2 doesnât tell the entire story of your financial picture. Nobody is telling you to sell your beach house.
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My two cents is if:
(A) you have a lot of home equity, such that even in a bad market event you will still be in the black with the amount you are thinking about borrowing; and
(B) you have a well-worked-out payment plan; and
(C) you have considered alternatives means of financing and this turns out to be your lowest-cost means . . .
. . . then borrowing against home equity can make some sense. But I think a lot of people get in trouble when not satisfying one or more of those conditions.
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@j_t_03 just make sure you have a financial payment plan that will work for all four years your student is in college. Itâs heartbreaking when we read here about families who borrowed, but couldnât do so in subsequent yearsâŠor for all four years.
I donât know how much you need, but for freshman year, your student can take out a Direct Loan of $5500âŠ.in their name only.
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Thank you - yes, we have a rough financial plan, albeit one that was always a last priority. Letâs get the kid into college and weâll figure out finances later - sound familiar to anyone? 
We are fortunate to get the aid we did and we will have to tighten expenses quite a bit. This idea is more of a measure of last resort.
In your planning, keep in mind that there may be tuition increases each year, depending on the college. (Some have fixed tuition for each entering cohort, others have tuition increases from year to year.)
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What if you and I had the same job and make the same amount. We both buy houses that cost the same. You double pay your mortgage to build up equity and I pay the mortgage and put an equal amount into a college savings plan.
Do you think it is fair if the college doesnât consider your home equity but does consider my college account, so gives your child more financial aid and expects mine to use my college fund? Iâd like to use that college fund to pay down my mortgage, buy a beach house, travel.
I had two kids who started college at the same time. I was a single parent, so family size of 3. The guy who sat next to me had a wife who also worked and one child, so family size of 3. His asset allowance was about 5x mine because he was married (I think mine was $10k and his was over $50k, maybe even $80k. Thatâs how the formula worked because of his having 2 adults and my having 1 adult. Nothing fair about it. I would have argued (if there was anyone to argue with) that I needed MORE in savings as I had to pay everything by myself without another income.
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To be fair⊠it isnât really about fairness, though. If two people have the same job and make the same amount, and one puts money into a college savings plan, while the other blows the same money on fancy vacations and gambling on horse races⊠the one with the money saved in the college savings plan is going to end up paying more for their kidâs college (assuming both people are getting financial aid, that is).
Itâs simply about their estimate of âability to pay.â The college has a model that tells them that a person with a certain amount of home equity is likely to have the financial resources to pay a certain amount for college. So thatâs how much they ask that person to pay.
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Thatâs right, but I think it is also true it is not UNfair to see net home equity as a form of savings that affects ability to pay. And while I would agree they do not necessarily âexpectâ parents to take out a HELOC, it is a relevant background fact that such things exist as an option.
That said, different colleges can and do assess home equity differently. A few not at all, others only up to a limit, or at a complicated schedule of rates, or so on.
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In our particular situation, we did not overpay our mortgage to build up the equity - the area we live in got substantially more valuable over the years and especially after the pandemic. This created a significant difference between what we paid for the house 15 years ago vs. what itâs valued at now. Great for building equity, but the algorithm increases family contribution given the HE. Itâs a primary residence, not a beach house or an investment account. It is unfortunate that it is basically fair game as any other asset in this calculation. But thatâs how the system works I guess.
I note at a typical parental asset assessment rate, you are still going to end up much better off financially with the additional home equity and having to pay more tuition than without the additional home equity in the first place.
In fact usually at most it adds up to around 20% over four years (could be less depending on if their formula has special rules for home equity and also your overall financial picture), and again this is net home equity. So you would normally be keeping at least 80% of this appreciation for yourself.
That said, I understand housing markets can be fickle, and so that can be a bit nerve-wracking even so. This is part of the logic behind the rules of thumb I suggested above, and it certainly could be the case a family would rationally decide to avoid any college that assessed home equity, or at least those that assessed it at the higher rates.
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Do colleges take into account mortgage costs in addition to home equity?
For example- if my home is $4M w/ a $700k mortgage and my current income is $175k/yr pre-tax in a very HCOL city does the college take into consideration the $5k/mo after tax l pay for âhousingâ?