Should a HELOC cover your college costs?
Chances are if you have a college-bound child, you have explored all scholarship, grant and government loan options to cobble together funds for tuition and board. But if you are like most families paying for costly higher education, you may still come up short by thousands of dollars. You may have considered borrowing money through a home equity loan or home equity line of credit to come up with the shortage -- but is this a good option?
Here are the pros and cons of using your home as a source for college funding.
- Interest rates are better than private student loans and even some of the federal student loans.
- You can deduct mortgage interest at tax time.
- If you opt for a home equity line of credit, or HELOC, you can tap into it whenever the bill arrives for the balance of the tuition.
- Home equity loan interest is not tax deductible if you are subject to the alternative minimum tax, or AMT.
- If you are not subject to AMT, there is a $100,000 limit on interest deductions if you are using the loan for something other than home improvements.
- If you get a HELOC, you may be faced with rising interest rates.
- Banks can cut off a HELOC loan at any time your home value drops.
- You may be putting your home at risk of foreclosure if you can't pay the loan.
- These loans will always need to be paid back; on the other hand, student loans can be deferred in cases of financial hardship or even "forgiven" if the student graduates with teaching or medical training and chooses to work in certain areas.
While taking out a home equity loan to pay for your child's college may seem like a logical solution to financing a college funding gap, you may want to first consider other options such as a Federal PLUS Loan for parents or a private student loan before tying your home equity up with expensive higher-education costs.