Borrowing money from your home to pay for your child’s college

If you’re gearing up to send a child to college, the cost can feel overwhelming. A home equity line of credit (HELOC) or home equity loan could help pay for it — but before leveraging your home ownership stake in this way, you’ll need to balance a number of considerations. Here’s our crash course in the pros and cons of using your home to pay educational bill.

Paying-for-college data

College isn’t cheap. In 2022-23, the average published tuition and fees for full-time students at four-year institutions are $10,950 for public schools in-state; $28,240 for public schools out-of-state; and $39,400 for private nonprofit schools, according to the College Board. These figures represent year-over-year increases ranging from 1.8% to 3.5%.

What is home equity and how can you use it?

Home equity is the portion of your home that you own outright (as opposed to financing). It’s the equivalent of the percentage of the purchase price you paid cash/made a down payment for, and what you’ve repaid on your mortgage.

Another way to look at it: Home equity is the difference between what your home is worth and what you still owe on your mortgage.

Your home equity isn’t just a theoretical amount, though: It can be turned into cash (as the ads say) — or, strictly speaking, as collateral for a cash loan. You can borrow against your home equity in two basic ways.

A home equity loan is a type of second mortgage that provides a lump sum at a fixed rate. A home equity line of credit (HELOC) is also a second mortgage, but it operates more like a credit card. You access the money as needed, instead of receiving one large loan, paying variable interest rates on the amount you borrow.

Homeowners can tap their equity and use it for a variety of big expenses, including major home improvement projects, large medical bills, debt consolidation — and yes, higher education costs.

But just because you can use your home equity to pay for college, should you?

Using home equity to pay for college

There’s no one-size-fits-all answer regarding whether a home equity loan is the right choice to cover college costs. Ask yourself these key questions to determine if it’s the best option for you and yours:

What are your student loan options?

If you’re going to borrow, you have to compare home equity financing with student loan financing. Be sure to check out options for federal student loans (the traditional go-to) and private student loans. Bear in mind students rarely have much credit, so if your child is borrowing without you as a co-signer, their rate can be high, and paying off the debt can be daunting (see “Home equity loans vs student loans,” below).

What are current home equity rates?

While rates on home equity loans and HELOCs have historically been lower than other financing (since they’re secured loans, with your house as the collateral), they have been rising quickly in the last year, as the Federal Reserve has upped the federal funds rate to fight inflation. So crunch the numbers carefully: For a similar financing cost, it might make more sense to go with a student loan at this time, depending on the deal you or your child can get.

How close are you to retirement?

You also need to think about the big picture for you. If you’re nearing the end of your working years, you’ll need to be laser-focused on your budget to ensure you can pay back the debt (whether a home equity or student loan) while covering your own expenses.

How many college tuitions do you need to cover?

If you have more than one child heading off to college, a home equity loan might not provide enough money to handle both sets of tuition, room and board, unless you own a high-priced home and have a significant amount of equity built up.

What does your student’s future look like?

It might be too early to know, but if your child has a set career path already, they might be eligible for student loan forgiveness in the future. Teachers, government employees and employees at some non-profit organizations can eventually have a portion of remaining debt canceled after a certain point. In contrast, with a home equity loan, you’ll need to pay every dollar back.

Should you use this opportunity to help your child grow?

As your child begins college, now might be the time to help them understand what it takes to make an investment in their higher education. By opting for a traditional student loan with their name on it, you might instill a deeper sense of responsibility to go to class, apply for that internship and find a good job to pay all that money back.

Home equity loans vs student loans

While you can access your home’s equity for any purpose, student loans are solely for covering the costs related to earning a degree.

Student loans can come from either federal or private sources. On the private lending side, rates can be very high and/or fluctuating, while federal lending programs offer lower fixed rates. You can borrow a loan in the student’s name or in the parent’s name. They are unsecured loans — that is, there is no collateral backing them.

HELOCs and home equity loans are issued by private lenders. As secured loans, they require you to put your house on the line. The debt will be in your name.

There are benefits and drawbacks to either option.

Risks to using home equity for college

• You’re putting your home at risk. When you take out a home equity loan, your home is on the line as collateral. If you fall on hard times and can’t afford to make your payments, your lender could foreclose.
• You’re adding to your debt. Taking on more debt can strain your finances and add to your stress. You need to make sure you’re comfortable sleeping at night knowing your monthly bills are getting bigger.
• Your property value could decrease. Losing value in your home might seem unlikely right now, but prices don’t always follow the rapid upward trajectory we’ve seen in recent years. Indeed, some local real estate markets have experienced softening already. If your home value drops significantly, you could find yourself underwater — that is, owing more than it’s worth.

How to pull out home equity for college

If you feel like tapping your home equity is the right decision, here’s how to get started:

1. Estimate your equity. Your home’s value is not the number you initially paid for it. Home prices tend to appreciate, and they have done so at a frenetic pace over the past two years. Estimate what your house is worth to get a sense of how much equity you really have to tap.
2. Know your credit score (and take steps to improve it if necessary). While you can get a home equity loan with bad credit, you won’t qualify for the lowest interest rates. Most lenders reserve the best loan terms for borrowers with scores of 740 and above. Check your credit score before you apply, and see if you can boost it.
3. Compare lenders. Consider at least three home equity lenders and compare rates, fees, term lengths, maximum loan amounts, credit requirements and more. Consider other features you might need down the line, as well, such as the ability to convert a variable-rate HELOC to a fixed-rate version.
4. Decide which financing method you prefer. HELOCs and home equity loans each have their pros and cons. In the case of college funding, HELOCs might have an edge, as they’re well-suited to expenses that extend over a long time period: You can withdraw money in installments — per year or per semester — only owing interest on the amount you actually borrow.

Alternatives to using home equity for college

If tapping your home equity doesn’t feel like the right choice, consider these other routes to come up with the necessary funds.

• Grants and scholarships – While your child applies for admission to college, have them apply for grants and scholarship opportunities. Many universities offer merit-based scholarships that reward academic track record, but there are other places to turn for financial assistance, as well. Some scholarships are small —  just $500 — but they can add up to cover the entire bill. Discover’s Scholarship tool includes more than three million scholarships for just about every kind of student.
• Financial aid – Make sure you complete the FAFSA (Free Application for Federal Student Aid) application, which can help your student qualify for monetary assistance based on your income.
• Work-study programs – Monitor the computer lab, grade papers, lead campus tours: Many colleges offer work-study positions for students who qualify for financial assistance. Students will earn at least the federal minimum wage (and much more in some cases).
• Payment plans – Many colleges now offer monthly payment plans, which might be easier to manage than handing over a large check at the beginning of the semester — and a better deal than home equity loan repayments.