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The cost of college has risen drastically over the past twenty years—perhaps as much as doubling (or more!) since you were of college age. And as the US News and World Report points out, “In addition to rising tuition prices, paying for housing, food, transportation, books and other school-related fees can add thousands of dollars to college expenses.”

While student loans and other forms of financial aid are often the first option you may think of when exploring options for how to pay for college, homeowners may also consider using the equity in their home as a way to access affordable education financing. This may be especially true for individuals whose home’s equity has increased significantly due to rising housing prices or who have recently completed value-adding home renovations.

In this post, we’ll answer common customer questions about these lending products including: What is a home equity loan? How does a home equity loan work? and What are home equity loan (or line of credit) requirements? Whether you are looking to pay for your own education, supplement your child’s financial aid, or find a low-interest financing option to help your loved one avoid student loan debt, keep reading to learn more about leveraging your home’s equity to pay for education expenses!

The Cost of College in Pennsylvania 

Chances are you already have a pretty good idea of how much you might expect to pay for college. But if you don’t, an important part of figuring out financing options is understanding how much you’ll need to finance. Here are some current college costs for annual tuition for local colleges in Pennsylvania to help you get started. Note—these costs do not include room and board.

• University of Scranton: $52,233 (includes fees)
• Marywood University: $39,570 (includes fees)
• Lackawanna College: $17,020
• Penn State University: $19,286 (in state)
• University of Pennsylvania: $66,104

Traditional Ways of Paying for College 

Before you dip into your home’s equity, it’s important to explore other, more traditional options for paying for educational expenses. At your institution, the student aid office can work with you to learn about both Federal financial aid in the form of loans and grants, as well as inhouse financial aid options including scholarships and work study programs available direct from the school. 

However, in addition to these common options, looking into outside scholarships and grants may help defray some of the costs of tuition. Resources like the College Board’s BigFuture Scholarship Search and StudentAid.gov’s Finding and Applying for Scholarships site are a great place to start. There may be local grant programs available as well. In Pennsylvania, you can apply for state grants through PHEAA’s PA State Grant Program site.

Lastly, even if your student is already in school, it’s not too late to open a 529 Savings Plan. While these plans are designed to grow in value over the years, serving as an investment, in Pennsylvania account owners can currently deduct $17,000 of contributions (or $34,000 if married, filing jointly) from their PA state taxes. By contributing to a plan and paying expenses out of the plan instead of out-of-pocket, these deductions have the potential to significantly reduce your state tax bill. Visit their website to learn more about PA529 Savings Plans. 

Leveraging Your Home’s Equity to Pay for College 

After you’ve considered all your options, you may find that using your home’s equity to help offset education costs makes financial sense for your family. Let’s take a look at exactly what home equity is, and how it can be used to help you finance certain expenses.

Equity is the value of your home, minus all the loans you have out against your home. For instance, if a home’s value is $300,000, but the homeowners have a $200,000 balance on their mortgage, the equity would be $100,000 ($300,000 - $200,000 = $100,000).

When you take out a home equity loan or line of credit, you are using that value (the equity) as collateral for the loan. You won’t be able to get a loan for that full amount—usually lenders will allow you to borrow up to 80% of your equity. In the example above, the homeowners may qualify for up to $80,000 (80% of their $100,000 equity).

There are two direct ways you can use your home’s equity to pay for college. Those options are a home equity loan and a home equity line of credit. 

Home Equity Loan vs. Line of Credit 

While we go into more detail in our post, Home Equity Loan vs. Home Equity Line of Credit, here are the essential differences between these two forms of financings.

Home Equity Loan

Sometimes referred to as a second mortgage, a home equity loan is a term loan, similar to a mortgage. You’ll receive a lump sum payment at closing (usually up to 80% of your equity, as needed), and will pay it back with fixed, monthly payments over a set term (usually between 5 and 30 years). Most home equity loans also have a fixed interest rate, meaning your monthly payment will stay the same over the loan term. Home equity loans are useful when you have one large expense you need to pay for. 

Using a Home Equity Loan to Pay for College

Often used for home renovations or to pay off high-interest debt, home equity loans can also be useful for covering a high tuition bill, or consolidating student loans after you or your child’s course of education is over.

If you don’t need to use the funds all at once, you may also consider putting them in an interest-bearing account, so you can access them as needed, but earn interest to offset the paid interest costs on the loan. However, this approach may only make sense if the window for which you need the money is still fairly limited (for instance, under a year). For accessing funds for the entire duration of a four-year college degree, a home equity line of credit may make more sense. 

Home Equity Line of Credit

Home equity lines of credit are a more complex lending product, but once you understand how they work, they can become a useful financing tool. Often called by its abbreviation of HELOC (pronounced HEE-LOCK), a home equity line of credit is a revolving line of credit, more like a credit card than a traditional loan. Instead of receiving a lump sum payment, you’ll have access to a certain amount of money—your borrowing limit. This borrowing limit will be set at no more than 80% of your home’s equity. Withdraw funds at your bank, use your HELOC’s debit card, or write checks directly from your HELOC, up to your borrowing limit, whenever you need to access your funds.. 

Interest rates for HELOC’s usually are not fixed, and can go up or down based on the current market rate. You’ll make monthly payments based on the amount you’ve borrowed and your owed interest. After your HELOC’s initial “draw phase” (usually up to 10 years), it will enter what is called a “repayment phase” (usually 10-20 years). During the repayment period, you won’t be able to access any remaining funds, and monthly payments will be set up to pay off the balance (principal and interest). 

Using a Home Equity Line of Credit to Pay for College

HELOCs can be used for larger payments, but they are also useful tools for ongoing expenses, like tuition and room and board. Because you only pay interest on the amount you’ve borrowed, they can end up saving you money in the long run. 

As we mentioned above, draw periods for HELOCs are usually up to 10 years, so a typical college education will fall well within this time frame. However, you don’t have to wait till the end of the draw period to pay off your HELOC. Pay off as much as you can, whenever you can, to reduce your interest costs.  

Should you use a home equity loan or line of credit to pay for college? 

Because you are using your home as collateral, it’s important to give the decision careful consideration. Let’s take a look at the pros and cons of using home equity loans and lines of credit for financing an education.

Pros of Using Home Equity Loans to Pay for Education Expenses:

• Lower interest rates. Because home equity loans and HELOCs are secured by your home, they tend to have lower interest than unsecured loans. It’s possible that they have lower interest rates than student loans taken out by students themselves. It’s likely that they have a lower interest rate than parent student loans (PLUS loans). And if you’re considering a personal loan or using credit cards to pay for expenses, it’s very likely that a home equity loan will have lower interest costs.
• Flexible usage. Home equity loans and lines of credit don’t have rules about how you use your funds. You can use them to pay for a number of expenses beyond education costs. Additionally, they can be used to pay for education expenses for individuals who are not your children or legal dependents (such as grandchildren, nieces, or nephews). 
• Flexible repayment options. Choosing between a term home equity loan or a line of credit can give you different choices for how you access and repay your borrowed funds. Home equity loans come in a variety of term lengths to allow you to find a repayment plan that fits your monthly budget. And HELOCs often have low initial payment requirements—make the minimum payment or pay more, depending on your needs. 
• Help your child stay debt-free. If you want your child to start off life without significant debt, a home equity loan can be an affordable way to assist them. 

Cons of Using Home Equity Loans to Pay for Education Expenses:

• Personal risk. Unless you are using it for your own educational costs, you are essentially taking on debt—and putting your house on the line—for someone else. You want to help a loved one (and that’s commendable!), but since there is no certainty that they will finish college, consider the risks first. If your financial situation changes and you aren’t able to make payments, it could put your home at risk.
• Impact on your credit. Taking out a loan or line of credit can have an impact on your credit score, and will increase your debt-to-income ratio, potentially it harder for you to be approved for other loans. If you are considering taking out another loan in the future, talk to your lender about any possible impact first.
• Federal student loans may have more flexible repayment options. If federal student loans are an option, they may be the best choice. Interest payments may be tax deductible, payments can be based on students’ income, interest rates are often quite affordable, and sometimes loans can be forgiven. They also may have more flexible qualification requirements.
• Qualification limits. In order to get a home equity loan or line of credit, you need to not only have sufficient equity in your home, but also sufficient income to make your payments, and a minimum credit score of 640. As we mentioned above, federal student loans may be easier to qualify for.
• Closing costs. Adding expenses for closing costs may be more than your savings in interest. Speak to your lender for more information on potential out-of-pocket costs. 

Mortgage Refinance: Another Method to Leverage Your Home’s Equity 

Taking out an additional loan or line of credit on your home isn’t the only way to use home equity to access an affordable interest rate. A cash out refinance can be a smart alternative to home equity loans in certain situations. 

A cash out refinance replaces your existing mortgage with a new loan. This new loan essentially does two things: 

• Pays off your current mortgage
• Provides cash at closing

Like a home equity loan, you can receive cash for up to about 80% of your home equity. But instead of having an additional monthly loan or line of credit payment, you’ll simply have one monthly payment to make, simplifying your finances. 

Cash out refinances are the most cost effective when:

• Your refinance interest rate is lower than your current mortgage interest rate or lower than a home equity loan or other financing options.
• You have many years left on your current mortgage (remember, you’ll be starting from the beginning again).
• It will allow you to lower your monthly payments and make them more affordable for your current financial situation. 

Tips for Borrowing Against Your Home to Pay for College 

Because your home is on the line with a home equity loan or line of credit, it’s important to give your loan repayments serious thought. Be sure to…

Come up with a plan for how you will use your funds:

• If you’re taking out a home equity loan but won’t use all the money upfront, make a plan for where to keep the funds—for instance, in an easily accessible interest savings account.
• Think about what costs you need your loan or line of credit to cover. 
• Will you use the money just for tuition or for other school expenses? 
• Will you use it to cover other costs, like home renovations? If so, have a specific plan and stick to it. Be wary of falling into the habit of using your loan as a general fund.
• How much in total will you need? (By only borrowing what you need, you can save on interest costs.) 

Consider how your child or student will contribute to their education costs:

• Encourage them to pick up a part-time job that is flexible and won’t interfere with their studies.
• Work together to develop a repayment plan—but be prepared financially to cover the entire cost of the loan if they are unable to help upon graduation.

Pay it off early, if possible:

• If you can, start putting money aside to make extra payments to save on interest. 
• Consider using your tax refund or bonus to help pay down your loan or line of credit.

Should You Borrow Against Your Home to Pay for College? 

Not sure if a HELOC or Home Equity Loan or Mortgage Refinance is a good option to pay for college or other education expenses? We can help you weigh your options and learn more about what a home equity lending product may mean for you.

Citizens Savings Bank has multiple locations throughout Lackawanna, Wayne, and Monroe Counties. For branch locations and hours, visit our website. We also have a Customer Support Team ready to answer any questions you may have. Call us today at 1.800.692.6279 or email [email protected]. Member FDIC. Equal Housing Lender.