Jan 10, 2020
By Mariclare Cranston, Content Specialist

Using your Home’s Equity for Tuition and Educational Expenses

When it comes to financing higher education, the cost can feel overwhelming. With a little planning, though, you’ll be able to navigate your way through.


Can I use my home’s equity to pay for school?

It’s smart to always pursue what is referred to as “free money” first; in other words, look for financing made available via scholarships and grants. Ask the financial aid office, check your local library or do some research online to uncover scholarship and grant opportunities. Federal loans are often the next best bet, as they typically carry lower interest rates. You may also be able to find an on-campus job, either through a work-study program or not, to help defray some of the costs of your education.

Once your free and lower-cost options are exhausted, you may be able to use a Home Equity Loan or Home Equity Line of Credit (HELOC) for tuition and other education expenses. Because both options use your home as collateral, you will be able to borrow more than you typically can with a Personal Loan. Both Home Equity Loans and HELOCs will usually carry a lower interest rate than other funding options, including credit cards or personal loans. This is important because the lower the interest rate, the less money you are spending on interest charges.


Is a Home Equity Loan or Line of Credit a better option to pay for tuition?

Both a Home Equity Loan and a Home Equity Line of Credit (HELOC) are good solutions for education expenses. Both options are secured by the equity in your home, meaning your interest rate will likely be lower than with a personal loan or credit card, which are both forms of unsecured credit. Because education expenses can add up quick, you will definitely want to find the best rate possible to save on interest charges

Determining which is a better option, though, depends on your individual needs. There are pros and cons to both so it’s important to understand what you will need the money for, and how often you will need to access it.
 

Draw Period
The draw period on a Home Equity Line of Credit is the timeframe during which you can access the funds. During the draw period, you will not need to make any payments unless you actually access your line, and often those payments are interest-only.

Once the draw period is done, you will no longer be able to take advances against your HELOC and you will begin the repayment period.


If you want to be able to access funds whenever you need them without receiving a lump sum, a HELOC may be a better option for you. Because HELOCs allow you to draw money as needed, you can access your line as your tuition and other education expenses are due. You only have monthly payments if you use your HELOC, and often those payments are interest-only during the draw period. You can also access your line in the event of an emergency, although it’s important to resist the temptation to use it for miscellaneous expenses outside of your education expenses.

A Home Equity Loan might be a more attractive option if you need a large sum right away. With this option, you will receive all of your funds upfront, allowing you to pay for class fees, tuition costs and books. Because you receive all of the money upfront, though, be sure to calculate all of the expenses that will be associated with your education, and build in extra for unexpected costs, before applying for your Home Equity Loan. Keep in mind that with a Home Equity Loan you’ll receive all of the funds as a lump sum, so you may want to set up a separate savings account to keep that money earmarked specifically for your education expenses.


Estimate your monthly payment using our Home Equity calculator.

How do I pay for school?

Here are four simple tips to help get you started on financing your higher education.

  1. Free Money. Search for college scholarships and grants, which cost you nothing and do not have to be repaid.
  2. Consider Options. Before applying for a Home Equity product, be sure you have exhausted all sources of free and low-cost financial aid, including scholarships, grants and federal direct student loans.
  3. Calculate Costs. Think about all of the costs associated with higher education, including books, fees, travel expenses and dorm supplies. Does the money you received from scholarship and lower-cost solutions cover it all? If not, how much will you need to cover with a Home Equity Loan or Home Equity Line of Credit?
  4. Apply. You can quickly and easily apply right from our website!


What education expenses can I use my Home Equity Loan or HELOC for?

The funds from your Home Equity Loan or HELOC can be used for just about anything you’ll need to pursue your education, without piling on higher rate credit card debt. Before you apply for your loan, think about all of the expenses involved in your schooling. Do your other funding options cover them all? If not, come up with an amount that you will need to fill that funding gap. Think about costs like:

  • Books
  • Housing
  • Meal plans
  • Tuition fees
  • Transportation

 

Do I qualify for a Home Equity Loan or Line of Credit?

Lenders will often look, at the very least, at your credit score and your debt-to-income ratio (DTI) before deciding to lend to you. Your credit score is a mathematical analysis of how likely you are to repay your loan on time. Your score factors in things like how many loans or credit cards you have, how well you pay your bills on time, how much of your available credit you’ve used and how old your oldest credit or loan account is. All of these factors are weighted and combined to assign you a score. It is very important to have a good understanding of what your credit score is before you begin the process of applying for a personal loan. If your score isn’t high enough, there are steps you can take to work on improving it.

DTI measures how much debt you currently have relative to your income. A DTI that is too high suggests you may be spread too financially thin to be able to make the payments on your Home Equity Loan or HELOC. Even if you have a good credit score, a high DTI can cause some lenders to deny your application. Using a monthly budget tool is a great way to manage your finances and keep your debt at a manageable level.


For more information on understanding your credit, watch our brief explainer video here. 

Is using my home’s equity for tuition right for me?

Keep in mind that there are some differences between using your home’s equity to pay for school and student loans, the biggest of which is the deferment options available on student loans. Student loans will typically allow you to defer payment, or make interest-only payments, until after you graduate college. With a Home Equity Loan, though, you will be required to start making your full monthly payments right away. HELOCs will require payments as soon as you draw on the line. Also remember that a Home Equity Loan or Line of Credit is a financial commitment; the funds should be used for those things that you really need for your education. It may be tempting to use your loan or line to deck out a dorm room or apartment, but doing so may not be worth the financial commitment. Borrow only what you need for your education.

Paying for your education doesn’t have to be an overwhelming concept. Invest the time in doing research on scholarships, grants, federal loans and when and how to file your financial aid paperwork. Use the financial aid office, your library and other professionals to help you plan for the expense.

Download our free eBook “The Free Money Guide” for more tips and information on paying for college!

Free Money for College eBook


 

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