BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Paying For College With The Equity In Your Home

This article is more than 7 years old.

I got a call last week from a client who was on his way home from a college visit with his soon-to-be-a-college freshman son. He had literally just left the campus and was actually calling from the car to tell me that not only did he have a soon-to-be-private-university freshman tuition bill looming, but he was also trying to figure out how to help his daughter pay for med school. The subject of our conversation quickly turned to mortgage refinancing and how much cash could he get out of the equity he has in his house.

For many families, the mighty FAFSA (Free Application for Federal Student Aid), often comes up short in the treasure hunt for scholarships, grants and even student loans needed to pay for college. Navigating the private student loan marketplace can be fraught with peril in the form of variable rates, befuddling terms and co-signor requirements. And then of course there is that post-graduation sticker shock when repayment for that newly minted sheepskin begins in earnest. The media calls this The Student Loan Crisis.

Planning and saving for future college costs has been a prudent, well thought strategy that has saved many education dreams from the FAFSA/financial aid struggle. Qualified tuition savings plans (529) have long been one of the best ways to pay for education, but not everybody could or did set these plans up and continually fund them. Best intentions will often collapse under the weight of household budgets in crisis. Too many many families are living paycheck-to-paycheck and for them, college savings is just a someday wish.

But you homeowners have a secret weapon to defend against the emerging middle class struggle to pay for college tuition and it is the equity in your house. The mortgage financing universe offers up two alternatives that allow homeowners with equity in their homes, to take cash out and pay that tuition bill. One option is the cash-out refinance, the other is the Home Equity Line of Credit or HELOC.

A cash-out refinance replaces your existing mortgage with a new larger mortgage, and you (the borrower) take the difference in cash. Depending on the amount of cash you take out and with interest rates continuing to trade at historically low rates, the difference in your monthly payment may be far more manageable than student loan debt. It may also be tax deductible.

A homeowner with a college bound high school senior and a house worth $350,000 with a $200,000 mortgage, can cash-out refinance for up to 80% of that $350,000 value and get close to $80,000 to help pay those tuition costs. Of course the new $280,000 mortgage will come with a higher monthly mortgage payment but it will be significantly less than a student loan payment and it may be tax deductible.

A HELOC is a second mortgage line of credit that you can draw down as you need it. The payments are usually interest only for the first ten years and you only pay interest on the amount that you actually use. HELOC payments may also be tax deductible.  That $350,000 homeowner with the $200,000 mortgage can also tap into that equity with a HELOC but the amount he can access may be less and the interest rate is often variable.

Using the equity in your home to finance college tuition costs is a decision that requires lots of information and careful consideration and comparison of the mortgage options available. It may be a great solution in the immediate but needs to fit into your overall financial profile and long-term financial goals. Talk to a financial planner, if you don’t have one, get one.

And that client that called me from the car on his way home from a college visit is in the process of refinancing his mortgage to get almost $60,000 to help with his tuition bills. His new interest rate is lower than what he had so his new mortgage payments only increased $58/month. His kids will not be unwilling participants in the student loan crisis and they will not have to manage a budget crushing student loan payment when they graduate and start to make their way in the world.

So if your future undergraduate got an Award Letter that came up short and the EFC (Expected Family Contribution) on your FAFSA is a how-am-I-going-to-pay-for-that sized number, call your trusted mortgage rep and see if a cash-out refi or a HELOC is a make sense solution for you.