Should I use home equity to pay for my kid's college?
College comes with a hefty price tag. If you own your home, you may be considering funding your child's education with a or a instead of taking out student loans.
But should you?
There are upsides to tapping into your home equity for higher education, but serious downsides, as well.
Home equity loans and HELOCs are second mortgages that allow you to borrow against the equity you've built up while paying your mortgage. The money can be used for anything — home improvements, paying down debt and, yes, your children's tuition and room and board.
A home equity loan is a one-time cash infusion paid back with a fixed interest rate, typically over 30 years. Rocket Mortgage, one of our top picks for home equity loans, will approve homeowners for up to 90% of their home's value, compared to 85% for most lenders.
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages are available.
Conventional loans, FHA loans, VA loans, Jumbo loans, low-down-payment mortgages
10-, 15- and 30-year fixed-term conventional loans, 30-year VA and FHA loans, custom mortgages with fixed-rate terms from 8 to 29 years.
620 for conventional loans
0% for VA, 1% for RocketONE+, 3% for conventional, 3.5% for FHA, 10% to 15% for jumbo
Already have a mortgage through Rocket Mortgage or looking to start one? Check out the Rocket Visa Signature Card to learn how you can earn rewards.
Read our review of Rocket Mortgage
A HELOC, meanwhile, is a revolving line of credit that lets you withdraw what you need during a draw period (typically 10 years), and then repay over up to 20 years.
PNC Bank approves borrowers for HELOCs with credit scores as low as 600, compared to the industry standard of 640.
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, HELOCs, Community Loan and Medical Professional Loan
10 – 30 years
620
0% if moving forward with a USDA loan
Terms apply.
Read our PNC Bank mortgage review
College expenses will vary from year to year, based on tuition, financial aid offerings, housing, work study and other factors. So, a HELOC may be the stronger option if you're tapping into your home equity to pay for schooling: Its revolving structure allows you to borrow only what you need.
So you've determined that you can leverage your home equity to pay for your child's college education. But is it a smart strategy? There are some pros: You'd get a lower interest rate than with private student loans and, if the The 2017 Tax Cuts and Jobs Act isn't renewed, you could deduct the interest on your HELOC or home equity loan from your taxes.
However, these are secured debts that use your house as collateral, so if you fail to make timely payments, your lender could foreclose. Federal and private student loans are unsecured, so lenders can't seize your assets to recover losses.
In addition, if you take out a HELOC or home equity loan, it would be considered additional income and could impact access to financial aid in the following year.
Offers in this section are from affiliate partners and selected based on a combination of engagement, product relevance, compensation, and consistent availability.15 to 30 years50025%10, 15 or 20 years68020%
There are many other ways to pay for your child's education than a home equity loan or HELOC. In most cases, it's best to exhaust all these options before you touch your home equity.
Check what financial aid you're eligible for by filling out the Free Application for Federal Student Aid (FAFSA). Your child may also be eligible for federal loans, grants and scholarships, which will offset how much you need to take out with a private lender. Interest rates on federal student loans, like Parent PLUS loans, are typically lower than both private students and home equity products.
Private institutions also provide students with grants and scholarships based on academic merit, athletic performance, civic involvement and other categories.
According to SoFi, more than $100 million in college scholarships and over $2 billion in grants are left unawarded each year. This list connects students with grants and scholarships they may qualify for.
If you've exhausted federal loans, scholarships, grants and other aid, there are also private loans available from banks and other lenders.
Sallie Mae is known for offering low rates and not charging origination fees or prepayment penalties.
Undergraduate and graduate students, borrowers seeking career training
$1,000 minimum; maximum up to cost of attendance
Range from 10 to 15 years
Variable and fixed
Deferment and forbearance options available
Only for international students
No
Terms apply.
See if your child's school offers a tuition payment plan, which allows you to pay off their bill over the year instead of in one lump sum before the semester starts. (There are also third-party lenders that offer payment plans.)
When you sign a payment plan, however, you essentially out a short-term loan, and the consequences of late or delinquent payments can be more severe. You'll get hit with steep late fees, and you may not be able to graduate.
Parents can start saving for college while their kids are still in diapers with 529 savings plans. Funds invested in these state-sponsored plans grow tax-free, and withdrawals are also tax-free as long as they are used for qualified education expenses. Starting in 2024, unused funds from a 529 plan can be rolled over tax-free into a account, effectively turning it into a retirement account.
New York's 529 College Savings Program, managed by Ascensus College Savings and available in all states, is one of our top picks for these savings plans. You can put as much as $520,000 into the account.
None
$520,000
Options include age-based options and individual options
Investors can choose funds from Vanguard mutual funds
Total asset-based expense ratio: 0.12%
Terms apply.
You should consider many other options before going down this route, including financial aid applications, scholarships, grants, private loans, tuition payment plans and 529 plans. If you do decide to use home equity to pay for college, you should be sure that you can make on-time payments, though, because if you don't, the lender could force you into foreclosure.
Unlike other financing, home equity loans and HELOCs are secured debts that use your house as collateral. If you fail to make payments, your lender can force you into foreclosure. You'll also lose equity in your home and funds received from a home equity loan could impact access to financial aid.
You can determine your home equity by looking at what your home is worth and subtracting any outstanding mortgage balance. For example, if your home is worth $500,000 and you have $200,000 outstanding on your mortgage, you would have 60% equity ($300,000) in your property.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of mortgage products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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