With the rising cost of a college education, it can be challenging to come up with the money to pay for higher education. Student loans, grants, scholarships, and college savings plans can all help with financing a college education. However, sometimes even with several different funding sources there just never seems to be enough money for college.
For a homeowner, taking out a home equity loan or line of credit can appear to be a solution to funding a college education. However, the cons of doing this will almost always outweigh the advantages for numerous different reasons.
Borrowing from the equity in a home to fund college is not a good idea. The cost of doing this could end up being the most valuable thing a person has and this is a place to live.
Why shouldn’t you use the equity in your home to pay for college?
One of the largest reasons to not use your home as a financing tool for college is the risk. The primary risk from home equity to fund college is the danger of losing your home. With a standard student loan, a person’s credit might be damaged when payments are missed. However, if you miss payments with a home equity loan the bank might decide to take your house to recover the money they do not receive.
Losing a home for not paying back a home equity loan is a major risk of borrowing money from your house. Home equity loans can be easy to qualify for and the interest rate can be lower compared to other forms of financing a college education. Yet, the risks are much larger when using home equity to pay for higher education.
The issue with the risks of losing a home is a loss of employment. Today, employers and employees are less loyal than they ever have been. The chase for the lowest price and cutting costs is the global economy we live in today. Unfortunately, one of the quickest ways to cut costs at a business is to lower overhead. The result is a loss of jobs.
According to the Bureau of Labor Statistics, the average worker will have ten different jobs before age 40. This number is projected to only get bigger. Today’s younger workers will likely have 12 to 15 jobs in their lifetime.
Not having the income to repay a home equity loan can result in losing it. The economy we live in today does not provide job security to ensure successful repayment for a home equity loan. Without job security, the risk is just too high.
We all need a place to live. With the loss of employment, it will likely be a struggle for many people to pay a mortgage payment. Add in repayment for a home equity loan and this could be the end of home ownership.
Odds of Success
Student debt either in the form of standard federal student loans or a home equity loan does not have the same odds of success today as it did decades ago. There was a time when just by getting a bachelor’s degree it almost did guarantee a good-paying job and long career. Today, this is no longer the case.
Going to college is still not a bad plan. However, the return on investment is not always a positive outcome. College graduates today are more likely than ever to have periods of being both underemployed and unemployed.
There is some argument for choosing the correct area of study to ensure the success of a college degree. But the problem is the fast changes in the global technology world we live in today. What someone chooses to study in college today could possibly have a minimal chance for employment in 4 or 5 years.
Taking a home equity loan for a college education does not have the same odds for success today. There is a real risk for the return on investment not paying off either immediately or entirely at all. Going to college does not guarantee a good-paying job and selecting a good college major is important but not an assurance for financial success.
With a home equity loan, the money needs to be paid back to the lender regardless of an investment in a college education paying off. If the money can’t be repaid, losing a home is a real possibility.
Why do some people argue that a home equity loan can be a good source of college funding?
Half of all families borrowed something to pay for college in 2019, according to a report by Salliemae.com and 43% of college costs came from family income and savings. Of the income and savings contributions to college costs, only 5% came from home equity loans.
For the families making the decision to take the risks involved with using home equity to fund higher education, some of the following reasons are used to take on the dangers of borrowing money from a house.
Home equity loans or credit can be easy to qualify for.
Because a home is the collateral for borrowing money, it can be easy to quickly get some money out of a home. This is one of the reasons some families decide to take the risk. Opposed to filling out paperwork and waiting to qualify while unsure of the amount of money that might be available, some families just tap into their home equity as an easy way to access money. The ease at which home equity can be used is many times the reason behind the choice to utilize it.
A home equity loan can be less expensive.
Home equity loans will often come with a fixed interest rate. Getting a line of credit through a home will come with a variable rate, but it can often still be less compared to other forms of financing a college education. This is one of the appeals for using home equity for financing an education. Yet, the risks involved with a home equity loan are still not likely worth a break in financing costs.
Retirement money does not have to be used.
One of the arguments for college financing costs and using home equity is that the money can be used without the need to tap into retirement funding. This argument is likely not a good one because retirement savings should not be used for anything except retirement. Saving for retirement is probably one of the most important financial goals for just about everyone and using money in a retirement account to finance college should never be a consideration.
The argument to using a home equity loan for higher education costs instead of tapping into retirement money is not a good excuse for using the equity in a home to pay for college.
More money could be available with home equity.
With federal student loans, there is a maximum amount of money that can be borrowed for education. A home equity loan or line of credit can simply be a way to borrow money when it is needed. Using a HELOC provides the most flexibility without having to take out large sums of money from a home. Depending on the equity in a home or the amount of credit available, the amount of money can supplement or possibly even fully fund a college education.
The risk of home loss is not the only negative associated with using home equity to fund college.
Even with some arguments for using home equity for college costs, the cons outweigh the few advantages. This is in addition to losing a home for not making home equity payments and paying back a loan.
Home equity repayment options might not be flexible.
Other student loan funding options, such as federal student loans, can have a lot of different options for repayment. This might include forbearance, income-based payments, or paying interest-only for a period in financial difficulty. Home equity loans can also have prepayment penalties that are not ever associated with federal student loans.
The flexibility of repayment options for something like a federal student loan compared to using home equity for college financing is a substantial advantage. Federal student loans also have the possibility to qualify for loan forgiveness. This might occur for some type of work in public service. Don’t look for a bank to forgive a home equity loan. It will never happen.
Using home equity for a college education is not worth the risk.
With the cost of a college education increasing on average at around 8% per year, coming up with the money for higher education can be a challenge. There are funding sources through financial aid and federal student loans that can help. Tapping into home equity can seem like a good solution to paying for a college education. However, the risks involved are just not worth a slightly lower interest rate or the ease at which money might be able to be accessed.
There are some benefits to using home equity for an education, but even the smallest chance of losing a home is not worth the gamble. Job stability and the odds of a college education paying off are not a guarantee. Getting a college education can still be a good plan for financial and career success, but taking the wager on losing a home in the process is not worth the bet.
A few decades ago, just getting a college degree almost did guarantee a long career with a good living. This is no longer the case today. The goal of an education today should not be to just get one at all costs even if it includes a home equity loan but to obtain an education debt-free. This should be the primary goal and one without risking a home.