Using a Home Equity Loan to Pay for Your Child's Education
A home equity loan (HEL) allows you to get the most out of the equity you've built up in your home and use that money to your advantage. There are a lot of different expenses for which a home equity loan can be used. Because it is secured by your house, you can often borrow more than you might have been able to otherwise. One good reason to take out a home equity loan is to use it to pay off your child's education.
The price of receiving an education has been rising steadily year over year. From 1989-90 to 2019-20, average tuition and fees tripled at public four-year institutions, after adjusting for inflation.1
The costs don't stop at tuition. Additional expenses for college students include room and board, books and supplies, transportation and other school-related expenses. This adds up to an estimated average total cost of* $14,960/year.2
Benefits of using a home equity loan to pay for school center around potentially lower pricing and fewer fees. This could mean a lower interest rate, no application or origination fees, no closing costs and no debt for your child to have to pay off.
When should I use a home equity loan to pay for my child's education?
On some occasions, people choose a home equity loan to pay school tuition for their child—or children—as an alternative to a student loan.
Here are three cases in which a home equity loan might be a good choice for you:
1. Home equity loans could be a good alternative to the Federal Direct PLUS Loan, which allows parents to borrow up to the total cost of their child's college education, minus other financial aid. These factors include:
- Potentially lower pricing: Federal Direct PLUS Loans often have low fixed interest rates. But home equity loans can go even lower. Discover has fixed rates from 3.99% - 11.99% APR**.
- Fewer fees: Though relatively low, Federal Direct PLUS Loans do carry a percentage of the loan amount as a fee. Discover Home Loans does not charge any origination fees.
2. A home equity loan could be a good choice if you have debt to consolidate or a home improvement project that you could also use the funds for.
3. If your child has no credit, or credit that is not good enough for a traditional student loan (and does not have the option to add a co-signer), a home equity loan could be a good choice for that scenario as well.
There are times when a student loan could be a better choice. For instance, if you want your child to pay for school. Some student loans can offer more flexibility in that instance. They also have more protections than a home equity loan might offer (such as in-school or deferred repayment options).3
*Based on four-year public college costs
** Fixed rates starting at 3.99% APR for first liens and 4.15% APR for second liens.
The APR will be between 3.99% and 8.99% for first liens and 4.15% and 11.99% for second liens based on loan amount and a review of credit-worthiness, including income and property information, at the time of application. The lowest APRs are available to borrowers requesting at least $80,000 for second liens or $150,001 for first liens, with the best credit and other factors. Loan amounts available from $35,000 to $200,000.