Using a Home Equity Line of Credit for College Tuition


There's nothing as exhilarating to parents as the thought of their child heading off to college. But it can be equally depressing financially. That's because college tuition rates are skyrocketing. Annual tuition increases of nearly 10 percent at public universities are easily out-pacing inflation's long-term 3 percent average yearly increase. Tapping into retirement accounts for tuition might jeopardize retirement plans. As a result, parents are turning to HELOCs for tuition help.

Say Hello to a Home Equity Line of Credit

A HELOC is a line of credit borrowed against the equity on your house. It differs from a home equity loan in that you don't need to borrow the entire lump sum at once. You borrow the money when you need it. Suppose you need $3,000 for tuition, and you have a $10,000 home equity line of credit. Simply take out the $3,000, which allows you to avoid paying interest on a large, lump-sum loan.

The interest rate on a home equity line of credit is adjustable, and generally tied to the prime interest rate. If the prime rate go up, so does your interest rate. However, the prime rate is generally not as volatile as some indices, and many HELOCs can be converted to a fixed-rate loan if you can't stomach the interest-rate uncertainty. And you can take heart in knowing that the interest you pay on a home equity line of credit is tax deductible.

Flexibility Today, Retirement Tomorrow

The beauty of the HELOC is its flexibility. Basically, the closing costs are minimal to open a home equity credit line, and access to funds is simple. Write a check, or perform a web-based transfer through your financial institution. Presto, you've got college tuition covered.

There's also a growing school of thought that believes that using a HELOC for college tuition is a prudent move if your college savings are coming at the expense of your retirement funding. Keep in mind that if you have many years between now and retirement, you can always earn more money to pay off a HELOC. No one, however, will lend you money to fund your retirement.

When you're considering how to pay for your child's college education, do plenty of research and find out how much you'll need to save. If you can save plenty for retirement and sock away a little each month for the rapidly expanding tuition, you're in a good spot. But if you find that you need to borrow money, the flexible HELOC might be just the ticket to help finance your child's college adventure.

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