Going back to college doesn't have to cost an arm and a leg, for you or your child. For many parents, feeling nostalgic when college is on the horizon quickly turns to shock at the price of tuition, books, housing, and more. Recent estimates put the average cost for college tuition and fees at almost $26,000 per year, for a grand total of about $105,000 over four years with outside of state and private colleges costing even more.
What to do? Education loans can be a good option, but if you have equity built up in your home you may want to explore a home equity line of credit, or HELOC, as well.
What is a HELOC?
A HELOC is a line of credit that uses your current home's value as collateral. For example, if you've owned your home for 10 or so years, then you likely have a significant amount of money (equity) invested in it and could access that money without refinancing or selling your home. We have a handy calculator to help you see what payments could look like.
Going back to our 10-year ownership example, that maximum amount could be $80,000. With a standard refinance with cash out, you'd be paid a certain amount at closing, and you would start your mortgage over with a new interest rate. With a HELOC, a maximum amount is established based on your qualifications, credit history, appraised value and needs, and then you may use as much, or as little, of that amount as you like. Unlike most other loans, the timing of accessing some, or all, of the funds is at your discretion. You could “draw” $3,000 for tuition this semester, then not use the line again until it's time to pay next semester's bill.
HELOCs have what's called a draw period, typically around 10 years, during which time borrowers can access the funds. During the draw period, the borrower is only required to pay interest on those funds that they actually drew out and used. After the draw period closes, the repayment period begins where borrowers are required to make payments to repay what they borrowed. Similar to a loan, the total amount you borrowed and still owe during the draw period is fully amortized over the repayment period. Repayment periods typically range from 10 to 20 years. WaFd Bank's HELOC offers has a draw period of 10 years and a repayment period of 15 years.
Advantage of Using a HELOC
HELOCs are beneficial because you're only paying interest on the funds you actually use, so if you're not sure how much money you'll need for the school year, then a HELOC can be a good option. Generally speaking, the interest rate for a HELOC is also lower than a standard loan, although it is still variable, so make sure to check the loan terms before making a decision. Will the interest rate be variable or fixed? How long will you be paying the loan back? Keep in mind that the minimum payment amount can be lower than the cost of interest every month, so unless you pay more than the minimum, your loan balance will actually increase each month.
As with any loan, you'll want to talk to a financial expert and be confident you can pay off the HELOC before establishing one. Remember, the ultimate goal of homeownership is to own your house free and clear, so if you're unsure as to whether you can handle additional payments after the draw period, then you may want to explore other avenues of funding or look at adjusting your existing budget.
Risks of Transferring Student Loans to a HELOC
While there are definite advantages to using a HELOC, it's important to also weigh the risks of using it to pay student loans. First, you'll be moving to a loan that has a variable interest rate, which means that the interest rate fluctuates and can start low but could move up over time. Payments are initially interest only during the draw period, which at WaFd Bank is 10 years. Then, your HELOC will convert to payments only for the remaining term (15 years at WaFd Bank). Having your payments increase is something to keep in mind, otherwise you may need to refinance your HELOC. Also, your home serves as collateral, so if you can't afford to make the payments, your home could be at risk. You also forfeit any tax deductions you might have been able to claim by having student loans, but you could claim tax deductions on a HELOC. Because laws vary by state, check with a tax professional on that so you know what to expect come tax time! Lastly, many student loans have no prepayment penalties, which you'll want to check on before you commit to a HELOC (WaFd Bank does not charge prepayment penalties on their HELOC).
Check Out Grants, Scholarships, Student Loan Forgiveness, and Tuition Reimbursement First
Put this at the top of your to do list! There are many grants out there to help pay for college, and many of them might surprise you. Did you know there is a scholarship out there for left-handed students? There is a lot of money available to aspiring students. Searching does take time, but it's worth it to save thousands on your tuition bills. Student loan forgiveness depends on a few factors, such as chosen field and where they end up working, so it's important to understand these details before paying cash since any student loans might be forgiven in the future. If you paid for your tuition yourself (whether that's a HELOC or loan instead of taking out a student loan) you may not qualify for student loan forgiveness. Lastly, if you're an adult looking at going to college, ask your employer if they offer tuition reimbursement and what the terms are. You might be able to get your degree for a very reduced cost, or even free!
WaFd Bank is Here to Help
Talk to your neighborhood loan officer to find out if a HELOC might be right for you. Just like other loans, all HELOCs are subject to credit approval.
Check out WaFd Bank's HELOC calculator!
Use your home's equity to finance your next big project. Whether it's to pay for a home renovation or remodel, or pay consolidated bills, a no annual fee HELOC from WaFd Bank is often more affordable than using credit cards or other loans. For more information, give it a try!
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