Should you use a HELOC to pay your kid’s college tuition?

By Kate Wood | NerdWallet

Proud of your new high school graduate but still wondering how you’ll pay for college? If you’re a homeowner, you might be eying your home equity, the current value of your home minus the amount still owed on your mortgage.

College tuition has been on the rise, but so have home values, and in March 2024 real estate data provider ICE Mortgage Technology estimated that American homeowners are sitting atop roughly $11 trillion dollars in tappable equity.

A home equity line of credit, or HELOC, is one way to turn that equity into usable funds. Because a HELOC is a second mortgage, your primary home loan’s interest rate — which for a majority of homeowners is well below current mortgage rates — remains intact.

So if you’re trying to figure out how you’re going to come up with cash for those tuition bills before back-to-school season, should you consider a HELOC? Before you decide, weigh the possible benefits against the drawbacks — including a huge one — and review all your options.

Why equity borrowing is tempting

HELOC benefits go beyond keeping your current mortgage interest rate. For one, a HELOC may enable you to borrow a sizable sum. Lenders will usually let well-qualified homeowners borrow up to 80% of their home equity.

For example, say you have a $350,000 home and you still owe $150,000 on the mortgage. That means you have $200,000 in equity and could get a HELOC that goes up to $160,000. In contrast, with a federal Parent PLUS loan, you’re limited to exactly what’s needed: your student’s school-determined cost of attendance minus any other assistance they receive.

And because you aren’t required to use the money for educational expenses, as you are with federal student loans, you could use cash from a HELOC for other necessary expenses.

With a HELOC, you don’t take out all the money at once. Instead, you borrow from the line of credit as needed during what’s known as the draw period. You could borrow as the bills come in, and it may be easier to roll with unexpected costs, like a summer study abroad program.

Interest rates on Parent PLUS loans hit a record high for the 2024-2025 school year, and private student loan interest rates may also be in the 8% to 9% range, if not higher.

“Since interest rates are comparable, it may be a better fit to pursue a HELOC,” Noah Damsky, a chartered financial analyst at Marina Wealth Advisors in Los Angeles, said in an email. But, Damsky emphasized, “Parents need to evaluate alternatives to borrowing against their homes.”

Risks and drawbacks

Failure to repay any loan against your home, including a HELOC, can result in foreclosure.

“While the interest rates might be competitive or even better than a private student loan or a Parent Plus loan, the ramifications of something going wrong [are] far too great,” says certified financial planner Nick Marino, CEO of Breakaway Wealth Planning in Columbus, Ohio. Think through the risk, he advises. “You have kids at college, but they don’t have a home to go back to. Was it worth it?”

Second mortgages are not the fastest or easiest way to get cash. HELOC borrowers may wait more than a month between applying and accessing funds. You’ll benefit from shopping lenders and getting multiple rate quotes, and you’ll want your financial stats — like your credit score and debt-to-income ratio — to be in solid shape. That’s comparable to shopping for private student loans, but it’s much tougher than qualifying for a federal Parent PLUS loan. Though you’ll go through a credit check for Parent PLUS loans, there’s no minimum credit score, and borrowers may even be eligible despite previous credit challenges.

HELOCs generally have adjustable interest rates, which can make it hard to predict what your monthly loan payments will be. In contrast, with a Parent PLUS loan, you lock in the interest rate when you take out the loan. Borrowers may choose a fixed rate for private student loans, and refinancing is an option for private loans if rates drop.

How to make a smart choice

Start by taking a step back and assessing your financial needs. Prioritizing retirement savings is crucial, says Stacy Dervin, a CFP and CFA at Tailored Financial Planning in Eugene, Oregon.

“Underfunding your retirement to fund your child’s education now may only delay financial costs for your child,” Dervin said in an email. “If parents outlive their money, their adult children can end up paying for the parent’s late-in-life health care or living expenses.”

Here’s a practical guide to sorting through how to find money for college.

1. Start with the FAFSA

No matter how you think you’ll pay for college — and despite the past year’s issues — start by filling out and submitting the Free Application for Federal Student Aid, or FAFSA. This will allow you to see how much money your kid could receive from grants, programs like work-study and some scholarships, none of which have to be repaid.

2. Consider federal loans

Federal loans, whether student loans or Parent PLUS, should be considered next. Federal student loans have fixed interest rates that are set based on the year they’re originated, not your financial characteristics. That can be especially helpful for borrowers who don’t have much credit history, but federal loans are a solid choice regardless of your credit score.

3. Use private loans sparingly

Even if you think you could get a better rate elsewhere, federal loans offer borrower protections and flexible repayment options that you’re unlikely to find on a private student loan. Federal loans also may be eligible for eventual forgiveness. But if you’ve hit federal loan limits and it’s not enough, private student loans could be an option to fill those gaps.

4. Exercise caution with other financing sources, including HELOCs

If you consider the risks and decide to use a HELOC to help pay for college, take the time to run all the numbers, figuring out how much you’ll borrow and what your repayment strategy will be. HELOCs often require interest-only payments while you’re withdrawing money, but putting off paying back the principal could leave you strapped for cash when the repayment period kicks in.

Because it can’t be said enough: A HELOC is secured by your home, and failure to repay has dire consequences. Marino notes that even if a HELOC was a client’s least expensive option for education funding and they had sufficient assets to repay the HELOC at any time, “I still probably wouldn’t necessarily recommend it, but I could get more on board with it.”

Kate Wood writes for NerdWallet. Email: [email protected].

The article Should You Use a HELOC to Pay Your Kid’s College Tuition? originally appeared on NerdWallet.