Using Your Home to Finance College Tuition
Wondering how you’re going to pay for your child’s college tuition? You’re not alone! College Decision Day was May 1st, and many parents are now facing the same dilemma.
And according to the Education Data Initiative, you’re looking at significant costs:
- The average cost of attendance for a student living on campus at a public 4-year in-state institution is $25,487 per year or $101,948 over 4 years.
- Out-of-state students pay $43,161 per year or $172,644 over 4 years.
- Traditional private university students pay $53,217 per year or $212,868 over 4 years.
While costs might seem daunting, there are a number of options out there to explore.
Traditional Ways to Pay for College Tuition
Some parents will have a 529 College Savings Plan in place. And many students along with their parents will fill out the Free Application for Federal Student Aid (FAFSA®) form to see if they qualify for grants, loans and programs like work-study. A Parent PLUS federal loan is then frequently used to offset what’s not covered.
Other strategies include looking into private loans and tapping into retirement savings. Parents under the age of 59 ½ with an IRA account can typically withdraw without penalty but may have to pay taxes. A 401(k) loan may also be possible, but it depends on the plan.
And who wants to deplete retirement savings anyway?
Using Home Equity to Pay for College
If you own your home and are aware of what’s going on in the real estate market across the country, you know that a lack of homes for sale has driven up prices for buyers—and equity gains for owners like you. This opens the possibility of using that equity to finance tuition. Here’s how:
- Home Equity Line of Credit (HELOC) – This provides a credit line with a variable interest rate based on your home’s value, typically giving you access to 80% to 90% of the equity in your home. You’ll typically be able to access money as needed for a certain time period (5-10 years) and make interest-only payments. Once the draw period ends, you’ll begin paying off what you borrowed over the next 10-20 years.
- Home Equity Loan – Basically, this is taking out a second mortgage on your home. It’s paid out in a single lump sum and you’ll begin repaying it in fixed monthly payments at a fixed interest rate over a certain period of time, whether 5 or 30 years. If tuition or other costs end up costing more than this lump sum two years in, you won’t be able to draw more money, so you’ll need to have a clear idea of how much you need.
- Cash-Out Refinance – Here, you’ll create a new, larger mortgage on your home. It will pay off your original mortgage and you can then take out a part of the difference (around 80% to 90% of your home’s equity) in cash. If your original mortgage came with a high interest rate, this might be a good route if current rates are low. Just remember that this option comes with closing costs and other fees.
The pros of using equity are pretty attractive. You can often access more money at a lower interest rate than other types of loans. You’ll also typically have more time to repay your loan. However, the biggest downside of an equity-based strategy is that if you become unable to pay due to financial hardship, you could lose your home.
Of course, always discuss your options with a financial professional as interest rates can vary and tax benefits may or may not make sense compared to other loan types. And before moving forward, make sure you clearly understand the upfront costs, eligibility requirements, repayment schedule, and any penalties for early repayment. Read that fine print.
How to Pay for College by Investing in Real Estate
If your College Decision Day is on a distant horizon, or perhaps you don’t even have kids yet, a smart option is to buy property now and use your equity gains to pay for college down the road.
While there are multiple ways to accomplish this and cash out at tuition time, here’s a quick scenario.
Buy a rental property in a solid location, even an up-and-coming neighborhood, as long as it would appeal to both renters and buyers. If needed or if you want to maximize your rental rate, fix the place up but don’t go overboard. Keep wear and tear in mind. Now, rent it out and let your tenants pay off the mortgage and then some. Anything above and beyond can be set aside to keep the place in tip-top shape, or you can use it to pay down the mortgage even faster.
When your kid heads to college, you can then refinance and pull out equity gains and have your tenants cover that extended repayment—or simply sell the home.
Yes, it could be just that easy which is why real estate is such a fantastic way to build wealth. Again, just be sure to discuss your plans with a financial professional and of course, a great real estate agent, to ensure you purchase the right property in the right place. Happy investing!