Photo: Marc Royce
Q: My husband and I have two children. Our daughter just graduated from college, where housing and tuition ran $17,000 a year. She will repay $15,000; we assumed the rest of the debt for her. Our son is now a senior at a private college. His school gave him a few small scholarships, but his tuition alone this year was $45,000. As with our daughter, he will take on $15,000 and we will pay the balance. Of course, we don't have this kind of money saved. We applied for all the assistance we could think of, but because we each make a good living, my husband and I don't get much tax relief. We're up to a whopping $98,000 in loans. Should we max out our home equity? We're so proud of our children, but we are literally forever in their debt.
A: Lots of parents find your situation frighteningly familiar. The sad fact is that college costs are rising at a rate that far outpaces the growth in household income, which has necessitated both parents and their children taking on huge amounts of student loan debt. So in the spirit that tough times require making tough choices, I'm going to give you a qualified green light to use your home equity to help cover college costs. But you are never to max out your available home equity—that's too risky. Tapping 30 percent is as high as you ever want to go.
My take on this issue may surprise many of you. In the past, I've gone on the record as saying it's dangerous to use home equity to pay for college. I haven't changed my mind; the risk is still front and center. If you fall behind on your home equity payments, you could lose your house. But you face a good deal of risk with college loans, too. Failure to repay means your wages can be garnished, and even if you were to file for bankruptcy, student loans are rarely forgiven.
While there are risks associated with both, I see a few advantages to using a home equity loan (HEL). First, I'm assuming you have a strong credit score. That should allow you to qualify for an HEL with a lower interest rate than what most parents end up paying on private and federal loans for their kids. You also get a better deal with an HEL because the interest will be tax deductible; with student loans, you can deduct up to only $2,500 a year if you and your husband report less than $140,000 in adjusted gross income and your kids remain dependents for tax purposes. It's very important that you opt for a fixed-rate loan so you will never have to worry about increasing installments. HELs—as opposed to home equity lines of credit (HELOCs)—are typically the best way to go when you want a fixed rate.
Once you start borrowing against the value of your home, the hard work begins. Your family must cut all nonessential spending so you have more income to put toward paying back the HEL as quickly as possible. It's not enough to know you gave the kids a good education; you need to give yourselves the security you're temporarily borrowing against.