Giving a child a quality college education to equip them for a professional career has long been considered an integral element in the American dream. Today, parents and students face a dilemma with the financial crisis intensifying competition for a declining number of jobs and thus increasing the importance of gaining impressive qualifications, while at the same time the costs of college are rising dramatically. Although college fees remain the most significant component of these costs, it is important to remember that students incur many ancillary expenses that fall on the supporting family. Accommodation, food, books and visits back to the family are just a few examples of the additional expenses that need to be anticipated.

DSC_0104Joey Dunn

Even families of average means are severely challenged by the expenses of putting a child through college and these challenges are multiplied many times over for those who have lost their jobs or businesses. Costs increase dramatically the higher the level of education being pursued. A survey carried out by the National Postsecondary Student Aid Study (NPSAS) in 2007-2008 showed that while bachelor degree students borrowed an average sum of just under $20,000, graduate and professional degree student average debts ranged between $30,000 and $120,000 depending on the discipline being studied.

College Funding Options

It makes sound financial sense to investigate all the funding options available, and aim to cover the largest possible percentage of the college expenses using the lowest cost financing alternatives. In some cases, for example particularly gifted students, scholarships might be awarded. Another recommended option (assuming you were in a position to make this investment) is using money invested in a state 529 higher education saving scheme while your children were young. Federal loan options usually offer superior terms to private loans, for example, fixed interest rates, and so it makes sense to take advantage of them if you are eligible.

Although there are possibilities to use cheaper subsidized government and state sources to pay for your child’s college, not every applicant qualifies and only a portion of college costs are covered. A look at the great demand for student loans on the private market, and the number of people who yield to temptation and withdraw funds from their 401(k) retirement loans, are all indicative of a common need to raise substantial additional sums.

While the demands for private student loans are increasing, the current state of the market makes lenders reluctant to increase loans to a sector of the community classed as high risk. The interest rates on private student loans reflect the lenders’ estimation of the risk, and if the student gets a bad credit status through late payments or default on payments, any new loans they take out are going to carry an even higher interest burden.

Using a HELOC has Advantages over Private Education Loans

Before a student or their parents decides to take out a regular private loan to pay for the college, the advantages of taking a Home Equity Line of Credit (HELOC) deserve serious consideration. The HELOC is available for home owners. It is based on the equity of your property – the difference between its market value and the amount you owe on it to the bank who supplied the initial mortgage.

Principal advantages of this college financing option over other student loan types include:

  • Flexibility
  • Lower cost
  • Availability

The HELOC is usually extended through a credit or debit card, or a checking account and you can draw upon this credit as required. Instead of having to take out a huge loan and start paying interest on the whole sum immediately you can increase or decrease use of HELOC credit to match changing college expenses. The HELOC gives considerable flexibility in scheduling repayments to suit your circumstances. Each borrowing on this credit line does not incur any extra loan processing or access fees and you only have to pay interest on the amount of credit. These facts mean that the HELOC can work out much cheaper than using alternative loan types to cover education costs. However, you should bear in mind that if you take the credit line in small installments there is a possibility that you might lose unused credit; banks have the rights to cancel unused credit and in difficult financial times they may exercise this right.

The fact that the banks have solid security enables them to offer more generous terms for the HELOC than it is reasonable to extend on loans dependent on credit status. The same concerns that have been leading private student loan firms to reduce their activities and restricting new student high risk loans do not apply to HELOC lenders. Lending to a student with limited abilities to pay back until they start earning a reasonable salary involves much greater risk than lending against the security of a property – even when declining house prices are taken into account.

Furthermore, there are also advantages in financing college education with a HELOC since the interest payments are usually tax deductible. It is well worthwhile consulting with your tax advisor to see if you qualify for such a mortgage tax deduction.

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