How To Use Your Home Equity To Pay For College
Day in and day out, you’ve thrown yourself into the grinder of parenting.
You’ve changed enough diapers to form a small island. You’ve cleaned crayons, paint, and less identifiable substances off your walls. You’ve watched the litany of firsts etch themselves into memory: drives, games, dates, plays, and more. You’ve done it all and then some in the name of guiding tiny humans through the first part of their journey.
Congratulations. Now comes college: where the light at the end of the tunnel is really just the oncoming train of tuition.
Consistently cited as one of Americans’ top concerns, paying for college will be a family’s single greatest financial hurdle next to retirement and home purchases.
“How does this involve real estate, and when do you explain the best ways to use home equity to pay for college?”
Great question. You’re a genius for asking and, frankly, you’re intimidating us. So rather than try to match wits with someone like you, we’ve reached out to an expert in the college planning process: Theresa Crowley. She’s the right person to help us understand the best ways to use home equity to pay for college.
Theresa’s the founder and chief strategist at Red Team College Planning headquartered in the DC area. Her company is dedicated to empowering parents by teaching them about the rules behind how colleges award financial aid, and subsequently working to develop strategies to minimize their cost (similar to how an accountant helps lower your tax burden).
While we’ll eventually get to the best ways to use home equity to pay for college, it’s important to go through some equally critical tips first.
Our most foundational tips involve redefining concepts for families.
For instance, many families believe their best hope to pay for college comes in the form of applying for countless scholarships. In reality, the bulk of their money will come from merit aid from schools that really want their student. Merit aid is often what colleges call the scholarship money they give out.
Great tip but our readers are clamoring to know the best ways to use home equity to pay for college. Can’t we give the people what they want?
There are ways your home can work for you when it comes to college.
Before we get into that, It’s important to address a common mistake many families make. No matter how much money you make, Every family who wants money for college should fill out a FAFSA (free application for federal student aid). The FAFSA communicates to a college that you want to receive some sort of aid.
Which brings up the question of families who show a lot of income.
Many families, particularly those who are wondering about the best ways to use home equity to help pay for college, feel like they make too much to qualify for financial aid. Why would they need a FAFSA?
Simple: not filling out a FAFSA communicates to universities that you’re expecting to pay full price.
Colleges are businesses, so they will be happy to oblige. Even when a family does show too much income to qualify for federal aid, they will often receive some form of aid from the school itself.
Makes sense. So how does being a homeowner change the game? What are the best ways to use home equity to help pay for college?
First you need to understand how specific colleges view home equity.
Many universities use home equity as part of the equation to determine how much money your family needs. For some families, this is a great time to take on a home equity line of credit (HELOC) or refinance. This strategy is especially useful for families who haven’t saved much for college. Hopefully it goes without saying that taking money from retirement is almost never a good option for paying for college.
A Parent Plus loan can carry a 7-9% interest rate while a refinance or HELOC lands around 4-5% cost in interest. Using the latter means you’re not only borrowing cheaper money but also simultaneously reducing what your family is expected to pay for college.
Interesting. So having smarter debt on your books for college seems like a good thing. Does this only affect a primary residence?
Not at all. In fact, colleges are even more consistent in considering equity in investment property when determining how much aid to give out. So for those families who own investment real estate, generally speaking you’d want to take cash out of investment properties before a primary residence.
So families should get to work applying for refinances or selling their Airbnb properties?
No. They need to speak with someone who knows what they’re doing to help them strategize. Some colleges don’t consider home equity, in that case you would only want to borrow on your home if you had no other savings to use for college and did not want your student to take on student loan debt. More importantly, timing is critical. You do not want capital gains showing up on a base year.
Wait, what? I wanted to know the best ways to use home equity to help pay for college, and suddenly I’m like a newborn thrust into a world I neither understand nor am prepared for.
I know. The strategy leading up to a $100-250K educational investment gets complicated. If this was simple, you’d be writing this piece alone.
That felt unnecessary, but fair. So, base year?
A base year is two years before your child graduates high school, and is the year the FAFSA focuses on.
In the case of a 2021 graduate, your base year is 2019. Any big money moves in your base year are risky, as they could show extra income you wouldn’t normally earn.
Anything else families should know?
Yes. Families should take the example of your cavalier interview style and do the opposite of that when planning how to pay for college. Take the process seriously and start early. Speak to a professional to have your unique situation assessed.
Using home equity to pay for college is not a catch-all, and frankly nothing is.
Each family’s situation is nuanced and needs to be treated as such.
We’re grateful for Theresa’s time and knowledge. If you have additional questions about the best ways to use home equity to pay for college, or would like to be pointed towards the right professional, Theresa offered to guide our readers. Contact her at Red Team College Planning.
All this might have you asking What’s My Home Worth? We’ll tell you so you can get started.