4 Reasons to Pay for College with a Home Equity Loan versus a Student Loan

If you pay for college with a home equity loan, you will note several key advantages over a traditional student loan option. This choice is usually only available to borrowers of a more advanced age who have had the chance to acquire a home. Parents may also use this option to cover the cost of sending a child to school. Ultimately, these loans will not be eligible for the same tax benefits as student loans. However, there are a number of reasons you may still choose this method.

#1 Home Equity Loans are Cheaper

The main reason to seek a secured loan, like a home equity loan, over an unsecured loan, like a traditional student loan, is the lower cost of financing. Lenders assume less risk in a loan secured with an asset. When this occurs, a lender will reward the borrower with a lower interest rate. Since the cost of education can be in the hundreds of thousands of dollars, a lower interest rate will save you tens of thousands of dollars over the life of the loan. You will find this option more likely to have flexible loan terms as well.

#2 Home Equity Loans May Be Revolving Lines

A popular way for lenders to distribute home equity loans is through revolving credit line options. Revolving lines are similar to credit cards. You have a maximum limit, but you can choose how much of that limit to spend each month or to pay off each month. This option is harder to find with traditional student loan contracts. Months when you have been able to save money or earn extra cash, you can pay more down on your loan. Months when you are short on income, you can allow your principal to carry over for another 30 days, paying only a minimum interest payment. This works well for families with another income source that is not always predictable.

#3 Home Equity Loans are Easier to Source

You will find it difficult to get a student loan without placing down some degree of collateral. If you do not use collateral, as mentioned above, the loan will be much more expensive, but it will also be harder to source. When you approach lenders offering a lien on your house, lenders will be much more likely to review your loan application and pass along the funding. The lower risk to the lender means they have more to gain from your loan than from a similar applicant without the necessary collateral.

#4 Home Equity Loans Put Your Assets to Work

Owning a home does not just give you a place to live rent-free. Your home is likely you largest asset. Allowing that asset to remain dormant does not make as much financial sense as putting the asset to work. Of course, you are taking on additional risk in doing so. Therefore, you should be careful not to over-collateralize the equity you have. Not using it at all, however, means you are missing out on valuable interest rate savings for financing options in the future.

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