In 1999 (when the parents of this year’s graduating seniors began putting aside money for college), the cost of attendance was much lower than it is today. It’s ironic, but college tuition costs actually dropped in 1999. All that soon changed. In fact, 2015 saw tuition rates rise 3% at a time when the rate of inflation remained relatively flat.
If you noticed the cost of college was going up and were able to save accordingly, you’re fortunate. Some parents are only now realizing that the money available from savings and federal student loans won’t be enough to cover the high cost of tuition, textbooks and housing. In these cases, a Home Equity Line of Credit or HELOC can help make up the difference.
The current HELOC interest rate is slightly higher than that of federal loans for undergraduate students and lower than the interest rate on federal loans for graduate students. Your actual rate may be higher or lower, however, because HELOC interest rates are variable. The rate you pay will also depend on the term of the line of credit, the equity you have in your home, and your credit rating.
A HELOC is different from a Home Equity Loan because it offers a line of revolving credit rather than a single lump sum. A HELOC has a “draw period” between five and 10 years, and borrowers usually have 10 to 20 years to pay off the loan principal. Another difference is that HELOCs only charge interest on money you actually borrow. For example, if you have a $100,000 HELOC, you’ll only pay interest on $60,000 if that’s all you draw from it. You may also want to check with your tax advisor to see if the interest on your HELOC is tax deductible.
While you can use a HELOC to meet tuition or other college expenses right away, you can also have one for the added security of knowing the money is available if you need it. If this is the case, be sure to find out whether there is a minimum amount of money you must draw from the line of credit. Maintenance and cancellation fees may also apply.
The First is here to help. Contact us to find out if a HELOC makes sense for your financial needs.
How are you meeting the rising cost of a college education? Let us know in the Comments section.