Since HELOCs are excellent tools for handling irregular expenses, it makes sense that lots of people are turning to them to provide additional cash for college. Usually a student applies for as much scholarship, grant or student loan money as he/she is eligible, then the parent will make up the difference, if needed, by accessing home equity with a HELOC. This arrangement works well for many reasons: 1) The HELOC allows the parent to pull out only as much money as needed at a time without having to borrow (and make payments on) a large lump sum; 2) As the payments are interest only for up to 15 years, repayment is easier on the parents pocketbook; 3) The credit line doesnt have to be used specifically for tuition. It can also provide money for additional expenses such as housing, books, transportation, etc.; and 4) The payments are usually tax deductible (consult your tax advisor).
The scenario above illustrates how most people use HELOCs to help get their kids through school. However, a recent conversation with some colleagues brought up the question of whether or not a HELOC could be used as a vehicle to fully fund a college education. Surprisingly, the answer may very well be yes and doing so could even save you money!
Consider the following scenario:
If you have a child who is 8 years old today, he or she will ideally be ready to enroll in college in ten years. If tuition is currently $5,000 per year, you would need a minimum of $20,000 for four years of school at todays tuition rate. Unfortunately, with ten years before your child leaves for State U, you will have to account for inflation, which, according to the U.S. Bureau of Labor Statistics, is currently around 5% for higher education. That means that ten years from now the same school would cost not $20,000 but $35,104. Assuming you have nothing saved now, you would need to put at least $292.53 under your mattress each month in order to pay for four years of school.
Creative financing may create a viable alternative.
529 plans are becoming an increasingly more popular means for parents to pay for their childrens educations. The 529, named for the government regulation that pertains to the program, is a plan that allows parents to pre-pay a future college education at todays prices. Using our previous illustration, $20,000 paid now would pay for four years education at Imaginary State U at any future date. The challenge for most of us would be where to get the $20,000.
If you dont have that kind of cash readily available to you, one option might be to use you home equity.
Read this carefully before you try this at home.
Lets say you went to MrHELOC.com and made arrangements to get a Home Equity Line of Credit. You could write a check against the line for $20,000 and pre-pay college at todays price. At todays prime rate of 6.5% your monthly, interest only, tax deducible payment would be only $108.33.
In theory, by using creative financing (a HELOC), you could conceivably provide your child a completely funded college education at a savings of $184.20 per month. If you consider the fact that college graduates earn an average of about *70% more income than non-graduates, its certainly something to think about.
*Data reported in U.S. Government Statistics
Copyright 2005 Robert E. Jones, Jr.
Robert E. Jones is a Mortgage Loan Officer with years of experience helping homeowners manage their debt.
He is also known as "Mr. HELOC".
Robert has an established reputation as a creative problem solver. He specializes in helping homeowners use their equity and credit to achieve their personal and financial goals and overcome difficult situations.
If you have questions about HELOCs or creative financing, you can contact him by visiting http://www.mrheloc.com
