Using home equity for college: is it worth the risk?

Introduction

Using a home equity loan or line of credit (HELOC) for college often provides lower interest rates than federal Parent PLUS loans or private student loans. However, these secured loans use your home as collateral, meaning you risk foreclosure if you cannot repay. This guide explores whether the potential interest savings are worth that specific risk.

For families, this decision requires a careful balancing act. Parents must weigh the benefit of lower monthly payments against the danger of placing their home or retirement security on the line. Meanwhile, students need to understand how different funding strategies affect the family’s overall financial health and their own future flexibility regarding debt repayment.

In this article, you’ll learn how home equity financing compares to traditional student loans, the specific qualification requirements, and how to calculate the true cost of borrowing against your home. By understanding the pros and cons, you can decide if tapping into housing wealth is the right strategy for funding your degree.

Understanding home equity financing for college

Before deciding whether to use your home to pay for college, it is essential to understand exactly how these financial products work. Unlike student loans, which are unsecured debts based on the student’s or parent’s creditworthiness, home equity financing is secured debt. This means the borrower pledges their property as collateral to secure the loan.

For families considering this route, there are two primary ways to access the equity built up in a home: a standard home equity loan or a home equity line of credit (HELOC).

A home equity loan is often referred to as a “second mortgage.” It provides a one-time lump sum of cash that is repaid over a fixed term, typically ranging from 5 to 30 years. Because these loans usually come with fixed interest rates, your monthly payments remain consistent throughout the life of the loan.

For college funding, this predictability can be advantageous. Families can borrow the exact amount needed for a specific year of tuition and lock in a rate, making budgeting easier. However, because you receive the money all at once, you begin paying interest on the full amount immediately, regardless of when you actually send the funds to the university.

A Home Equity Line of Credit (HELOC) functions more like a credit card. Lenders approve you for a maximum credit limit, and you can draw from that line as needed during a “draw period” (typically 10 years). During this phase, you often make interest-only payments on what you have borrowed.

HELOCs typically feature variable interest rates, meaning your payments can fluctuate based on market conditions. This flexibility allows parents to borrow only what is needed for each semester’s bills, potentially saving on interest costs compared to a lump-sum loan. Once the draw period ends, the loan enters a repayment period where principal and interest must be repaid, often resulting in significantly higher monthly payments.

Lenders do not allow you to borrow 100% of your home’s value. Instead, they look at your Combined Loan-to-Value (CLTV) ratio. Most lenders cap borrowing at 80% to 90% of the home’s appraised value, minus what is still owed on the primary mortgage.

To qualify, borrowers generally need:

• Sufficient equity: typically at least 15–20% equity remaining in the home after the new loan is calculated.
• Credit score: A minimum score of 620 is often required, though scores above 700 secure the most competitive interest rates.
• Debt-to-income (DTI) ratio: Lenders prefer a DTI ratio below 43%, ensuring you have enough income to manage the new payments alongside existing debts.

Unlike private student loans which can sometimes be approved in days, accessing home equity is a slower process. Because it involves property appraisals and mortgage underwriting, funding typically takes 2 to 6 weeks. Families relying on this method must apply well before tuition deadlines to ensure funds are available when the semester bill arrives.

Decision at a glance: home equity vs. parent loans

Choosing between tapping into your home’s value and taking out traditional student loans often comes down to a trade-off between lower interest rates and higher financial risk. To help you navigate this choice, the table below compares home equity financing directly against Federal Parent PLUS loans and private student loans.

Once you have reviewed the numbers, use this framework to determine which path aligns best with your financial goals:

• Choose home equity financing if: You have significant equity built up, possess an excellent credit score, and want to secure the lowest possible interest rate. This is also a strong option if you want to avoid the high origination fees associated with federal parent loans.
• Choose Parent PLUS loans if: You want a fixed interest rate without putting your home at risk, or if your debt-to-income ratio is too high to qualify for private financing. This is also the right choice if you need access to federal protections like consolidation or income-contingent repayment.
• Choose private loans if: You have strong credit but do not want to use your home as collateral. Private loans are also preferable if you want the student to share responsibility for the debt (via a cosigned loan) rather than taking it on solely as a parent.

Key advantages of using home equity for college

For homeowners with significant equity and strong credit, borrowing against your home is often the most cost-effective way to fund a college education. While the risks of secured debt are real, the financial mechanics of home equity loans and HELOCs offer distinct advantages over federal Parent PLUS loans and private alternatives, particularly regarding interest rates and upfront costs.

The primary driver for choosing home equity financing is the potential for substantial interest savings. According to StudentAid.gov, Federal Parent PLUS loans carry a fixed interest rate of 9.08% for the 2024–2025 academic year. In contrast, borrowers with excellent credit scores (typically 760 or higher) can often secure home equity loans or HELOCs with starting rates significantly lower than this federal benchmark.

While HELOC rates are often variable—meaning they can rise if the prime rate increases—the initial savings can be significant. According to Mark Kantrowitz, financial aid expert, “Private loans can offer variable interest rates, which may be lower than federal fixed rates initially.” For families who plan to pay off the debt aggressively, taking advantage of a lower initial rate can reduce the total cost of borrowing by thousands of dollars.

One of the most overlooked costs of federal borrowing is the origination fee. According to the Department of Education, as of October 2024, the government deducts a 4.228% fee from every Parent PLUS loan disbursement. This means if you need $20,000 for tuition, the government keeps approximately $845, and the school receives only $19,155. You are still responsible for repaying the full $20,000 plus interest.

Home equity loans and HELOCs typically have no origination fees. While you may encounter closing costs (such as appraisal or recording fees), many lenders offer “no-closing-cost” options for borrowers with strong credit. This ensures that every dollar you borrow goes directly toward educational expenses.

Federal Parent PLUS loans generally enter repayment immediately after the loan is fully disbursed, with a standard 10-year term. While deferment is possible, interest continues to accrue.

HELOCs offer superior cash-flow flexibility during the college years. Most HELOCs feature a 10-year “draw period” during which you are often required to pay only the interest on what you borrow. This keeps monthly obligations low while the student is in school, freeing up household cash flow for other expenses. Additionally, home equity loans can be structured with repayment terms of up to 20 or 30 years. While a longer term increases the total interest paid over time, it dramatically lowers the monthly payment, making the debt more manageable for families on a tight monthly budget.

Historically, mortgage interest was fully deductible regardless of how the funds were used. The Tax Cuts and Jobs Act of 2017 changed these rules, restricting the deduction for interest on home equity debt unless the funds are used to buy, build, or substantially improve the home.

However, there is a nuance for education. According to IRS Publication 970, interest paid on a home equity loan used exclusively for qualified education expenses may be deductible as student loan interest, rather than mortgage interest. This deduction is capped at $2,500 per year and is subject to income phaseouts based on your Modified Adjusted Gross Income (MAGI). Because tax laws are complex and subject to change, families should consult a tax professional to determine if they qualify for this benefit.

According to StudentAid.gov, federal student loans for undergraduates have strict annual limits (e.g., $5,500 for dependent first-year students). While Parent PLUS loans cover the remaining Cost of Attendance, they cannot exceed it. Home equity financing is limited only by your available equity and lender requirements. This provides families with the flexibility to cover not just tuition and room and board, but also related costs that might fall outside the strict definition of “Cost of Attendance,” such as off-campus transportation or specialized equipment, without dealing with financial aid office appeals.

Major risks and disadvantages to consider

While the prospect of lower interest rates and flexible draw periods is appealing, using your home to fund a college education carries distinct and serious risks. Unlike student loans, which are designed specifically for education financing, home equity products are general consumer loans secured by your property. This fundamental difference shifts the consequences of repayment struggles from your credit report to your front door.

The single most significant disadvantage of using home equity for college is the collateral requirement. Home equity loans and HELOCs are secured debts, meaning your home serves as the guarantee for the loan. If you encounter financial hardship—such as a job loss, medical emergency, or unexpected reduction in income—and cannot make the payments, the lender has the legal right to foreclose on your home.

In contrast, federal Parent PLUS loans and private student loans are unsecured debts. If you default on an unsecured loan, the consequences are severe—including damaged credit scores, wage garnishment, and aggressive collection efforts—but the lender cannot seize your property. For many families, the safety of knowing their primary residence is protected from education debt outweighs the potential interest savings of a secured loan.

By opting for a private home equity product, you forfeit the robust safety net provided by the federal student loan system. Federal loans offer specific protections designed to help borrowers weather economic downturns, which standard bank loans do not provide.

• No income-driven repayment: Federal Parent PLUS loans can be consolidated to qualify for the Income-Contingent Repayment (ICR) plan, which caps monthly payments based on income. Home equity lenders generally do not offer income-based adjustments; you must pay the agreed-upon amount regardless of your earnings.
• No forgiveness options: Federal loans may be eligible for Public Service Loan Forgiveness (PSLF) or discharge in the event of total and permanent disability or death of the borrower (or the student). Home equity debt typically remains an obligation of the estate or the surviving spouse.
• Less leniency: As noted by Jason Delisle, a higher education finance expert, “Federal loans are more lenient … no late fees, unlike private loans.” Private lenders are often quicker to penalize missed payments and less likely to offer forbearance during temporary hardships.

While home equity loans usually have fixed rates, HELOCs typically feature variable interest rates tied to the prime rate. This introduces significant uncertainty into your monthly budget. If the Federal Reserve raises rates to combat inflation, your interest rate—and your required monthly payment—will increase immediately.

For example, if you borrow $40,000 on a HELOC at an initial 7% interest rate, your monthly interest-only payment would be approximately $233. If market rates rise by just two percentage points to 9%, that monthly obligation jumps to $300. Over a four-year degree, these fluctuations can add thousands of dollars to the total cost of the loan, potentially erasing the initial savings you sought.

While home equity products avoid the federal origination fee, they often come with their own set of expenses that student loans do not carry. Because these are real estate transactions, you may be responsible for closing costs, which can range from 2% to 5% of the loan amount. These may include:

• Property appraisal fees ($300–$500)
• Title search and insurance fees
• Attorney or notary fees
• Government recording fees

Additionally, some HELOCs charge an annual membership fee or an inactivity fee if you do not use the line of credit. When calculating the “true” cost of the loan, these expenses must be factored in against the interest rate savings.

Finally, using home equity for college reduces the equity you have available for other life events. Your home is often a primary source of wealth for retirement, emergency funds, or downsizing later in life. By leveraging that equity now for tuition, you limit your ability to use it for home repairs, medical expenses, or supplementing retirement income. If the housing market declines, you could also find yourself “underwater,” owing more on your home than it is worth, which would make selling the property difficult or impossible.

When home equity makes sense vs. traditional parent loans

While the lower interest rates of home equity products are attractive, the decision should ultimately hinge on your risk tolerance and financial horizon rather than the rate alone. Financial aid expert Sandy Baum notes, “Borrowing is not inherently bad; the question is how much, and under what terms.” Choosing the right terms depends heavily on your family’s specific financial profile.

Leveraging housing wealth is generally the most strategic move for families who prioritize the lowest possible cost of capital and have a highly stable financial foundation. This option makes the most sense if:

• You have a significant equity buffer: You should have enough equity that even after taking out the loan, you retain at least 20% ownership in your home. This protects you against market downturns.
• Your income is stable and predictable: Since your home is on the line, you need high confidence in your ability to make payments for the next 10 to 20 years without interruption.
• You have excellent credit: To beat the federal Parent PLUS rate, you typically need a credit score above 740. If your score is lower, the rate difference may not be wide enough to justify the risk of secured debt.

Despite higher fees and rates, Federal Parent PLUS loans remain the safest choice for many families because they do not put assets at risk. You should prioritize this route if:

• You work in public service: Parent PLUS loans can be eligible for Public Service Loan Forgiveness (PSLF) if consolidated and repaid under an income-contingent plan. Home equity loans are never eligible for forgiveness.
• You have a high debt-to-income (DTI) ratio: Unlike home equity lenders, the federal government does not check your DTI ratio. This makes Parent PLUS loans accessible even if you already carry significant debt.
• You lack equity: If you rent or have recently purchased your home, federal loans are often your only option for covering the full Cost of Attendance.

If you have strong credit but are uncomfortable pledging your house as collateral, private student loans offer a compelling alternative. These unsecured loans can sometimes offer rates competitive with home equity products but without the risk of foreclosure. This path is optimal when:

• You want to share responsibility: Private loans can be taken out in the student’s name with a parent cosigner. This builds the student’s credit history and allows for potential cosigner release later, whereas home equity debt belongs solely to the homeowner.
• You want a fixed rate without fees: Many private lenders offer fixed-rate loans with zero origination fees, providing a middle ground between the stability of federal loans and the low costs of home equity.

Your stage of life plays a critical role in this decision. If you are nearing retirement, taking on a 15-year home equity loan is risky; you do not want to carry a mandatory mortgage payment into your fixed-income years. In this case, federal loans (which can be discharged upon death) or smaller private loans might be safer.

For self-employed parents or those with variable commission-based income, a HELOC can be dangerous. If your income drops during a period when interest rates rise, the payment shock could threaten your home. In contrast, federal loans offer deferment options during economic hardship that home equity lenders generally do not provide.

If you determine that your financial profile supports the use of secured debt, the next step is understanding the specific hurdles you must clear to get approved.

Qualification requirements and application process

Securing a home equity loan or HELOC is fundamentally different from applying for student financial aid. While the FAFSA process focuses on financial need and federal formulas, a home equity application is a mortgage transaction. This means you must undergo a rigorous underwriting process where the lender scrutinizes your ability to repay the debt based on your income, credit history, and property value.

Qualifying for home equity financing is generally more difficult than qualifying for federal Parent PLUS loans. For a Parent PLUS loan, the government only checks for “adverse credit history” (such as a recent bankruptcy or foreclosure) and does not look at your income or debt-to-income ratio. In contrast, home equity lenders require proof of financial stability.

• Credit score: most lenders require a minimum FICO score of 620 to qualify. However, to access the lowest advertised interest rates, you typically need a score of 740 or higher.
• Debt-to-income (DTI) ratio: Lenders calculate your DTI by dividing your total monthly debt payments by your gross monthly income. According to the Consumer Financial Protection Bureau (CFPB), 43% is the standard maximum DTI ratio for a qualified mortgage. If your new loan payment pushes your total monthly debt obligations above this threshold, you will likely be denied.

You cannot borrow 100% of your home’s value. Lenders generally limit the Combined Loan-to-Value (CLTV) ratio to 80% or 85%. This means you must retain at least 15% to 20% equity in your home after the new loan is added to your existing mortgage balance.

To verify this value, the lender will almost always require a professional property appraisal. This is an out-of-pocket expense (typically $300–$500) that protects the lender by ensuring the collateral is worth enough to cover the loan. If property values in your area have dropped, you may find you have less borrowable equity than you anticipated.

Because this is a secured loan, the paperwork requirement is extensive. Be prepared to provide:

• Two years of W-2s and tax returns
• Recent pay stubs (usually for the last 30 days)
• Current mortgage statements
• Proof of homeowners insurance
• Bank statements for other assets

Plan for a longer timeline. While a federal Parent PLUS loan can be approved almost instantly online, and private student loans can be funded in a matter of days, home equity financing takes time. According to the CFPB, the process typically takes 2 to 6 weeks from application to funding due to the appraisal and title search requirements. If tuition is due in two weeks, a home equity loan may not arrive in time to avoid late fees at the university.

Cost analysis: calculating your true borrowing costs

To determine if leveraging your home equity is truly the right financial move, you must look beyond the headline interest rate. The true cost of borrowing involves a combination of monthly payments, upfront fees, lost investment opportunities, and tax implications. By running the numbers on a concrete scenario, you can see exactly how these factors stack up against federal and private options.

Let’s compare the total cost of borrowing $50,000 to fund a four-year degree. In this example, we assume a repayment term of 10 years for both options. We compare a standard fixed-rate Home Equity Loan against a Federal Parent PLUS loan (using 2024–2025 rates).

In this scenario, the home equity loan saves the family over $6,500. A significant portion of this savings comes from avoiding the federal origination fee. With the Parent PLUS loan, the 4.228% fee is deducted immediately, meaning to actually receive $50,000 for the school, you would need to borrow approximately $52,200, further increasing your interest costs.

The math changes significantly if you choose a HELOC with a variable rate. You might start with a lower introductory rate—perhaps 7%—but if the prime rate rises, your costs will spiral.

If you borrow that same $50,000 on an interest-only HELOC at 7%, your monthly payment is a manageable $291. However, if market rates jump to 9% two years later, your required payment rises instantly to $375. Over a four-year period, a 2% rate hike could cost you an additional $4,000 in interest alone, eroding the savings you initially planned for.

Many parents assume home equity interest is automatically tax-deductible, but the Tax Cuts and Jobs Act of 2017 limited this deduction. Interest on home equity debt is generally no longer deductible as mortgage interest unless the funds are used to improve the home. However, if you use the money strictly for qualified education expenses, you may be able to deduct the interest as student loan interest.

According to IRS Publication 970, this deduction is capped at $2,500 per year. If you are in the 22% tax bracket, maximizing this deduction saves you $550 annually on your tax bill. This is a helpful benefit, but it rarely makes or breaks the decision on its own.

Ultimately, the math suggests that home equity is cheaper, but cost isn’t the only factor. According to Sandy Baum, education finance expert, “Borrowing is not inherently bad; the question is how much, and under what terms.” If the “terms” involve putting your home at risk of foreclosure to save $50 a month, the cheaper loan may not be the better choice.

Before signing any paperwork, it is wise to compare these costs against private student loan options, which can sometimes offer the “middle ground” of competitive fixed rates without requiring your home as collateral.

If you have strong credit and want to see how an unsecured private loan compares to your home equity numbers, you can check current rates quickly.

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Alternative financing options

Before finalizing a home equity loan, it is critical to verify that you have maximized safer funding sources. Home equity financing should typically be considered only after exhausting options that do not put your primary residence at risk.

• Federal Direct Loans: Students should always borrow the maximum available in federal student loans first. These come with built-in consumer protections, such as income-driven repayment plans and potential forgiveness, which private bank loans and home equity products do not offer.
• Scholarships and grants: Unlike loans, scholarships do not need to be repaid. Students should continue applying for external awards every year, not just as incoming freshmen, to reduce their total borrowing need.
• Private student loans: If you have strong credit but are uncomfortable pledging your home as collateral, private student loans may be a better fit. They allow you to bridge the funding gap without the risk of foreclosure.
• Institutional payment plans: Most colleges offer interest-free monthly payment plans. This allows families to spread tuition costs over a semester rather than borrowing a lump sum and paying interest on it for years.

Comparing these options ensures you are not taking on unnecessary collateral risk for funds you could access through safer channels. If you determine that a private loan offers the right balance of safety and cost for your family, you can view current offers quickly.

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Frequently asked questions

When weighing the decision to secure college funding against your home, specific logistical questions often arise that go beyond simple interest rate comparisons. Below are answers to the most common questions families ask about navigating this process.

Generally, you cannot claim the mortgage interest deduction for home equity debt unless the funds are used to buy, build, or substantially improve your home. However, according to IRS Publication 970, you may be able to deduct the interest as student loan interest if the loan proceeds are used exclusively for qualified education expenses. This deduction is capped at $2,500 per year and is subject to income limits. Always consult a tax professional to verify your eligibility based on current IRS rules.

Because a home equity loan is a mortgage product secured by your property, the repayment terms remain unchanged regardless of the student’s enrollment status. Unlike some private student loans that may offer temporary forbearance if a student withdraws, you must continue making payments on your home equity loan to avoid foreclosure. The debt is tied to your house, not the degree.

On the FAFSA, the equity in your primary residence is not reported as an asset. However, if you take out a lump-sum home equity loan and keep the cash in your bank account, that cash is reported as an asset, which could reduce the student’s aid eligibility. A HELOC is generally better for financial aid purposes because the unborrowed line of credit does not count as an asset, and you can draw funds only as needed to pay the school directly.

Yes. You can combine different funding sources as long as the total financial aid package (including loans, grants, and scholarships) does not exceed the college’s official Cost of Attendance (COA). Many families use home equity financing to cover the gap left after federal student loans are maxed out, rather than taking the full amount in higher-interest Parent PLUS loans.

Yes, you can use the proceeds from a home equity loan to pay off existing Parent PLUS loans. This is often done to secure a lower interest rate. However, proceed with caution: by doing this, you convert unsecured federal debt into secured debt. You will lose access to federal benefits like Income-Contingent Repayment (ICR), Public Service Loan Forgiveness (PSLF), and death/disability discharge protections.

Deciding whether to leverage your home for college tuition is not just a math problem; it is a question of risk tolerance. While the interest savings can be substantial compared to Parent PLUS loans, the security of your home must come first. As you finalize your funding strategy, keep these core principles in mind:

• Exhaust federal options first: Federal Direct Loans for students should always be the first step due to their income-driven repayment options and lack of collateral requirements.
• Know your stability: Home equity financing is best reserved for families with highly stable incomes and significant equity buffers. If a recession or job loss could threaten your ability to pay, the risk of foreclosure outweighs the benefit of a lower rate.
• Compare the true costs: Don’t just look at the interest rate. Factor in appraisal fees and closing costs (for home equity) versus origination fees (for Parent PLUS) to calculate the true cost of borrowing.
• Evaluate unsecured alternatives: If you have strong credit but hesitate to pledge your home, private student loans can often provide competitive fixed rates without the collateral risk.

By weighing these factors carefully, you can choose the funding strategy that protects your financial future while investing in education. Before signing any paperwork, ensure you have compared all available rates.

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References and resources

Verify your numbers and explore all funding options using these trusted resources:

• Federal Student Aid: Check official loan rates and limits.
• CFPB: Review home equity consumer protections.
• College finance guides: Read our FAFSA tutorial and scholarship strategies.
• Calculators: Estimate payments with our student loan calculator.