Some of us are deep in the land of college tours and scholarship research and trying to learn all we can about how to get our kids into their preferred school, and pay for it without having to pack up and live with them in their dorm. And, by "some of us", I mean Yours Truly. And by "deep in," I mean sinking into a world of confusion and despair and conflicting information and Google searches like, "How much can I get for my plasma?" The bottom line is sobering but so is the massive information dump. If you can remember what it was like to learn a language from scratch, you kinda get it, but only if that language consistently contradicted itself and caused even more waves of confusion. So, a lot like English, then.
But, lost in all the fun, new terminology and layers of requirements and so many dates for scores and applications and deposits that you need to expand your iPhone calendar entry space is a bit of great news for homeowners and homebuyers who are staring down the reality of paying for college for their dependent child.
First, a reality check. Think you know how much it actually costs to go to college? "Unfortunately, for many parents, it's simply not possible to fund a degree from their savings or income - not with the total annual cost of college hitting roughly $23,000 for the average four-year public school and about $46,000 for private schools, according to The College Board," said mortgage site HSH.com. In case you missed it, that's PER YEAR. PER CHILD.
Ouch. Especially if you're nearing retirement age. There goes that beach house. But, the good news for homeowners is twofold, and it's the first one that came as a surprise:
1) Nothing about your house - not the mortgage, the value, how much you owe, or how much equity you have - matters when it comes to getting financial aid for most public schools. You can owe $1 on a home worth $2 million and it won't matter or even be known to those who are deciding whether your child receives financial aid. Presumably, if you owe $1 on a $2 million home, you won't need financial aid, but that's another story.
2) If you do have equity in your home, congratulations. You may have a built-in solution to pay for those classes, books, and meal plans.
Let's talk financial aid
The FAFSA is the Free Application for Federal Student Aid, and you will come to love/hate this document that will be used to determine how much you receive to offset the cost of college. "The purpose of the FAFSA is to calculate your expected family contribution, or EFC - the amount the government believes your family can contribute for college that year," said Bankrate.
The FAFSA will ask you for your driver's license and social security numbers, your most recent tax returns, and information on bank accounts and investments, including any stocks you might have. But what it won't ask you for is information about your house. This is great because it protects what is, for most, their single largest investment and also "boosts their aid eligibility by knowing which assets the government doesn't take into account," said Bankrate.
Some financial planners also focus on the family home as a smart investment tool when it comes to paying for college by encouraging them to pay down the mortgage and "transfer assets from assessable accounts to sheltered ones."
Keep in mind, though, that different rules may play for private universities. "Generally speaking, private colleges look at the equity you have in your home as a resource to pay for college," said Money Crashers. "Public schools, however, typically do not."
Tapping home equity to pay for college
Has your home appreciated since you purchased? Many homeowners who need to find additional funds for college are using their home equity and taking advantage of low interest rates instead of looking to other types of loans.
"In a climate of lower housing interest rates, a home loan might seem like an attractive option for some parents to help shoulder the cost of paying for college," said US News. "Since the downturn of '08 and '09, the lending environment has improved enough that some of the rates on home loans are more competitive over a Plus loan," Trish Gildea, senior financial planner at Summit Financial Corp. in Burlington, Massachusetts, told them.
In fact, Bankrate currently shows a home equity interest rate of 5.21% and a 30K home equity line of credit (HELOC) at 5.38%. The current rate on a Parent PLUS Loan "a federal student loan available to the parents of dependent undergraduate students," is 6.31%," according to Edvisors, plus there is an origination fee that's over 4%. You may also have an easier time qualifying for credit tied to the equity in your home as long as you have been making payments on time and have a low enough loan-to-value ratio; "Eligibility for a Parent PLUS Loan does not depend on the borrower's credit scores or debt-to-income ratios. The borrower of a Parent PLUS Loan must not have an adverse credit history.
Dipping into home equity may also have specific advantages if your child is planning to attend a private college. "Taking out a mortgage or tapping a home equity line of credit will reduce the amount of equity you have in your home," said Money Crashers. "Since private schools view home equity as an option to pay for tuition, utilizing this strategy can increase your chances of receiving financial aid if your child is attending a private college. You could use the money you pull out of your home to pay down high interest consumer debt -- but pay close attention to the interest rate. It probably wouldn't make sense to take on a home equity loan at 8% to pay off debt at 5%. But if money is cheap, pulling it out of your house to pay off other debts can help you qualify for financial aid at a private institution."
US News notes that, "On average, parents borrowed $7,406 through a home loan -- an umbrella term that includes a home equity loan, a home equity line of credit known as a HELOC, cash-out refinance and a reverse mortgage."
Wondering which of those loans is best for you? It depends on your unique set of circumstances, but, because of the flexibility, "Wealth advisors say a HELOC is the most common choice for parents choosing a home loan to pay for school," they said. "A borrower can limit the amount to just what's needed under a HELOC compared with a home equity loan, which requires taking out a lump sum. The minimum amount for a home equity loan can range between $10,000 and $25,000 at lending institutions."
In addition to all the other factors, you'll want to keep the "when" in mind if you're considering a HELOC. "Experts say timing is important when it comes to a HELOC and filling out the FAFSA," said US News. That's because, "If the proceeds of a home equity or HELOC is in your bank account on the date you file the FAFSA," you'll have to count it as an asset, which can reduce the amount of aid received.