Should You Use a Home Equity Loan or Private Student Loan to Pay for College Expenses?
College decision letters are on their way to a home near you. Maybe someone in your household is expecting one soon. What you might not be expecting is the lean financial aid award package that accompanies many college acceptance notifications.
While financial aid awards might include free grants and low-interest rate federal student loans, funds are limited and only available to eligible students and parents. Tuition, fees, and living expenses may surpass the financial aid available, leading families to consider alternative funding sources.
Before deciding on a supplemental funding option for your situation, compare the advantages of using a home equity loan versus a private student loan to cover college expenses.
Borrowing Minimums and Limits
Private student loan borrowing limits are often based on the college’s cost of attendance, less any financial aid received by the student. But what if your student’s unexpected college-related expense exceeds the pre-determined cost of attendance formula?
To help your young adult pay for college, you can use the higher borrowing limits of a home equity loan to cover college expenses. These limits are linked to the equity in your home.
But, unlike private student loans, a home equity loan uses your home as collateral. If you default on a home equity loan, you risk losing your home. Defaulting on a private student loan does not put your home on the line.
Credit and Cosigners
For the 2018 – 2019 academic year, 92% of student borrowers could only qualify for a private loan with the help of a creditworthy cosigner. Few lenders will allow students with a thin credit file access to a private student loan without a cosigner, which limits their ability to borrow funds. A cosigner can help the student secure loan approval.
An added benefit of using a cosigner is that repayment activity shows up in both the student’s and cosigner’s credit report, which can assist with building credit for the student.
But there are other options. Bypass the need for your student to qualify with a cosigner by using a home equity loan instead. With a home equity loan, the debt is in the homeowner’s name, not the student.
Many college graduates are waiting to buy a home or start a family due to the burden of student loan debt. This can be a significant help to young adults entering the workforce after college.
Interest Rate and Repayment Options
Private student loan interest rates are less than what you’d pay on a credit card, but more than what a home equity loan could offer. Even a few percentage points difference can cost you $1,000s. For example, if you borrow $100,000 with a 10-year repayment term, a personal loan at 7% interest will cost you over $12,000 more than a home equity loan at 5%.
Home equity loan borrowers will also need to weigh the benefits of varied repayment options available with private student loans. For example, income-based repayment terms allow private student loan borrowers to make payments based on their income and other factors. They may also qualify for payment deferments, e.g., no required loan payments until after graduation. Home equity loans do not offer this flexibility.
Home equity loans offer extended repayment periods that work well for borrowers who plan on staying in their homes for the foreseeable future. If, however, you’re planning to sell your home soon, then you would need to repay the home equity loan in full to close the deal. Private student loan borrowers can sell or buy a new home with no need to pay off the student loan balance.
Rest easy with an ENB funding option that supports your student’s college education.
ENB’s HomeLine is a type of home equity loan that offers the flexibility of a home equity line of credit. It can provide the funds you need to bridge the gap between college expenses and student aid packages. Unlike a traditional loan, which is disbursed in one lump sum, HomeLine operates as a home equity line of credit. Borrowers can lock in a fixed rate and access cash as needed.