03 Aug Should I use a home equity loan to pay for college?

Q. I need to borrow money to pay for my son’s college. I have no real college savings but I do have a home equity line of credit. What are the pros and cons of using this instead of student loans?
— Dad

A. Using a home equity line of credit (HELOC) may seem life a smart way to borrow for college, there are some real disadvantages.

If your home is the only source of savings you have, it would not be wise to borrow against it when student loans are available, said Paul Criscione, a certified financial planner with Freedom Capital Management in Colts Neck.

“For example, if you deplete your one source of liquidity, should you experience any other financial difficulty, such as a sickness, a job loss, a divorce or death, where will you be able to turn?” Criscione said.

Plus, the HELOC will be in your name and not your son’s.

Criscione said a HELOC normally requires a minimum payment per month – the very first month the credit line has a balance.

“Even though a HELOC may have lower interest rates than a student loan, these rates are normally not locked in,” he said. “Student loan payments may be deferred until six months after graduation.”

And, student loans can never be “called” and interest rates are locked in. Depending on your loan agreement, the HELOC could be called by the bank, requiring repayment in full, he said.

If you ever decide to sell your house, the HELOC will have to be paid back at closing.

“If that happens, you and your son may have a hard time meeting the funding needed to finish school depending on your situation, the economy and your son’s college progress,” he said. “Fifth year students can have difficulty getting student loans.”

Student loans are meant for college, Criscione said, and there’s a good possibility that your son’s college of choice may offer him interest free loans or subsidized rate loans.

“You must file a Free Application for Federal Student Aid (FAFSA) to qualify, but if do not, you could eliminate yourself from any federal, state and college grants,” he said. “The FAFSA is the basis for financial decisions made by the federal, state and individual colleges your son applies to.”

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