What’s the best way to pay for my son’s college tuition?

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Q. I’m trying to decide how to pay for my son’s college. He starts in September. I will need to pay about $50,000 a year. My sources are: $100,000 in a 529 plan, $100,000 home equity line of credit and I have an emergency fund of $50,000. I don’t want to saddle him with loans but that’s also a possibility to defer some of the costs, and then I can take the payments after he graduates. What do you think?
— Mom

A. Congrats to you and your son on his college future.

It sure is expensive.

There are a variety of factors to consider when assessing what the best options are to help fund the expenses once your 529 plan funds have been spent, said Charles Pawlik, a certified financial planner and chartered financial analyst with Beacon Trust in Morristown.

First, when it comes to your $50,000 emergency fund, Pawlik said it would not be prudent to use this for college costs.

“An emergency fund is a vital part of maintaining financial stability, and not having one in place can lead to a ripple effect in terms of the impact of attempting to pay for unforeseen expenses or access liquidity in the shorter-term in the event of a job loss,” he said. “If either one of these were to occur and you do not have a sufficient emergency fund in cash or other highly liquid short-term investment vehicles, you run the risk of having to disrupt your longer-term investment portfolio by selling investments at the wrong time — during a significant downturn in the markets — potentially triggering tax liabilities depending on where the funds are sourced, or having to utilize costly debt options in order to be able to meet those needs.”

On the home equity line of credit, while this can be an important source of liquidity that people look to in order to fund major purchases such as home renovations, or like you, college costs, it is important to understand the potential risk, Pawlik said.

“Borrowing against your home can look attractive from an interest rate perspective relative to student loans, and particularly given the strong price appreciation we have seen in real estate markets,” he said. “However, the primary reason that a home equity line of credit typically carries more attractive interest rates on a relative basis is because the debt is secured by your home, giving the lender a legal claim to foreclose on your home in the event you cannot make your payments.”

Using a home equity line of credit to pay for college costs instead of a federal student loan effectively converts the loan to secured debt, which is debt that is backed by a personal asset, he said.

Pawlik said in considering using your home for college bills, it’s important to take into account in the context of your overall cash flow situation, a potential job loss and the likely unsustainable home price appreciation we have seen to date relative to the overall debt you may be carrying on your home between your primary mortgage and the use of a home equity line of credit.

“The risk here would be further exacerbated if you were to have used a portion of your emergency fund for college costs as well,” he said.

Student loans can offer a variety of protections relative to repayment options and forgiveness benefits that are not offered with a home equity loan, Pawlik said.

“The student loan repayment moratorium that has been in place, as well as the student loan forgiveness plan recently announced by President Biden are examples of this,” he said. “ It’s also important to remember that there are no loans to help you fund your retirement, and ultimately it is important that you don’t compromise your ability to be financially secure in retirement at the expense of fully funding your son’s college expenses.”

Ultimately, he said, the best option to pursue depends on a confluence of factors and on your overall financial situation. You might want to consider working with a certified financial planner who can take your overall financial picture and broader goals and objectives into consideration to develop a comprehensive financial plan, can help to provide good context in order to make informed and sound decisions around important questions such as funding your son’s college expenses, and balance that with other important long-term goals such as retirement, Pawlik said.

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This story was originally published on Sept. 2, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.