Using a Home Loan for College is a BAD idea!

I see a lot of advertisements from banks that encourage people to use a second home loan or HELOC (Home Equity Line of Credit) to pay for their children's tuition. To me this is a bit predatory and is a financially bad idea. I see many problems with this:

  • You are borrowing against your home to finance a piece of paper
  • You are responsible for the payments--not the child
  • You jeopardize your savings and retirement
  • HELOC's have a variable rate
  • The interest is usually higher than a student loan
To borrow against your house to pay for education is a bad move. If the child does not complete college then it is wasted money you are stuck paying. If you suddenly can't afford to pay you could eventually lose your home.  At the very least you could wreck your credit for a few years by being late.

Secondly you are stuck with the payments. Regardless of what the child does in life you have to pay for it. Doing this means that you also have less money to save towards retirement and other goals since you have that extra payment each month. This is even worse with a variable interest rate that will eventually rise over time.

The bottom line: DON'T DO IT! 

I can completely understand that parents want to help pay for the child's college education. There is nothing wrong with that. By doing so you need to be smart about it. It is more than just money. Legal liabilities, consequences of it going wrong, and relationship with the child have to be considered when making this decision.

My solution: Use student loans in the child's name.

Who says you can't make payments on those loans instead? You can also make an agreement that you will pay the loans only if he/she completes their degree. If they drop out the foot the bill (or whatever other arrangement you want to make).

Advantages of using student loans:
  • Once graduated they can consolidate to one payment and a fixed interest rate
  • They get a tax write off for the interest on the loan
  • They can be deferred during financial hardship
  • If they pass away the student loans are forgiven (the home loan is not!)
  • No payments are needed during school. You can save more for retirement during those years.
  • The child gets a good credit from the loans.
  • You only borrow what you need. Amounts available fluctuate with tuition costs. Home loans fluctuate with home values (and can be a problem!)
This need not only apply to children. You can do the exact same thing for yourself too. Making the smart financial choice makes life easier in the long run. I have student loans myself and don't regret it. They allow me to make a lot more money than I would otherwise and have a very low fixed interest rate. Make the savvy choice!