A HELOC for College?

Although payment plans vary from school to school, many parents will get their first college tuition bill in the mail within the next few months. Some will opt to finance their children’s college education through a second mortgage on their house or an equity loan, if they can get one. Another option is a home equity line of credit. There are pros and cons to both approaches, according to college finance counselors.

If you go for a second mortgage or a home equity loan, you get the money all at once and you start paying it back right away. And the interest you earn when you put that lump sum to work could skew your financial picture, which could affect your child’s eligibility for financial aid. In the current interest rate environment, mortgages and equity loans have higher interest rates than a HELOC, although they do offer the advantage of a fixed rate.

Then there’s the HELOC. Right now, interest rates on a HELOC tend to be lower than on other loans, and it can be a much more flexible way to pay college bills. You tap the HELOC only when you need the money and then only for as much as you need. And you don’t have to start paying anything back until you actually take the money out.

Interest rates on a HELOC fluctuate, however, which means that they rise and fall in lockstep with interest rates in the marketplace. If interest rates rise, as many expect they will, your HELOC could end up costing you more than a mortgage or an equity loan.

For more information on these loans, go to LendingTree.com. For facts on paying for college, go to Finaid.