How to Use a HELOC to Pay for College

Attending college is a major milestone, but paying for it can feel overwhelming. Traditional college financing methods include grants, scholarships, and student loans, but homeowners have the additional option of using a home equity line of credit (HELOC) to pay for college. 

HELOCs, which involve borrowing against the equity of your home, can come with competitive interest rates. However, you risk losing your home if you borrow more than you can afford to pay back. 

In this guide, we’ll explain how HELOCs work, how to use one for college costs, and how this financing option compares to traditional student loans.

How to use a HELOC to pay for college in 5 steps

Using a HELOC to pay for college is an option for qualifying homeowners, but it may not be right for everybody. If you’re interested in this approach, here are five steps to take: 

1. Understand how a HELOC works
2. Assess your eligibility
3. Choose a HELOC lender and apply
4. Get the funds and pay for school expenses
5. Repay the HELOC

1. Understand how a HELOC works

A HELOC lets you borrow money against your house. Most lenders will lend up to 85% of your equity, which is the difference between your home’s value and the amount you owe on your mortgage. Here’s an example: 

Home value	$300,000
Mortgage balance	$100,000
Total equity	$200,000
Maximum HELOC (assuming 85%)	$170,000

Many HELOCs have a 10-year draw period, meaning you can withdraw money as needed for a decade up to the maximum amount available. During this period, you’ll usually only pay interest on what you’ve withdrawn. Interest rates may be fixed or variable. 

Once the draw period is up, you’ll begin making regular principal-and-interest payments to your lender. Because a HELOC uses your home as collateral, failure to make payment could lead to your home being foreclosed.

2. Assess your eligibility for a HELOC

To qualify for a HELOC, you’ll need a decent amount of equity in your home. You also must be in good standing on your mortgage—meaning you’re up to date on payments.

Eligibility requirements vary by lender, but here’s an example of what you need to qualify for a HELOC with our partner Figure:

Requirement	Value
Minimum credit score	640
Loan-to-value ratio	75% – 95%, depending on your credit score
Income	Must be employed, self-employed, or retired
Property	Single-family residences, townhomes, planned urban developments, or condos

You can apply for a HELOC with your mortgage lender, but shopping around can help you find the best pricing and terms. See if you can prequalify for a HELOC without a hard credit check. 

What if the lender doesn’t let me prequalify?

Most lenders will let you prequalify for a HELOC, but if yours doesn’t, proceed carefully. Filling out a complete application might result in a hard credit check, which could hurt your credit score—and make it harder to get a loan.

Before applying, be sure you’re set on the HELOC and the lender you’re applying with. If you’re unsure, you can use an online rate-shopping tool to help compare your options. Reading lender reviews can also help point you toward the best choice.

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Tip

If you’re applying for a HELOC and worried about the impact of multiple hard inquiries on your credit score, keep in mind that credit scoring models often recognize the need to shop for the best rates. For certain types of loans, including mortgages, car loans, and student loans, multiple hard inquiries made within a short period (often 14 to 45 days, depending on the credit scoring model) are consolidated into a single inquiry on your credit report. So, shopping around for the best rates and terms can have a much smaller impact on your credit score than you might fear. However, it’s crucial to conduct this rate shopping within a focused time frame to benefit from this consolidation.

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3. Choose a HELOC lender and apply

After you’ve explored options with multiple lenders, take these steps to choose a lender and finalize your application: 

• Compare interest rates and terms: Finding an affordable HELOC is imperative. Look for one with a low interest rate and fees, as well as repayment terms that work for your budget. 
• Determine how much you can borrow: You may be able to borrow up to 85% of your equity. Calculate your equity by subtracting your mortgage balance from your home’s current value. 
• Fill out your application: Provide your personal and financial details, as well as required documentation. This might include tax returns, a mortgage statement, a property tax bill, and a copy of your home insurance policy.
• Close on your HELOC: The lender will take a few days or weeks to process your application and complete a desktop or in-person appraisal of your home. Some HELOCs come with closing costs, which might amount to between 2% and 5% of your loan amount. 

4. Get your funds and pay for school expenses

After you’re approved for your HELOC, you can withdraw the funds you need. You might pay the school for tuition and fees or use the HELOC for other purposes, such as buying textbooks or decorating the dorm room. 

You can draw from your HELOC as often as you like during your draw period. You may have multiple options for accessing funds, including: 

• Transferring cash into your bank account online or over the phone 
• Using a physical HELOC account card to make purchases or take out cash at an ATM 
• Requesting a check for the amount you need 

Some lenders require you to make a minimum draw on your HELOC, but others don’t have this rule. 

5. Repay the HELOC

In many cases, during your draw period, you’re just responsible for paying interest on the amount you draw from your HELOC, along with any account maintenance fees. If you pay back the full amount, you can withdraw it again until your draw period ends. 

After your draw period ends, you’ll start repaying the principal and interest on your credit line. Because HELOCs use your home as collateral, you must have a plan for repayment from the start. 

Set up automatic payments if possible, or configure calendar alerts leading up to each payment due date.

How does a HELOC compare to student loans to pay for college?

If you’ve prequalified with one or multiple HELOC lenders, you should have cost details to compare with student loans so you can see which financing option is more affordable.

With student loans, you have two options:

1. Federal student loans: These include loans for students and parents, and you can apply for them using the Free Application for Federal Student Aid (FAFSA). It’s wise to max out your eligibility for federal student loans before borrowing a private loan.
2. Private student loans: These loans are offered by private lenders and often come with higher interest rates than federal loans.

If you’re a parent or legal guardian, you can compare your HELOC estimates to a Parent PLUS loan. In the table below, we’ve compared the terms of a Figure HELOC to those of a Parent PLUS loan. 

	HELOC (Figure)	Parent PLUS
Borrowed amount	$15,000 – $400,000	Up to the total cost of attendance, minus any other financial aid
Rates (APR)	8.20% – 16.85% fixed*	8.05% fixed
Repayment terms	5, 10, 15, or 30 years	Up to 25 years
Origination fee	Up to 4.99% of the initial draw**	4.228%

You can create similar comparisons for other loans you’re considering. Use a calculator to determine the potential long-term interest costs. Factor in upfront costs of borrowing, too, such as origination and account fees. 

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Tip

The annual percentage rate (APR) can give you an understanding of the fees associated with a loan, in addition to the interest rate. The APR reflects the total cost of borrowing on an annual basis, including interest and lender fees, including origination fees, closing costs, and other charges. By considering the APR, you can get a more comprehensive view of the loan’s cost, making it easier to compare different loan options.

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Consider student loan repayment benefits 

Federal student loans often have more repayment options than private student loans and HELOCs. They qualify for income-driven repayment plans and hardship options, such as deferment and forbearance. 

In some cases, federal loan forgiveness is an option, meaning you don’t need to repay the remaining balance. This may be true for borrowers who enter a public service field, such as teaching or law enforcement.

Consider the different risks of HELOCs and student loans, as well. Not paying your student loans could hurt your credit score or lead to wage garnishment. HELOCs put your home at risk. If you fail to make payments, your lender could foreclose on the property and remove you from your home.

Should you use a HELOC to pay for your child’s college education?

Using a HELOC to pay for college has pros and cons. Consider both before you borrow. 

Pros

• May have competitive interest rates

  HELOCs may have a lower interest rate than a Parent PLUS or private student loan. 

• Might be able to borrow exactly what you need

  HELOCs are a form of revolving credit, so unless your lender requires an initial draw of more than the amount you need, you can withdraw money as needed. 

• Interest-only payments during the draw period

Cons

• You may get a variable interest rate

  A variable rate could go up or down over time, resulting in unpredictable costs of borrowing. 

• Your house is used as collateral

  The lender could foreclose on your home if you miss HELOC payments.

Before you choose a HELOC or student loan to pay for your child’s education, make sure you’re also on track to meet your own retirement goals.

Our expert’s take

Erin Kinkade

CFP®

I don’t think a HELOC is a terrible idea, but with so many other options to fund college, I think it should be a last resort. I suggest always maximizing federal loans first in combination with using 529, Coverdell, or other savings and investment accounts earmarked for a child’s education. If you start planning early enough, families can plan on the savings they need or the cost of education they may need to limit their child to (for example, in-state public versus private school, out-of-state, or Ivy League). I understand some parents and guardians are set on paying for all education costs and not letting their children enter the workforce with debt, and I recommend managing and understanding this preference. This is an example of when using a HELOC may be the best option as long as the borrower understands the considerations and consequences surrounding HELOC. This is a situation where they could lose their home, whereas a Parent Plus or other unsecured loan would far reduce that risk.

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What else can a HELOC be used for?

Is using a HELOC to pay for college right for you?

This option could be right for you in specific instances. But before applying for a HELOC, make sure your child submits the FAFSA. This free application will put them in the running for financial aid, such as grants and work-study. Applying for scholarships can also help them earn gift aid for school. 

If you need additional financing, compare using a HELOC with a federal or private student loan to see which is the more affordable borrowing option. Avoid borrowing a HELOC if your finances are tight or your income is unstable. This could put your home at risk of foreclosure. 

Consider, too, that student loans may come with a wider array of repayment options and qualify for the student loan tax deduction of up to $2,500 (even if you use the standard deduction). By contrast, HELOC funds don’t qualify for a tax break unless you use them on qualifying home renovations and itemize your deductions rather than using the standard deduction.

You want to find the financing approach that has the lowest costs of borrowing and is suitable for your situation. By comparing the pros and cons of all your options, you can make the right financial decision for you and your family.