Parents Are Relying Less on Home Equity to Pay College Costs
Despite rising levels of home equity, families are relying less on the wealth they are building in their homes to pay the costs of students currently attending college. With other options available, few families seem willing to risk their homes with home equity loans or cash-out refinancing to pay college costs.
Families are borrowing less money, both federal financial aid and private debt, to pay their children’s college expenses than they were five years ago despite the high cost of college, which averaged $23,688 a year per student in 2016. Borrowed money, including student loans and loans from parents, totaled only 20 percent of college costs in the 2015-2016 school year, compared to 27 percent five years ago.
Private borrowing to pay for college costs as a percentage of families’ total contributions, including home equity loans, has changed little over the past five years. In 2015-16, it accounted for only 7 percent of how typical families pay for college, up from 6 percent in 2014-2015. Most parental borrowing Federal PLUS Loans or private education loans.
Even the average homeowner gained $12,500 in home equity from October 2015 through September 2016 and some 93.7 percent of all mortgaged homes had positive equity by October 2016, only 1 percent of parents used home equity loans (HELOCS)to pay the costs for a child to attend college in 2016.
Using it as collateral for a loan is only one way to access equity. Another is to refinance an existing mortgage and “cash out” a portion of the accumulated equity. A homeowner with a college-bound high school senior and a house worth $350,000 with a $200,000 mortgage, can cash-out refinance for up to 80 percent of that $350,000 value and get close to $80,000 to help pay those tuition costs. Of course, the new $280,000 mortgage will come with a higher monthly mortgage payment but it will be significantly less than a student loan payment and it may be tax deductible.
Cash-out refinances have been booming. Homeowners tapped $22.6 billion in equity via cash-out refinances in Q2 2016, largest sum since Q2 200. That works out to about $65,000 in equity tapped per borrower. Yet there’s no evidence that this cash is contributing to a boom in expenditures in college costs. In fact, A smaller percentage of families are contributing more to pay for college costs in 2016 than 2015.
With other options like tax-deferred college savings plans available, parents may be more conservative about refinancing to pay tuition costs. Many experts generally caution against cash-out refinancing, which lowers equity and makes homeowners more vulnerable to default. Exceptions are to refinance to remodel, which improves house values, or to pay off high-interest debt, which saves money. With interest rates rising, cash-out refinancing is expected to slow considerably and use or equity to help with colleges costs may decline even more.
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