Student loans are often the go-to choice for families who need help paying for a child’s college education. But as you put together your financing plan, you may find there are other options worth considering — including using a home equity line of credit, or HELOC, to cover some college costs.
Both types of borrowing have advantages and disadvantages that may influence your decision to use one or both to pay for school. Read on for a look at student loans vs. HELOCs, and how each can be used to help with your family’s educational and financial goals.
What Is a HELOC?
A home equity line of credit, or HELOC, is a revolving line of credit provided by a private lender and secured with the equity you have in your home.
HELOCs are sometimes confused with home equity loans, but they are not the same thing. Because a HELOC is a line of credit, you pay interest only on the amount of money you’ve actually borrowed. Payments can vary from month to month, and as you replenish the account by making payments, you can borrow from it again. With a lump-sum home equity loan, a borrower receives all the money upfront and pays interest on the entire loan amount from day one.
A HELOC can be used to pay for just about anything — including tuition, books and supplies, housing, transportation, and other college expenses. But because the line of credit is secured with your home, if you fall behind on your payments, you could risk foreclosure. And should you decide to sell your home, you may be required to repay what you currently owe.
Recommended: Different Types of Home Equity Loans
What Are Student Loans?
Student loans allow students and, in some cases, their parents, to borrow money to pay for a college education. Here’s how the two main types of student loans work:
Federal Student Loans
There are a few different types of federal student loans, and each has its own rules when it comes to how much you can borrow and how the money is repaid. But generally, they offer lower interest rates than many other types of loans and include more protections for borrowers, including temporary relief programs in case of financial hardship, and even the potential for loan forgiveness.
To apply for federal student aid, you must submit the Free Application for Federal Student Aid (FAFSA®) form. If you qualify for assistance and accept what’s offered, the school will apply your federal loan funds to your outstanding account charges (tuition, fees, etc.). Whatever is left after that will then be turned over to you to use for other educational costs.
Private Student Loans
Private student loans are issued by nongovernment lenders, such as banks, credit unions, and other financial service companies. Because they aren’t backed by the federal government, these loans do not offer the same repayment options or safety-net protections as federal loans. So, if your family (student and/or parents) qualifies for federal student loans, you’ll probably want to tap those first. However, if you’ve exhausted your federal financial aid and require additional funds, you may find you can get the help you need by borrowing through a private lender.
Key Differences Between a HELOC and Student Loans
While you may decide to use federal or private student loans, a HELOC, or all three types of financing to help pay for a college education, it’s important to be aware of some key differences in how they work.
Interest Rates
• Federal student loans are usually the way to go for borrowers who are looking for the lowest interest rates available. These loans come with a fixed interest rate that is set by the government, so once you sign on the dotted line, you can expect to pay the same rate for the life of the loan. But different types of federal student loans have different interest rates, and the way interest starts accruing on these loans also varies. If you have a subsidized loan, for example, you won’t accrue any interest while you’re in school, for six months after you leave school, or during any deferment. The U.S. Department of Education pays the interest during these periods. The interest on an unsubsidized loan starts accruing immediately, however, and it is the borrower’s responsibility.
• Private student loans are generally available with a choice of a fixed or variable interest rate, but these rates, which are set by the individual lenders, can vary quite a bit — so it can be a good idea to shop for the most competitive offer based on your creditworthiness and other qualifications.
• HELOCs have a variable interest rate, which means the rate can fluctuate over time. This could be good or bad, depending on which way interest rates are going. If rates drop, the borrower could benefit; but if they rise, it may make it harder to keep up with the payments. Still, because a HELOC is secured with your home, the interest rate may be lower than with other types of unsecured borrowing, such as personal loan or credit card. And because it’s a line of credit and not a lump-sum loan, you’ll only be charged interest on the amount you’ve actually borrowed.
Recommended: Student Loan Interest Rates Guide
Fees
• Federal student loan borrowers are often surprised to learn they’ll be expected to pay an origination fee on each loan they receive. Origination fees are currently 1.057% for federal subsidized and unsubsidized loans for undergraduate and graduate students, and 4.228% for federal PLUS loans for parents and graduate students. The lender who is servicing the loan also may charge a fee if a payment is more than 30 days late.
• Private student loan fees also can vary based on the lender you choose. Some may charge an origination fee or fees for late payments, while others, including SoFi, have zero fees on student loans.
• HELOC fees can vary depending on the lender, but they often include an application/origination fee, notary fee, title search, appraisal fee, credit report fee, document prep fee, and recording fee. There also may be an annual maintenance fee, and charges for early termination or account inactivity.
Repayment Terms
• Federal student loans offer the most repayment options for borrowers, including a fixed payment plan that ensures loans are paid off within 10 years and income-driven plans that base your monthly payment on your earnings and your family size. Some borrowers also may be able to have a portion of their loans forgiven. And those who have multiple federal student loans may choose to consolidate them into a single Direct Consolidation Loan. Another plus: Student and parent borrowers may be eligible for a deferment period if they become unemployed, experience an economic hardship, or serve in the military.
• Private student loans have different repayment terms depending on the lender, and can often be repaid over a period of 10 to 15 years or longer, usually starting six months after graduation. There is no loan forgiveness with a private student loan, but some lenders, including SoFi, may offer borrowers a student loan deferment period that’s similar to what some federal loans offer. However, you can expect your loan to continue accruing interest during this time.
• HELOC borrowers usually are required to make at least a minimum monthly payment during their account’s “draw” period. When the draw period ends — typically after 10 years — access to the line of credit ends and the lender sets up a repayment schedule based on the balance owed.
Credit Requirements
• Federal student loan borrowers who are undergraduates don’t have to worry about passing a credit check as part of their application process — and they don’t need a cosigner to get a loan. Though parents and graduate students do have to pass a credit check to get a federal loan, there’s no required minimum credit score.
• Private student loan lenders may have different credit requirements, but all borrowers (including undergraduates) should expect to go through a credit check. Lenders generally will be looking for a solid credit history, a good-to-excellent credit score, and other factors that show the borrower — alone or with the help of an eligible student loan cosigner — has the ability to repay the loan.
• HELOC credit requirements can vary, but typically lenders require that you have at least 15% to 20% equity in your home, a healthy debt-to-income ratio that shows you can afford to take on the added debt load, and a credit score that indicates you can reliably repay the money you owe.
Tax Deductibility
• Federal student loan interest payments can qualify for a tax deduction of up to $2,500, as long as you used the loan to pay eligible higher education expenses for yourself, your spouse, or a dependent. And you don’t have to itemize deductions on your return to get the tax break: The interest you pay is considered an income adjustment, so there’s no separate form to fill out.
• Private student loan interest payments qualify for the same tax deduction as federal student loans, with the same requirements.
• HELOC borrowers can only claim their interest payments as a deduction if they used the borrowed funds to “buy, build, or substantially improve your home.” Interest paid on money used for college doesn’t qualify for a tax break.
Borrowing Limits
• Federal student loans have different borrowing limits based on the loan type and your student status (undergraduate or graduate) or if you’re a parent.
• Private student loan limits can vary by lender; there is no set borrowing limit as with most federal loans. However, the maximum amount you can borrow may be based on your school’s estimated cost of attendance minus any other forms of financial aid you receive, your creditworthiness, and other factors.
• HELOC lenders typically will allow you to tap into your home equity for 85% or more of your home’s current appraised value minus the amount you currently owe, So, for example, if your home is valued at $350,000 and you owe $250,000, you might qualify for a HELOC that’s $47,500 ($350,000 x 85% = $297,500 – $250,000 = $47,500).
Alternative Options
Although a HELOC can be used to pay for college — especially if you find you need more money than you can get in student loans — there are other options that could help your family manage education costs.
Scholarships and Grants
A wide range of scholarships and grants are available to students who are willing to take the time to do some research and apply. And this type of financial aid, which can come from private organizations, colleges, and other sources, doesn’t have to be repaid.
Work Study or a Part-Time Job
A work-study program or part-time job can also help pay some college costs. A student can check with the financial aid office at his or her school to learn more about participating in federal or state work-study programs. And local businesses like coffee shops, restaurants, retail stores, and markets often hire college workers to help out at night and on the weekends.
529 Plans
If your student is still a few years away from attending college, you may want to look into a state-sponsored 529 college savings plan, also known as a qualified tuition program. These tax-advantaged plans offer parents and others an opportunity to save ahead for a family member’s college expenses.
The Takeaway
Using a HELOC vs. student loans to pay for college has advantages and disadvantages. Because you only have to pay interest on the amount you actually borrow, a HELOC can be an affordable alternative, or addition, to lump-sum student loans. And since your home is used as collateral with a HELOC, the interest rate may be lower than with some other borrowing options. Of course, this also means you could lose your home if you can’t make your HELOC payments.
You may want to exhaust any federal financial aid for which your family is eligible — and check out potential private student loan offers — before turning to a HELOC for help. Federal student loans offer borrower protections you can’t expect with a HELOC, and you won’t be putting your home at risk.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
FAQ
Can I use both a HELOC and student loans?
Yes, if the federal financial aid for which you are eligible doesn’t cover all your college costs, you may choose to combine a HELOC with both federal and private student loans. You may want to compare all your options before moving forward, however, and it may be helpful to make a plan for how you expect to use and repay the money you borrow.
Does the interest rate on a HELOC vary?
Yes, a HELOC comes with a variable interest rate, which means the interest rate you pay could fluctuate based on movements in the underlying benchmark interest rate or index.
Are student loan interest rates fixed?
Federal student loans have fixed interest rates, so you’ll pay the same rate for the life of the loan. Private student loans may be offered with a choice of a fixed or variable interest rate.
Can you use a HELOC to pay off student loans?
If you can qualify for a lower interest rate, you might consider using a HELOC to pay off your student loans. But it’s important to keep in mind the upfront and ongoing costs that come with a HELOC — and you’ll lose the tax deduction you receive for the interest paid on your student loans. You’ll also lose the protections that student loans offer borrowers, and you could put your home at risk if it turns out you can’t make your HELOC payments.
Photo credit: iStock/andresr
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SOIS-Q224-1926316-V1