The U.S. Department of Education looked at annual tuition increases and discovered that the average increase between 2008 and 2010 was 15 percent. The increases were driven partially by inflation, but they are also the result of reduced spending at the state level. When state universities see a drop in their funding from the government, they must look to the students to make up the difference.
In this time of rising college costs, you may be wondering how you will pay for your children to attend a university. One option is to tap your home equity to help cover the expenses. This is a viable option, but you should be aware of the pros and cons before making the commitment.
Sell or Take a Second Mortgage
If you have been considering downsizing your home, then you might be able to cover tuition with the profit from your existing home. Before making the decision, be sure to take into account the cost of your mortgage on the new home, and make sure that you consider tax implications. Current laws allow you to sell your primary residence of at least two years without paying tax on up to $500,000 in profit. However, your tax write-off will be smaller in the new home. You also won’t add any new tax write-offs to the tax plan.
If you were not in the market to sell, then a second mortgage is a better option. There is generally less paperwork involved, and the process is a lot easier than selling the home and moving. You will also benefit from being able to write the interest for the loan off on your taxes.
Easy and Convenient
The greatest benefit of taking a second mortgage is that they are easy to get and convenient. Most banks won’t even require an appraisal of the property, and you can have the funds in the bank in just a few days. The interest if generally tax deductible as long as the loan is less than $100,000.
The Downsides to Using Your Home to Finance College
There are some downsides to using your house to finance college. The first is that you are literally putting your home on the line. If something happens and your income drops, will you still be able to make that payment? If you are unable to cover both mortgages for any reason, you could wind up losing your home.
The interest on student loans is deductible, but second-mortgage interest won’t always qualify. If you generally have to pay the AMT, then the interest on your home-equity loan may not be deductible. The interest rates are also usually variable, and that can wind up costing you more money over the years as the markets fluctuate.
The fact is that there are other ways to finance your child’s college experience. Grants and scholarships will help your child get through school, and there are college loans you can take out as a parent. With these plans, you don’t have to look to the equity in your home to cover college. While this can be the right move in some cases, you should consider the alternatives before making this important decision.
About the Author: Jay Barry is a writer who likes to use Net Loans when an unexpected expense comes up.
