Home Equity Loan Equals Affordable Education
After 18 years, Kate Hoy of Phoenix was sick of her career as sales representative for company that sold electrical and mechanical components. She was ready for change.
But the single mother didn't have a spouse's second income to help her through a transition period. So to help explore the options, Hoy, 48, took out a home equity line of credit (HELOC) for $50,000 while she still had a steady income. Unlike a traditional home equity loan, which is a one-time lump sum loan usually at a fixed rate, a HELOC is tapped only when bills are paid, like the line of credit on a credit card. With a HELOC, the interest rate fluctuates month to month.
What also made a HELOC attractive to Hoy was she was able to finance her life change without knowing exactly where she was headed. Most school loans were not an option due to Hoy's income at the time she opened her HELOC.
She soon began attending night classes at Scottsdale Community College. The film program caught her interest, and she became a full-time student in fall 2005, graduating with a motion picture and television associate's degree in 2008.
"I opted to go to school full-time, and the loan made it possible," says Hoy. "I couldn't have made a better decision."
Now Hoy is a multimedia video producer for Arizona Department of Health Services E-Learning Team and building her own production business on the side.
Despite the housing slump, home equity loans remain a popular option for paying education costs, since the interest is tax deductible and "the rates are unbelievably low," says Hoy, whose rate adjusts monthly between 3 percent and 4 percent. Still, some families are not comfortable putting their home at risk to foot the bill for college or grad school.
Another concern is that the interest rates on most home equity loans and lines of credit are higher than the rates on federal loan programs such as a Stafford or PLUS loan. However, home equity rates are generally lower than those on most private education loans.
Lastly, using a home equity loan to pay for college will lower a student's eligibility for financial aid, since proceeds from a home equity loan that aren't used for tuition will be factored into the need-analysis formula. Opening a home equity line of credit eliminates this concern because the line of credit is tapped only when paying bills.
As with any other loan for education, it is important to reconsider all costs. Hoy has 10 years to repay her HELOC, which she says is currently tapped out. Though her current income hasn't yet caught up to what it was in her previous career, she is confident she will be able to pay off the loan with her new vocation. But the educational experience her home equity loan provided is priceless.
"I had never gone to school full-time before, I had always worked," says Hoy, clearly pleased by her accomplishment. "It was awesome."