Overview

Tapping home equity to pay for college, graduate school, or other education costs is common because it often yields lower interest rates than many private student loans or credit cards. But converting housing wealth into education funding replaces unsecured education debt with secured debt backed by your home — and that changes the risk profile dramatically. This article explains how the options work, current tax and regulatory realities, the most important risks, when it can make sense, and safer alternatives you should compare.

How home equity borrowing works

There are three primary ways homeowners use home equity for education:

  • Home equity loan (second mortgage): A lump sum at a fixed rate, repaid in fixed monthly installments.
  • Home equity line of credit (HELOC): A revolving credit line you draw against during a set draw period; rates are often variable and tied to an index such as the prime rate.
  • Cash‑out refinance: Replacing your current mortgage with a larger mortgage and taking the difference in cash.

Lenders set combined loan‑to‑value (CLTV) limits (commonly 80% or 85% CLTV, sometimes higher), and credit, income, and property‑type affect how much you can borrow. HELOCs typically have variable rates and may include upfront costs or annual fees; home equity loans have fixed rates but may carry higher closing costs than small personal loans.

(For details on differences and when each fits, see FinHelp’s guide on HELOC vs home equity loan: https://finhelp.io/glossary/heloc-vs-home-equity-loan-explained-uses-costs-and-tax-considerations/.)

Tax treatment you should know (short version)

Many readers assume the interest on a home equity loan used for education is tax‑deductible. Under the Tax Cuts and Jobs Act (TCJA) rules that remain in effect through 2025, interest on home equity debt is only deductible if the loan proceeds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan (see IRS Publication 936). Interest on a home equity loan used to pay college tuition is generally not deductible as home mortgage interest. Separate student loan interest rules apply to bona fide student loan debt, and that deduction is distinct from home mortgage interest rules (see IRS: Student Loan Interest Deduction).

Sources: IRS Publication 936 and IRS student loan interest guidance (irs.gov).

Key risks — why many advisors hesitate

  • Foreclosure risk: Home equity debt is secured by your house. Failure to pay can lead to foreclosure (Consumer Financial Protection Bureau guidance on HELOCs and borrower protections).
  • Variable rates: HELOCs often reset with market indexes; payments can jump when rates rise.
  • Market risk and negative equity: A home price drop can leave you with high CLTV or underwater status, reducing refinancing options.
  • Opportunity cost: You reduce a key reserve (your home’s equity) that you might need later for emergencies or retirement.
  • Effect on financial aid: Borrowing against a parent-owned home can affect future financial aid calculations for students, depending on how funds are distributed and reported.

When it can make sense

Using home equity for education may be reasonable in limited situations:

  • You can secure a fixed‑rate home equity loan at a lower rate than available private student loans and you can comfortably handle the monthly payment.
  • You need a short bridge (e.g., a HELOC draw) and have a reliable plan to replenish the line once other funds arrive.
  • The borrower is a parent with substantial home equity, near retirement with a clear plan for repayment that won’t jeopardize housing security.

In my practice, I’ve seen homeowners successfully use a HELOC as a temporary bridge while awaiting scholarship or loan disbursements. But those cases succeeded because we limited the borrowed amount, stress‑tested the household budget for rate increases, and documented a repayment plan.

Alternatives to consider first

Before putting your home at risk, compare these alternatives:

  • Federal student loans for students: Fixed rates and income‑driven repayment plans or forgiveness options may make federal loans a safer primary choice (U.S. Department of Education, studentaid.gov).
  • Parent PLUS loans: Larger borrowing capacity for parents, though at higher rates than many home equity options; federal repayment protections are available.
  • Private student loans: Vary widely; shop for competitive APRs and terms, and compare to home equity offers.
  • 529 plans: Tax-advantaged college savings; if you have one, use it before borrowing against your home.
  • Scholarships, grants, work‑study: Always exhaust free money first.
  • Personal loans: Unsecured personal loans avoid putting your home at risk, though rates may be higher.
  • Cash‑out refinancing focused on getting a lower mortgage rate while raising cash (compare to home equity options — see FinHelp’s cash‑out vs home equity comparisons: https://finhelp.io/glossary/cash-out-refinance-vs-home-equity-loan-pros-and-cons/).
  • Employer tuition benefits, military education benefits, or school payment plans that defer costs without high interest.

How to compare borrowing options

Use an apples‑to‑apples approach:

  1. Compare APRs (include fees) not just the nominal rate.
  2. Check repayment terms (fixed vs variable, draw period, amortization period).
  3. Stress‑test your budget: What if rates rise 2–4 percentage points? Can you still pay?
  4. Consider the non‑financial cost: losing your home is catastrophic compared with a late student loan payment.
  5. Ask whether the lender requires an appraisal or has prepayment penalties.

A simple worksheet: list options, monthly payment, total interest over a 10‑ or 20‑year horizon, and risk level (secured vs unsecured).

Example calculation (illustrative)

Assume you need $40,000 for two years of tuition.

  • HELOC: Variable rate currently around prime + margin (example APR 6.5% — variable). If you draw $40,000 and amortize over 10 years, payment ≈ $455/mo (variable).
  • Private student loan: Fixed APR 8.5%, 10‑year amortization → payment ≈ $494/mo.

The HELOC looks cheaper, but if the HELOC rate rises to 9%, payment becomes roughly $484/mo and your total interest cost can exceed the private loan, plus you now face foreclosure risk. Always run sensitivity scenarios.

Note: Rates vary by credit score, loan size, and LTV.

Practical strategies and professional tips

  • Limit the amount you borrow against the home; treat it as last‑resort collateral.
  • If using a HELOC, consider converting the balance to a fixed‑rate loan before the draw period ends.
  • Keep an emergency reserve outside of home equity for cash flow shocks.
  • Document repayment sources (student income, future salary, other savings) so lenders and you have a realistic plan.
  • Talk to the school’s financial aid office about timing or additional institutional aid before borrowing.

Frequently asked questions

Q: Is interest on a home equity loan used for tuition tax‑deductible?
A: Generally no. Under current rules, home mortgage interest is deductible only when proceeds are used to buy, build, or substantially improve the home that secures the loan. Using equity to pay tuition typically does not meet that requirement (IRS Publication 936). Consider the student loan interest deduction rules instead for genuine student loan debt.

Q: Can I use a 529 plan instead of borrowing against my home?
A: Yes — 529 assets are intended for education and have tax advantages. Withdrawals used for qualified education expenses are tax‑free; they should be a top consideration before using home equity.

When to get professional help

If you’re considering borrowing more than a modest amount, run the scenario with a certified financial planner or tax advisor. Ask for a cash‑flow stress test, an estimate of tax impacts, and how borrowing affects retirement plans.

Disclaimer

This article is educational and not personalized financial or tax advice. Tax rules and lending practices can change; consult a qualified tax advisor, financial planner, or your lender for advice specific to your situation.

Sources and further reading

If you’d like, I can build a downloadable comparison worksheet or walk through a numeric scenario with your real numbers to show which option looks best for your household.