Should You Use a Home Equity Loan to Pay for Education?

If you’re going back to school to study something you love or sending your kids off to university or college, this is an exciting time! It can be thrilling to embark on a new adventure in education. But if you’re intimidated by tuition costs, you’re not alone. The joy of qualifying for post-secondary education is followed by financial concerns for many people. You might have experienced a wave of pride upon hearing that your children were accepted to their top university –– followed by a wave of “uh oh, how will we pay for this?” Let’s look at options.

The financial impact of student loans in Canada

You’ve likely taken out loans before, or used a credit card or line of credit. But your home can also be a great resource when you’re sleuthing for ways to fund education. You may be able to use your home equity to help pay for school for yourself or your family. But before you look into using home equity to pay for school, let’s explore the cost of tuition and grant options you may be eligible for. So take a deep breath and let’s get acquainted with the facts.

How much does tuition cost in Canada?

For undergraduate programs, the average cost of tuition is $6,693 for the academic year, and $7,472 for graduate programs. Secondary education is one of the bigger investments that Canadians make in their lifetime, and many students leave college or university with large debts. Overall Canadian undergraduate and graduate students are paying higher tuition costs this year –– up 1.7% from the 2020-2021 school year for undergrad programs, and up 1.5% for graduate programs. This rise is steady and comparable to the one from the year before. Some provinces didn’t see that rise in tuition costs; Ontario, Newfoundland and Labrador saw the same undergraduate tuition fees as they did last year. 

If you’re thinking ahead to what you’ll pay for your kids, consider how current trends will impact future tuition if they continue. Students starting a university education in 2032 should expect to pay over $100,000 for a 4-year degree. 

Is the high cost of secondary education worth it? 

A valid question. Studies show that in general, having a university or college education does pay off. Having a post-secondary degree results in higher earnings, a lower chance of layoffs, and a longer pension plan. But the immediate costs are high; most students leave their post-secondary programs with a debt of $25,000 or more. It’s undeniable that these are staggering costs, and out of budget for most Canadians. Let’s explore how you can afford to get the education you want with the least amount of debt.

Student loan and grant options for Canadians 

There are benefits to being Canadian beyond our great healthcare, cultural diversity, delicious Timbits, and beautiful landscapes. Canadians can also access a trove of programs for tuition funding for each province and based on specific needs. Do your research before you decide to dip into savings or revert to home equity. Grants are funds that you don’t have to repay, and loans may be available with a lower interest rate than you’d find from a financial institution. Here are a few student loan and grant options for students in Canada to explore.

Apply for funding through The Canada Student Financial Assistance (CSFA) Program

Here’s a basic starting place for anyone strapped for tuition cash. This program lets you apply for several grants and loans through one office. Use the handy student aid estimator to see how much you might qualify for based on your income, demographics, and other requirements. The National Student Loans Service Centre (NSLSC) can answer questions through their online chat function as well. If you’re attending school in Quebec, the Northwest Territories or Nunavut, these territories all have their own student loan programs outside of the system for other Canadian provinces.

Look for funding programs specific to your province, city, and school

Start where you live. Each province has specific grants and loans available to residents. Use the Government of Canada’s student loans and grants list to find the relevant loans and grants for your province. Ontario has the Ontario Student assistant program (OSAP), British Columbia offers SABC, and other provinces have programs like Alberta Student Aid, and Manitoba Student Aid. Once you’ve explored these options, look into programs that your specific program or school offers. Most universities offer emergency grants (like this one at the University of Toronto) for students who experience unexpected hardships or health concerns. Ask your guidance counsellor or call the school to ask about programs or grants that you might not see online.

Get specific and make your search personal

Here’s where your googling skills come in handy. Private grants, non-profit organizations, and special loans are independently available to some students based on their needs, demographics, special needs, and abilities.

Can a home equity loan be used for college or university?

Great news, yes! A home equity loan can be used for college or university tuition. Depending on your eligibility, a loan based on home equity, or a Home Equity Line of Credit (HELOC), can be a good alternative to the student loan or grant funding options above. Even if you qualify for funding, you might not be eligible for your full tuition costs and may need to borrow more money to pay for school. HELOC’s are popular in Canada, and account for around 17 percent of Canada’s biggest banks’ mortgage books in 2020. The equity of your home can be a useful tool, but it’s important to understand the nuances of borrowing against your house. Before we dive into whether it makes sense for you to use a home equity loan for your tuition, let’s first better understand what home equity is and whether it’ll affect any other financial aid options you might want to apply for.

What is home equity?

Home equity is calculated by subtracting the amount you still owe on your mortgage, from the property value of your home. So if your home is worth 500,000 and you still owe 200,000 on your mortgage, your home equity is 300,000. Home equity fluctuates based on the market value of your home and how much of your mortgage you pay off. 

Does a home equity loan affect financial aid?

For many programs, your home equity loan won’t impact the money you’re receiving because your monthly income, aid requirements, and assets remain the same. For other aid programs, you might be asked to disclose information that a loan does impact. The kind of financial aid you’re receiving will affect whether your home equity loan impacts your eligibility. Each financial aid program has specific requirements that may be financially rooted, performance-based, or health-related. Ask your financial advisor to explore the specifics of your loan and the kind of aid you want to apply for, or keep receiving.

Should I use a home equity loan for my tuition?

Home equity loans can be a good fit for education costs because they allow you to take out a large sum of money with low interest. But whether a home equity loan is right for you depends on your home value, your financial standing, and how much of your mortgage you’ve already paid off. It’s important to remember that you could lose your home if you aren’t prepared to make payments, so wise financial planning is imperative. Ask yourself these questions:

  • How will you pay off the debt? 
  • How long will it take to pay back the money you’re borrowing? 
  • Do you still have time for the lifestyle you love and the debt payments you’ll need to make? 
  • Are you or your partner starting a business or other endeavour that will require other surprise costs
  • Could you cut costs in other areas to prioritize paying off tuition debt?

Take time to create a payment plan and schedule a chat with your financial advisor so you know exactly how long it will take you to pay off your student debts. You’ll also want to plan for surprises and extra costs like legal fees, appraisal fees, and bank fees.

Pros of home equity loans

Home equity loans typically have lower interest rates than other types of loans, and you’ll only need to apply once to qualify. It’s easy to utilise this credit once you’ve accessed it, and you’ll only pay back interest on what you borrow. If you’re looking to consolidate debts so they’re all in one place, you may be able to use this line of credit to pay off existing debts more effectively and at a lower interest rate. 

Cons of home equity loans

You may not qualify for a home equity loan, and not all banks and financial institutions offer home equity loans. You’ll also need a decent credit score, consistent proof of income, and a reasonable debt balance. You may remember doing a “stress test” when you initially qualified for your mortgage; this is standard for most major Canadian banks and requires that you’re able to afford payments at an interest rate that’s higher than your contract. When you purchased your home, you had to prove your financial viability and any debts you’ve accumulated since then or changes in employment could impact how risky the loan feels to your lender.

Because you’re only paying monthly interest, it can be easy to accumulate large debts with this kind of credit –– so use online tools to strategize. 

How to get a home equity loan to pay for your tuition

Okay, but how does your house help pay school bills? Your home equity can help you pay for tuition in a number of ways. By refinancing your home, you may be able to borrow up to 80% of your home’s appraised value. Refinancing involves weighing your existing loans and mortgage balance against the value of your home. Based on this, a lender might allow you options like a credit line or second mortgage that are secured against the value of your property. If you’re shopping for loans or mortgages, make sure you compare rates and ask questions to secure the best rate for your situation. 

A Home Equity Line of Credit (HELOC) 

A HELOC is similar to other lines of credit and operates with a set limit. You can take out money as you need it, pay it back, and borrow more with the value of your home acting as collateral. Easy peasy. Interest rates go up or down based on the market, so make sure you’re considering how these changes could influence what you owe. This line of credit may be combined with your mortgage, or it might be a stand-alone account that you qualify for because of the value of your home. In general the credit limit on a HELOC goes up to 65% of the value of your home or property. 

A second mortgage

When you get a second mortgage, you’ll be paying off your existing mortgage and this second loan too. Interest rates are typically higher with this kind of loan because this is more of a risky deal (for both you and your lender). If you were to default on this type of loan, you’d lose your home and it would be sold to pay off your loans in order. The mortgage lender would be paid off first. 

How else can I pay for my tuition?

You don’t have to do this alone. A financial advisor can help find solutions to fund your education or to save for your children’s tuition

  • If your kids are young, start by paying off your highest-interest debts and creating a savings plan where small amounts are automatically deducted from your account.
  • Involve the whole family in the process of saving for their own tuition with resources like Mydoh –– where kids can learn to save, spend, and practice smart money management. 
  • Use online tools to find extra money in your cash flow that could be put aside.
  • Solutions like Registered Education Savings Plans (RESPs) are a great way to build up savings; the Canadian government matches 20% on the first $500 you put in annually through the Canadian Education Savings Grant (CESG). 
  • Financial resources especially for students  — like a student line of credit — could also offer you a way to pay off your tuition consistently over time and Tax-Free Savings Accounts (TFSA) are a great tool for tax-free investments. 

There are many options available to you when it comes to finding funds to pay for education. The important thing is to make sure you stay on track with your financial goals and do what’s right for you and speak with experts who can give you the best advice.

This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.

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