Should I pay for child’s student loans by refinancing my mortgage?
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UPDATED: Mar 12, 2012
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Refinancing a mortgage is a great way to reduce monthly payments and save some cash. If refinancing more than one needs to pay off an original mortgage, homeowners can secure extra cash for large expenditures. If considering a refinance to pay for a child’s student loans, though, one should proceed with caution.
A cash-out refinance is the type that extracts equity from a home and leaves borrowers with extra cash on hand. But when prospective college-goers apply for federal student loans and student aid, the government looks at their parents’ income and savings to establish what’s called the “expected family contribution.” The higher that number, the less aid a student will qualify for—and a cash-out refinance will raise that number.
If a homeowner is considering such a refinance, they likely have equity existing in their property. If that’s the case, they may consider the alternative means of extracting money from a home called a home equity line of credit (HELOC). HELOCs allow homeowners to establish a line of credit, but that line does not need to be tapped until cash is needed. Consequently, that line of credit is not considered cash until an amount is extracted, so it is not incorporated into the expected family contribution calculation. Homeowners’ with a HELOC will find their children more likely to acquire better student loans and student aid.
A final consideration to take into account is to be very careful leveraging something as important as home equity on a child’s student loans. As a bankrate adviser warns, “[Your child] may be able to count on you for college, but are you going to be able to count on her for your retirement?”
Such a statement may sound contrary to good parenting and the sacrifice that comes with it, but financial responsibility begs of parents to at least entertain such a thought. With the job market the way it is, dropout rates, and student loan default rates as high as they are, equity leveraged on a child’s future may be a gamble too risky for some to feel comfortable with.
Instead, a better move may be to begin saving for a child’s future student loans when they’re very young. That way parents’ futures can continue being secured by their equity, while their children can still attend college with some parental help.