Home equity isn’t paying for college?

I have three years until my first kid heads for college and I just assumed I’d be relying on the (remaining) equity in my home to pay for a big chunk of the tuition.

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I’m rethinking that now after looking at surprising survey data showing home equity isn’t the college financing tool I thought.

The report by Sallie Mae, the national college finance organization, shows home equity makes up only a sliver of the resources used by families to pay for higher education.

Middle-income families used home equity in slightly greater amounts than high-income families. Yet, overall, home equity only paid for 3 percent of the typical middle income family’s college cost.

That’s really surprising to me. For many Americans, their homes represent their largest single asset and so be the likely means to finance a huge purchase, like college.

But it’s not the case. Here’s a breakdown from Sallie Mae’s survey data (click on the chart for a larger view).homequity2.JPG

Scholarships and parent income are paying for college at levels higher than I expected. The report also notes, “Despite another year of sharp increases in college costs, more than half of families continue to pay for college without borrowing.”

For those who do borrow, here’s a breakdown of the parent borrowing piece (click for a larger view).

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My first thought was that home equity is a small chunk now because equity’s taken such a huge hit the past few years. Many people don’t have any home equity left to spend for their kids’ college.

And yet, Sallie Mae said the use of home equity credit grew this year compared to 2009.

The good news, I suppose, is that there are a lot more options beyond home equity and massive student loan debt to pay for college. Many families are cash-flowing a lot more college expense than I realized, which is encouraging and scary to me at the same time.

How are you paying for college? Doing anything creative or unusual? We know that families who’ve been hit hard by the recession are asking colleges to boost financial aid.

My colleague Tim Post reported this week that more grandparents are picking up the tab.

His report sparked a cool Facebook debate on whether students are working hard enough to pay their own way.

What’s your plan? Post something below or drop us a line and share your knowledge.

  • John O.

    Our youngest is a freshman at a private college in Washington State (we dropped him off last week).

    Like others, his grandparents are helping with covering a portion of his costs. Scholarships that he earned for athletics and academics are covering the vast majority of his tuition and fees. He understands that it is now up to HIM to maintain and retain those scholarships in subsequent years through hard work and good grades.

    The only advice I can offer is to encourage your child to excel in the classroom over the next three years. Also consider that while private colleges have higher tuition, they often offer higher scholarship amounts to offset the cost.

  • Paul / MinnEcon

    John, thanks. Good advice, especially about private schools.

    Our son may want to go to a public college outside Minnesota. If that’s the case, I think we’d want him establishing residency first. Paying a high out of state tuition at a college offering less financial aid than a private school seems like the worst of both worlds.

  • John O.

    The other issue I would be watching if I had a child considering attending a public college in another state is that state’s budget situation.

    As I recall, only Alaska and North Dakota have state budget surpluses at this point. It is not unreasonable to presume that public colleges in 47 of the lower 48 states are going to be under some kind of financial stress.

    With three years to go in the house of Mr. and Mrs. MinnEcon before the child heads off to college, a lot can change–especially tuition costs. Also consider the changes in financial aid and how it is administered.