MinnEcon: August 24, 2010 Archive

Home equity isn't paying for college?

Posted at 10:17 AM on August 24, 2010 by Paul Tosto (3 Comments)
Filed under: Education, Jobs & unemployment

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.

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).

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).

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.

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