HELOC vs Student Loans: What to Know

Inflation has touched everything in Canada, including post-secondary tuition fees.

The Tuition and Living Accommodation Costs survey revealed a 2.6% annual increase in tuition for Canadian undergraduate students for the 2022/23 academic year. Meanwhile, international undergraduates experienced an 8% increase.

Food and housing prices have also steadily increased over the past few years, making the overall cost to be a post-secondary student higher than ever.

According to a 2023 study by Embark, an education savings and planning company, the average cost of a 4-year undergraduate degree, when accounting for tuition and housing costs, is now over $75,000.

If you own your home, a home equity line of credit (HELOC) may seem like an easy way to cover the cost of your child’s future education.

While your intentions may be noble, it’s important to understand how using a HELOC to pay tuition might affect your other financial goals.

What is a HELOC?

A home equity line of credit (HELOC) is a revolving loan secured using your home equity — your home’s value minus the mortgage balance. If you fail to repay, the lender can seize your home. A HELOC may be combined with your mortgage or stand-alone.

The funds can be used however you see fit, making HELOCs a convenient solution for parents looking for a lump sum to pay tuition.

How a HELOC works

Because a HELOC is a revolving loan, it works much like a credit card. You can spend up to the limit and regain spending room if you pay down the loan. You can borrow up to 65% of your home’s value.

HELOCs have variable interest rates and interest-only payments during the initial draw period. Instead of having fixed monthly payments, your minimum payment will be based on the loan’s interest. You only pay interest on what you’ve used, so if you have a $75,000 line of credit but only spend $5,000, you’ll pay interest on $5,000. When the draw period ends, you’ll be making payments of principal and interest until the debt is repaid.

Who is eligible?

Like any loan, you must meet certain criteria to qualify for a HELOC. This includes:

Have a minimum of 20% equity in your home.
Demonstrate proof of steady employment.
An adequate credit score.
A manageable debt-to-income ratio.
A home appraisal report demonstrating your home’s current market value.

Lenders may also want you to pass a stress test to make sure you can afford your payments, even if interest rates increase.

Pros and cons of using a HELOC to pay tuition

Pros

Interest rates for HELOCs are typically lower than other types of financing, like credit cards.
You can borrow up to 65% of your home’s value.
HELOCs provide borrowing flexibility. Instead of taking a huge lump sum, you can use only what you need, limiting the interest you pay. Since your child’s financial needs may fluctuate throughout their time in university, this enables you more precise control over any debt associated with their schooling.
Using your equity to pay tuition may prevent your child from taking out student loans. Your child will be free to make thoughtful decisions about their future upon graduation without worrying about how they’ll manage their student debt payments.

Cons

Taking on additional debt could become a burden to your monthly budget. Think carefully about how a HELOC will affect your cash flow. Consider if it requires unwanted sacrifices or puts you in an uncomfortable financial position.
The combined total of your mortgage and HELOC cannot exceed 80% of the home’s value.
You could lose your home if you miss payments.
Spending your equity could strain your relationship with your child. If you’re not clear with your child about your expectations for how this money will be used, it could lead to resentment down the road. Make sure you and your child are on the same page before taking out the loan.

Steps to take if you decide to use a HELOC for tuition

Before applying for a HELOC, consider how it will affect your finances. These steps will help you do so.

Consult a professional. Speaking with a financial advisor will help determine how a HELOC fits your overall financial plan. They will help you to be objective about your options and ensure you don’t make decisions based purely on emotions. Your advisor may be able to point out pros and cons that you hadn’t yet considered.
Budget and plan. Creating a detailed budget and repayment plan will help you manage the cost of a HELOC with less stress or anxiety due to the additional expense.
Monitor and adjust. Regularly reviewing your financial situation is a great way to spot opportunities and make changes to help you reach your goals. Set a calendar reminder to review your finances at a regular interval of your choosing.

Alternative tuition financing options

Registered education savings plans (RESPs): Parents can use this tax-deferred investment account to save for their child’s post-secondary education. The lifetime maximum contribution limit is $50,000 per beneficiary, and the account can remain open for 35 years. Investing the funds held in an RESP can help grow the balance further. Contributions are tax-free until withdrawn.
Government student loans: Canadian students who demonstrate financial need can apply for federal and provincial student loans to help cover tuition and educational expenses. Government student loans are advantageous because they have flexible repayment options, and federal loans do not accumulate interest.
Scholarships and grants: Grants like the Canada Education Savings Grant and the Canada Student Grant can help cover educational expenses. Students can also pursue merit-based scholarships through independent organizations or their post-secondary institution. The Government of Canada’s Student Aid website has a wealth of information on the different forms of assistance available.

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