Student Loans

With Home Equity Gone, Families Look For New Ways to Pay For College

During the housing market’s heyday, when home values were at an all-time high, it wasn’t uncommon for families to finance a college education by borrowing against their home, or for schools to take home equity into the financial aid equation, requiring families to contribute 5 or 6 percent of their home’s equity toward tuition.

But with home prices dropping by the steepest annual rate on record – plunging 19 percent in January of last year – home equity is no longer a viable line of credit, particularly in the nation’s hardest hit housing markets. In January 2009, home values were down 35 percent in Phoenix, 32.5 percent in Las Vegas, and 32.2 percent in San Francisco, according to Standard & Poor’s/Case-Shiller 20-city housing index (“Report: Home Prices Slip in Seattle, but Plunge in Other Parts of U.S.,” The Seattle Times, March 31, 2009).

“With so many people up against the wall with declining home values,” said Philip Day, president of the National Association of Student Financial Aid Administrators (NASFAA), “the issue of using home equity loans for tuition is almost rendered moot” (“College Tuition Not on the House,” The New York Times, April 3, 2009).

Colleges, for their part, have, over the last decade, started to move away from considering home equity when determining a student’s financial aid award, after finding that including home equity as an asset was financially overburdening families of modest income.

More Families Turn to Private Student Loans

Home equity and home equity lines of credit haven’t been the only financial resources to fall victim to the ongoing recession and the ailing credit markets. Credit card companies have cut credit limits and closed credit card accounts, while investments and 529 college savings plans have tanked in value, leaving families without the cash and credit they’ve historically relied on to help pay for college.

Increasingly, students and families have been turning to private student loans to supplement federal college loans, grants, and other financial aid. But in the current economy, even private student loans can be hard to come by.

Since the fall of 2007, more than 40 student loan companies have suspended their private student loan programs, according to FinAid.org. And the remaining private loan programs, in a strangely resonating echo of the admissions processes at elite universities, have become much more selective, taking only cream-of-the-crop applicants with the most sterling credit histories.

Just like lenders in the auto loan, home mortgage, and credit card industries, student loan lenders have tightened their credit restrictions for private student loans. Between soaring unemployment, dwindling assets, and past-due bills dragging down credit scores, fewer families are finding that they qualify for credit-based private loans.

Private student loans, offered by banks and other private lenders, are credit-based student loans not backed by the federal government, as federal college loans are. Unlike federal parent and student loans, which carry fixed rates, private student loans are typically variable-rate loans. Private loans also generally don’t offer the same flexible and income-based repayment alternatives or the payment-deferment options that are guaranteed by all federal education loans.

But while private student loans may lack many of the benefits of federal student loans, federal financial aid may often not cover the full cost of college: In addition to tuition and fees, students will have thousands of dollars in education-related expenses like room and board, textbooks, transportation, and other living expenses. Private loans can help families to bridge the college-cost gap that federal student loans and other financial aid don’t cover.

College Costs and Financial Aid Playing a Bigger Role in Decision-Making

At the end of February 2009, nearly 3 million federal financial aid applications had been processed – a jump of more than 20 percent over the same period last year, according to NASFAA.

“I think the biggest shock to many families is that they might have to make that tough decision and say ‘I can’t afford to send you to where you want to go,’ ” Jacquelyn Nealon, vice president of enrollment services at New York Institute of Technology, told Newsday. “For many of them it might be the first time they’ve ever had to say ‘no’ to their child for a financial reason” (“Recession Forces Changes on Prospective Collegians,” Newsday, March 29, 2009).

This recession is forcing many families to redefine “safety schools” based on their ability to pay, rather than their child’s chances of being accepted, reports Newsday. More than a third of prospective college first-year students and parents surveyed by the Princeton Review said they were applying to more “financial aid safety” schools than they originally planned.

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