College and credit: Exploring your borrowing options

Despite calls for America’s colleges to slow down tuition increases, the cost of a post-secondary education continues to rise. Published tuition and fees at private schools rose in 2022-23 to an average annual tuition of $57,570, according to The College Board. But many schools charge far more than that.

With many Ivy League schools charging upwards of $60,000 a year for tuition, students and their families could find themselves paying close to $400,000 in total expenses over a four-year span—and that’s just for one child. As tuition and room-and-board costs climb, even high-net-worth families may find it increasingly difficult to fully fund four years of college expenses.

Those who haven’t set enough money aside for education must find other ways to pay for college. In many cases it’s simply a matter of timing. It might mean college expenses are funded over five years instead of four. Parents should also be mindful about not liquidating investments during periods when the market is down and having a ready line of credit, which can help make these cash-flow challenges easier to navigate.

One popular option for paying tuition is borrowing against established equity lines, including securities-based lines of credit and home equity lines of credit (HELOCs). Both allow families to borrow cash to make tuition payments at a typically lower interest rate than a traditional loan.

Securities-based lines of credit

A securities-based line of credit borrows against your brokerage account, providing quick access to capital. These types of loans have interest-only payments, which means that borrowers could choose to pay off the loan principal with a year-end-bonus, for example, or could invest the bonus and keep the loan longer and continue to pay monthly interest-only payments.

This differs from traditional loans with short-term amortization schedules, which typically leads to high mandatory interest and principal payments. 

“The amount you can borrow with a securities-based line of credit floats according to the balance in your portfolio,” says Fred Rose, head of credit and liquidity solutions at RBC Wealth Management–U.S. “Typically, you can borrow 60 to 70 percent of your equity investments and a little more of your bond investments. But it might be wise to borrow less than 50 percent of what you’re allowed to borrow.”

Home equity line of credit

HELOCs, meanwhile, have slightly higher rates than securities-based lines of credit, and the amount you can borrow is capped based on your home value at the time the line was established.

Homeowners typically can only borrow up to 80 or 85 percent of the value of their home, including their first mortgage and any other debt secured by the property.

You could have both a securities-based line of credit and a HELOC for liquidity. And while HELOCs and securities-based lines of credit may be preferable to other loan options, they aren’t completely risk-free. Every borrower needs a plan in place to repay these loans.

Just like wine and chocolate, Rose says, each can have clear benefits, but over-consumption creates risk.

“For example, if you max out what you can borrow, you run the risk of having to sell assets or your home to pay down the balance at an inopportune time,” he says.

Another reason Rose suggests someone might want to use a line of credit is if their savings earmarked for tuition are in the form of assets outside of a 529 plan.

“It may be better not to liquidate those assets at a particular time because of the market or because you could trigger capital gains taxes,” Rose says. “It’s always smart to look at your entire financial picture before making a decision.”

Apply for traditional loans or scholarships

Beyond HELOCs or securities-based loans, families can also look into applying for traditional loans, including federal or private student loans, to help fund college.

“Interest rates are higher on private student loans than on lines of credit, but they are another option,” says Angie O’Leary, head of Wealth Planning at RBC Wealth Management–U.S.

In addition, most educational institutions offer merit-based scholarships for which anyone can apply. In some cases, you’ll have to apply for financial aid and get rejected before you can apply for the merit-based award.

Saving early is the best approach

Of course, the best way to pay for college is to start saving early. It’s never too late to put money into a 529 plan. When trying to save, don’t forget about travel and living expenses for your student, which can add up to about half the tuition costs, adds O’Leary. “Many people only look at tuition and then find out they haven’t saved enough,” she says.

It’s also a good idea to develop a family philosophy around college tuition, especially for high-net-worth individuals. Decide on who’s paying—are the parents covering everything? Or should the children contribute too, necessitating they work while pursuing their education?

Understanding who will be accountable for what can influence the kind of credit used to fund a child’s education. Maybe the child pays, but the parents loan them money from their equity line of credit and charge the child a lower rate, for example.

“You have to think through all the options and decide, as a family, what makes the most sense,” says O’Leary. “Figure out together how best to pay.”