Parents who used to rely on home equity loans to help pay for their child’s tuition will have to look for other methods of payment due to a sharp decline in home values across the nation.
Previously, parents could ask the bank for home equity loans as an inexpensive financial aid option, according to Haley Chitty, director of communications for the National Association of Student Financial Aid Administrators.
However, the decline in home values has caused lenders to stop offering non-conformal loans, which include home equity loans. This limits lenders to offering these loans exclusively to wealthy families, if at all, due to the increased risk of not being paid back in full.
“If you have a bunch of equity in your house and the value of your home drops, then you can’t draw on that value to help pay for college,” Chitty said. “When real estate prices were increasing fast that was an extra source of money parents could tap into, but as the real estate has gone down that’s not an option for a lot of parents and students.”
Chitty added the decrease in home value was in response to today’s struggling economic climate, as the inability for most parents to retrieve this loan is particularly bad due to the increased need for financial aid.
“We have an increase in the number of people applying for financial aid and the number of people being eligible because of the recent downturn in the economy and we’re seeing a decreasing [number] of families being able to pay for college and more and more are looking for different financial aid outlets to pay tuition,” Chitty said.
According to Ald. Brenda Konkel, District 2, University of Wisconsin students will feel the affect of the loss of this student aid.
According to Konkel, the state of Wisconsin has seen a 17 to 18 percent decrease in home values.
“I would be concerned that students would have a harder time because their parents won’t be in the same position to help them,” Konkel said. “Additionally, there are so many more people afraid of losing their jobs at the moment while in the past people felt a lot more confident so I think it’s sort of a double whammy.”
Konkel added out-of-state students will bare the burden of the loss of home equity loans more so than students from Wisconsin.
“I think it’s particularly a big issue for parents that live in the east or west coast,” Konkel said. “In Madison we are more fortunate.”
The city has seen only a slight decrease in the value of homes in contrast to the remainder of the state, she added. Madison’s strong rental market has contributed to Madison’s relative maintenance in home value.
“Our prices probably weren’t as out of control as they were in other cities,” Konkel added. “I think the biggest impact in the housing market is it used to take less than 30 days to sell a home now it’s taking a lot longer, particularly with condos.”
