Now that you’ve gained admissions to a top tier MBA program, your heart sinks when you get the first bill. The prospects of paying for two or three years worth of the bill can be daunting. How are you going to be able to pay for living expenses for the family while going to school? One way to do it is via a HELOC, which stands for home equity line of credit.
Consider Employer Tuition Reimbursement First
Before considering the HELOC, you should make sure you’ve exhausted every possibility with respect to employer tuition reimbursement. Many employers slashed tuition reimbursement programs during the 2009 recession. Unfortunately, many employers have not decided to restore this benefit. However, it may be worthwhile for workers to ask management if it is possible to get reimbursement anyway.
Many are not able to get employers to pay for all of the tuition. Others are only able to get a portion of the tuition covered. That is when students should consider borrowing the money with a HELOC.
To be eligible for a HELOC, you need to have some equity in your home. As a result of the mortgage crisis that occurred after the housing boom, most lenders will not allow the homeowner to exceed a LTV (loan to value) of 85% on a HELOC. HELOC for 90%, 95%, or 100% of a home’s value are nearly impossible to find Those who have property in states that had severe declines in value during the recession may only be able to get a maximum LTV of 80%. Those states include California, Nevada, Arizona, and Michigan at many lenders.
A potential big advantage of having a HELOC is that the first 10 years is a draw period that only requires a minimum payment of interest only. That can make the payments quite affordable versus almost any other borrowing option including student loans.
700+ FICO Score Needed to Get Interest Only Minimum Payments
It is also necessary to have a good credit score. A score of 680-700 will usually result in higher minimum payments of 1% of the principal amount during the draw period. If you have a FICO above 700, you may be able to get monthly minimum payments of interest only. This can result in huge savings. If you borrow $100,000 on a HELOC with a 4% interest rate, your minimum interest only payment may be just $334. You can keep making interest only payments for up to 10 years on a HELOC. By the time the ten years have elapsed, an MBA graduate will have found a higher paying job that allows for paying down the HELOC.
Disadvantages of Using a HELOC to Pay for an MBA
There are some key disadvantages of the HELOC. First of all, the interest rate on a HELOC will change as the prime rate changes. However, the prime rate has not been above 6% for many years. So this may be a somewhat unlikely scenario. Another disadvantage is that borrowers will need to make bigger payments after the 10 year draw period ends. You’ll need to make payments that will completely pay off the loan within 15 to 20 years. Even with those payments, they are still quite affordable for most. The biggest disadvantage is that failure to repay the HELOC will result in the loss of your home.
Another risk to consider is that the bank can freeze your ability to draw funds. That can be a disaster if you haven’t completed the MBA program. In most instances, lenders freeze HELOC lines due to high utilization and missed payments reported to the credit bureaus. Those that are able to keep up with their debt obligations should not have a problem with this.
Most People Should Consider Using a HELOC to Help Pay for an MBA Degree
The HELOC is a really cheap source of borrowing with low interest rates and minimum payments that are affordable even when borrowing $100,000 or more. On the other hand, failure to repay the HELOC will result in the loss of your home. However, many students find that the advantages outweigh the disadvantages. That is why many are going through with the HELOC application process prior to entering business school.