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Should you use a home equity loan to pay off your student loans?
When cash-out refinancing can help — and when it's too much of a risk.
How does refinancing with a home equity loan work?
Refinancing your student loans with a home equity loan or home equity line of credit (HELOC) involves taking out a loan against the value you own in your home and using those funds to pay off your student loans.
Mortgage lenders like SoFi and Fannie Mae offer cash-out refinancing programs that guide you through the process of getting a home equity loan to refinance your student debt. Cash-out refinancing generally targets parents who took out loans for their children and high-earners with private student loans.
Home equity loans can have lower rates than private and expensive federal student loans, plus they come with tax benefits that allow borrowers with high income to deduct interest payments from their taxes.
How do I refinance my student loans with home equity?
Follow these steps to take out a home equity loan to pay off your student debt.
Step 1: Find out how much your home equity is worth
The first step to refinancing a student loan with home equity is contacting your lender to find out how much equity you actually own. This could involve a home appraisal. With other lenders, you might not need to have your home appraised until after your initial approval.
You can also use our guide to estimate how much equity you own in your home.
Step 2: Shop around
Compare rates, fees and other benefits available through different lenders. Often you can find out what rates and terms you might be eligible for by filling out a quick prequalification form online.
Step 3: Get a payoff amount for your student loans
Depending on your lender, you might need to provide the exact amount you need to completely pay off your student loans upfront. Others might not ask for your exact payoff amount until later in the application process. Either way, you’ll need to contact your student loan servicer to request your payoff amount.
Step 4: Apply for the home equity loan
Follow your lender’s directions to complete the application. You’ll also need to submit documents verifying your identity and showing that you’re able to afford repayments. These might include:
- Recent tax returns
- Pay stubs
- Bank statements
- Student loan statements
- A government-issued ID
Step 5: Pay off your student loans
What happens next depends on your lender. Some lenders like SoFi will take care of paying off your student loans with your home equity loan for you. With others, you might have to pay off your student loans yourself.
If you’re required to pay them off yourself, contact your servicer for instructions — often there’s a specific procedure for making a final repayment. In both situations, check your account to make sure the repayment has completely gone through. If you have any questions, contact the customer service team of your old servicer or new lender for help.
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How can I benefit from refinancing with a home equity loan?
From simplified repayments to potential tax benefits, here are some perks of refinancing your student loans with a home equity loan.
- Potentially lower rates. Home equity loans typically have lower rates than student loans in recent years, helping you save on the monthly and overall costs.
- Consolidate your loans. Refinancing multiple student loans with one home equity loan can simplify your repayments.
- Lower repayments. You generally can’t get a student loan with a term longer than 25 years unless you consolidate your loans, but mortgages can go as long as 30. This can translate into lower monthly repayments — though you’ll likely pay more in interest in the long run.
- Tax benefits for high earners. If you make too much to qualify for the student loan interest deduction, you can still qualify for the mortgage interest deduction — which has no income limitations.
What to watch out for
Putting your home at risk of foreclosure is just one of the potential drawbacks of paying off your student loans with a home equity loan. Other risks include:
- Losing your home. Defaulting on a home equity loan means your home could go into foreclosure. While student loans also come with serious consequences, you likely won’t lose your home as a direct result.
- Less flexibility. By refinancing with a non-student loan, you lose access to flexible repayment plans, deferment and forbearance that give you some leeway if you run into a financial catastrophe.
- Losing eligibility for forgiveness. Student loans — especially federal loans — are eligible to have all or part of the debt canceled if borrowers apply for forgiveness, loan repayment assistance or discharge. You lose that as soon as you refinance with a home equity loan.
- Turning an asset into a liability. Home equity is often a borrower’s biggest financial asset. You lose that when you use it to pay off another debt.
If you have multiple types of student loans, you may want to determine which ones you need to pay off first. If your private student loans have higher rates, one option is to refinance those with your home equity while paying off your federal loans directly.
Compare student loan refinancing providers
Understanding fixed vs. variable rates
When refinancing your student loans with a home equity lender or student loan company, you often have a choice between fixed or variable rates. Variable rates sometimes appear to be lower than fixed rates, but they have the potential to increase or decrease depending on movements in the lending market.
This can give you unpredictable monthly repayments and might land you with a higher rate than you initially expected. That might not be a risk you’re willing to take when your home is on the line. Read our guide to fixed and variable rates before you decide what type of interest to go with.
Alternative ways to pay off student debt
Refinancing with a home equity loan isn’t the only way to save on your student loans or get out of debt faster. Consider looking into the following alternatives before putting your house on the line:
- Refinance with a private lender. Student loan refinancing companies usually allow you to keep the perks that come with student loans. That means you’ll likely still be eligible for the same tax deductions, forgiveness and forbearance options that you won’t get with a home equity lender.
- Apply for forgiveness and repayment assistance. Federal and private student loans are also eligible for forgiveness and loan repayment assistance programs (LRAPs) that can make a serious dent in your debt if you qualify.
- Get a Direct Consolidation Loan. Parent PLUS borrowers could consider consolidating their student loans with a Direct Consolidation Loan, which gives them access to a wider range of federal loan benefits like income-driven repayment plans.
- Change your repayment plan. Federal loan holders have a wide range of repayment plans to choose from that can stretch as long as 25 years or 30 if you have a Direct Consolidation Loan. A new repayment plan can lower your monthly repayments, though it won’t change your rates.
Refinancing student loans with a home equity loan might give parents and high-earning borrowers access to longer terms and lower rates. But there are alternative ways to get more favorable rates or terms without putting your home on the line.
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