An official website of the United States Government
  • Home
  • Blog
  • Should I use a home equity loan to refinance my student loans?

Should I use a home equity loan to refinance my student loans?

By

Last month, we published a report on student loan affordability, which talked about the problems borrowers experienced when repaying student loans with high interest rates. The report also talked about the limited alternative repayment options, including refinancing, that are currently available to borrowers.

When we talk about refinancing a student loan, we generally mean taking out a new education loan with better terms and using it to pay off existing student debt. Refinancing your student loan could help you take advantage of any improvements in your credit profile that have occurred since you were a student, as well as today’s historically low interest rates. You would be able to lower your monthly payments and put the savings toward a financial goal, like starting a retirement plan or a small business.

Unfortunately, there aren’t many options available to refinance your student loans. Recently, we’ve received a lot of questions from consumers who are considering using a home equity loan to pay down high-rate student debt. We’ve uploaded this question and others on student loan refinancing to Ask CFPB. Take a look at these and other common questions about student loans.

Should I use a home equity loan to refinance my student loans at a lower interest rate?

This can be risky. Student loan borrowers who have built equity in their homes may find that paying back outstanding student debt with a new home equity loan looks appealing, given today’s historically low interest rates, but putting more debt on your home can lead to problems down the road.

Before you take out a home equity loan to pay off a student loan, you should try to look for a student loan refinance product first and see what rate you can get. You may be able to lower your interest rate without some of the risks that come with a decision to tap the equity in your home. Here are a few things to remember:

  • Your rate may be lower, but your home is at risk. Interest rates for home equity loans are generally lower than interest rates for student loans. (Lenders are willing to offer a lower interest rate because they know that if you don’t pay, they have a legal claim on your home.) If you can’t pay, you could end up in foreclosure.
  • On your federal loans, you are giving up repayment options and forgiveness benefits. Federal student loans feature a number of protections for borrowers that run into trouble, including Income-Based Repayment (IBR). These benefits no longer exist when you pay off a federal student loan with a home equity loan.
  • This may impact your taxes. The interest you pay on a home equity loan could equate to a greater tax benefit for some borrowers, when compared to the student loan interest tax deduction, especially if you have high income and itemize deductions. You may wish to consult with a tax advisor when considering your options.

For student borrowers with plenty of savings for a rainy day, a good job, and a solid understanding of the risks and benefits, a home equity loan may offer an opportunity to pay off your student loans at a lower interest rate. But again, there is always a risk of losing your home if you don’t make your payments.

If you’re having trouble making your student loan payments, be sure to check out our Repay Student Debt tool first to learn more about your options on federal and private student loans.

Rohit Chopra is the CFPB’s Student Loan Ombudsman.

  • Debt Suspension Rights

    What is so bad about taking a few years between high school and college, work, and save up a chunk of money before going to college? While the argument can be made that this method cuts down on the number of potential high earning year later on, it also gives young people the chance for a better perspective on what they may want to do with their lives and they may make a better choice as to what field to go into by waiting.

  • Debt Suspension Rights

    The home equity in the home should be saved for later. It can become an excellent fall back plan in which the parents allow the child to move back home and offer CareGiving services in exchange for room and board, and possibly a small monthly draw against the home. (Hopefully the government will wise up and give mortgage insurance breaks in these situations).

    Another plan of attack would be to reduce the present monthly mortgage payment due by extending the time to pay off the home. It’s a modest win win. Lower the monthly mortgage payment now by increasing the years needed to pay off the mortgage, then take some of that monthly savings and apply it to the college loan payment. If one can’t make that work, then taking a chunk out of money out of the home via equity probably means the home will never be paid off.

    Caution, I am assuming that monthly college loan payments are tax deductible in a similar amount to what is being lost by having a smaller monthly mortgage payment, anybody know for sure?

    • Leigh Andrews

      A drawback of extending the time to repay the mortgage is the need to pay refinancing charges that will be a minimum of 2% of the principal of the mortgage, presuming the need to pay a 1% loan origination fee, NO mortgage points, acquire a current appraisal, and pay other fees. Most HELOCs can be obtained with no closing costs, putting you at least a couple of thousand dollars closer to payiing off the student loans compared to what you advocate. I don’t like rolling mortgage fees into the mortgage and paying them off over the life of the loan.

      Many, if not most, people who are having difficulty repaying student loans aren’t in the position of having home equity. I would caution parents against taking a HELOC for their child(ren)’s student loans, though a HELOC might not be a bad option if they took PLUS (Parents Loans for Undergraduate Students) loans for their child(ren) due to the higher interest rate charged for PLUS loans.

      Interest paid on student loans is deductible as an adjustment to income, and does not need to be in excess of the standard deduction to be able to deduct it from your income. Tax-deductibility of interest isn’t what it used to be. If you are paying a 25% federal marginal rate and 5% state tax, the tax savings are only 30% of whatever you paid, and being able to deduct the increased mortgage interest for the HELOC is subject to having enough other deductions to be in excess of the standard deduction for your filing status. It can still be cheaper to pay off the loans via a HELOC, particularly if one has private loans. It is difficult to write a blanket recommendation because everyone’s circumstances are different, and some people are less tolerant of owing money than others.

      One thing to consider is to adjust the number of withholding allowances that one takes for withholding purposes, and putting the reduction on your tax withholding against the student loans. If you know that you will have $3000 in itemized deductions above the standard deduction for your filing status, you can take another deduction for withholding purposes only. You might get only $75 per month from doing this, but it is free, and might make a small dent in one’s loan balance. The drawback is that you won’t get a tax refund, or will get a much smaller refund than you are used to receiving.

      • Debt Suspension Rights

        It comes down to scenarios as well. If a homeowner has a 2,800 dollar monthly mortgage and can reduce it to 2,000 dollars a month by refinancing the mortgage, they can split the 800 dollar savings per month with their children. 400 hundred dollars a month could help finance a modest monthly college loan payment, plus the parents are keeping 400 in reserve per month as well.

        If refinancing the home loan only creates a small monthly reduction in the home mortgage, then yes it probably does not make sense to do.

  • JBP

    Student loans are non-dischargeable in most cases during bankruptcy while home loans are. Why would I not want that advantage along with a likely lower payment amount? There are many people being crushed by student loan debt who have little ability or hope of ever paying it off.

    • Bobo

      JBP,

      That is spot on. I make 50K a year gross income. I bought a home for 40K (appraised at 95K) and took out 50K through FHA refinance. Paid my 30K student loan off, and poof, now it’s gone. My mortgage and taxes is 687 a month on a 30yr.

      If I lose my job, i can just declare bankruptcy on my home loan since (that can be discharged) my student loan was paid off (that cannot be discharged).

      TAKE NOTE!!

      • heloc abuser

        Exactly! Turn your lifelong student loan into a heloc is a smart move. Even if you loose the house later on, at least your student loan is wiped out. You can always buy another house or just rent for a while which is often cheaper too. AWAY with ALL DEBT!!! Be free!!!

      • heloc abuser

        Exactly! Turn your lifelong student loan into a heloc is a smart move. Even if you loose the house later on, at least your student loan is wiped out. You can always buy another house or just rent for a while which is often cheaper too. AWAY with ALL DEBT!!! Be free!!!

The CFPB blog aims to facilitate conversations about our work. We want your comments to drive this conversation. Please be courteous, constructive, and on-topic. To help make the conversation productive, we encourage you to read our comment policy before posting. Comments on any post remain open for seven days from the date it was posted.