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

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.