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On This Page
- Home equity definition and uses
- Home equity loans vs. student loans
- Should you tap home equity to pay for college?
- Risks of a home equity loan for college
- How to pull out home equity for college
- Alternatives to using home equity for college
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On This Page
- Home equity definition and uses
- Home equity loans vs. student loans
- Should you tap home equity to pay for college?
- Risks of a home equity loan for college
- How to pull out home equity for college
- Alternatives to using home equity for college
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Terry Vine/Getty Images
7 min read Published August 30, 2022
Written by David McMillin Written by David McMillinArrow RightContributing writer David McMillin
Edited by Suzanne De Vita Edited by Suzanne De VitaArrow RightMortgage editor Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Student loans are one of the most common and crippling forms of debt that weigh down Americans. If you also happen to be a homeowner or more likely, your parents are, the equity in your house might be tempting you. A home equity loan or a cash-out refinance on your mortgage may seem like a quick source of cash to pay off student loans. Federal student loans are made available through the federal government but managed by a private company. There are four types of federal student loans: Private Student Loans are available through financial institutions and lenders.The benefit of a private student loan is that, unlike federal student loans, students can borrow 100% of the cost of their education. There are two types: In general, student loan interest rates are lower than other types of loan interest rates and come with some unique protections. Within student loans, federal loans generally have the lowest interest rates while direct-to-consumer loans have the highest interest rates.
But like all loans, there are some downsides to paying off your student loans as well as upsides.
Types of Student LoansInterest Rates
Direct PLUS Loans or parent PLUS loans have higher interest rates than direct federal loans.
Problems with Student Loans
The biggest issuer with student loans of any variety seems to be how they are managed by servicing companies. Student loans come with protections, but services appear to make it very difficult for borrowers to enroll in the protections and many people end up defaulting on their loans.
Benefits of Keeping a Student Loan
Some of the benefits of keeping a student loan include the possibility of having student loan interest deductions on your federal income tax. If you are below the income threshold, you should be claiming this!
Another plus with federal student loans is that you can ask for forbearance or deferment on payments, and indeed, the pandemic-inspired deferral has been extended to September 2021.
If you qualify for the somewhat limited and difficult to enroll Public Service Loan Forgiveness Program, you can have your federal loans forgiven in total or in part.
Direct Plus programs are income-contingent, so monthly bills are capped at 20% of disposable income with balance forgiveness after 25 years.
Using Home Equity to Pay Off Student Loans
There are three different ways to use the equity in your home to pay off student loans. These include a cash-out refinance loan, a home equity loan, and a home equity line of credit. Let’s look at each one separately.
A cash-out refinance means that you take out a new mortgage for more than you currently owe. You pay off the old mortgage and use the remainder to pay off student loans.
- These make sense for people
- Getting a new mortgage interest rate far lower than the student loan interest rate
- Having stable income and job is very important
- Are high income earners who can’t claim student loan interest deduction may be able to use mortgage interest deduction instead
- Downsides
- Puts your home at risk of foreclosure if unable to pay off new mortgage
- Could end up owing more than the home is worth making it difficult to sell
- Lose out on accessing student loan protections
A home equity loan allows you to access the equity (what your house is worth minus the current mortgage balance). You can usually borrow up to 80% of your equity.
- You may
- Be eligible for a lower interest rate that your current student loan
- Have more time to pay off student loans (30 years versus 5 to 15)
- Have fewer monthly bills to keep track of
- Downsides
- Not tax deductible as is student loan debt (based on income)
- Puts your home at risk of foreclosure if unable to pay off
- Could end up owing more than the home is worth making it difficult to sell
- Lose out on accessing student loan protections
A home equity line of credit is a revolving loan based on your equity. It works similarly to a credit card. You use some of the available amount, pay it back, and can reuse the line of credit again. Like a home equity loan, these are usually limited to 80% of your equity.
- You may
- Be eligible for a lower interest rate that your current student loan
- Have more time to pay off student loans (30 years versus 5 to 15)
- Have fewer monthly bills to keep track of
- Downsides
- Not tax deductible as is student loan debt (based on income)
- Puts your home at risk of foreclosure if unable to pay off
- Could end up owing more than the home is worth making it difficult to sell
- Lose out on accessing student loan protections
Now that you have seen both sides for keeping a student loan and for taking out a new loan, should you?
Possibly. Here are a few questions to ask yourself.
- Will you pay less in interest over the life of the new loan versus the life of the old loans (mortgage and student loan combined)?
- Have you taken advantage of all the student loan protections available?
- Can you refinance the loan through the federal government or a private loan option without putting your home at risk of foreclosure? Will you save money if you do so?
- Do you have other debt that is causing problems for you?
If you answered yes to the last question, it may be worth your time to pay off that outstanding non-student loan debt first. You’ll have the protections that having a student loan offers without risking your home.
If you have more than $10,000 in credit card and other unsecured debt, Pacific Debt, Inc may be able to help.
Pacific Debt, Inc
Pacific Debt, Inc is an award winning debt settlement company. If you’d like more information on how to get out of debt, we are happy to help. We will explain all your options and help you decide which is the best option for you. We can even refer you to trusted partners who can better meet your needs.
If you have more questions, contact one of our debt specialists today. The initial consultation is free, and our debt experts will explain your options to you.