Can you use a home equity loan to pay off your student loans?


If you’re thinking about paying off your student loans, you might consider using a home equity loan or a home equity line of credit (HELOC) because these often have lower interest rates than student loans, potentially making your monthly payments more affordable. However, student loans are designed to be easier to repay for graduates, so it’s important to carefully weigh the benefits and risks before deciding to use a home equity loan to pay off student loans.

Can you use HELOC to pay off student loans?

Yes, you can. But before deciding to pay off your student loans with a home equity loan, or HELOC, consider if you qualify for any federal loan forgiveness programs, because using home equity to consolidate debt means losing those opportunities. For private student loans, especially those with variable rates, using a home equity loan can switch you to a fixed rate, potentially stabilizing your payments.

Alternatively, a HELOC might still have a variable rate but could offer a lower one, which is beneficial if rates stay low. This could result in fewer payments and save you money, but it’s important to understand the differences and risks involved.

How Can You Start Using Your Home Equity to Pay Off Student Loans?

A home equity loan allows you to borrow against the value of your home for various purposes, such as funding home improvements, starting a small business, or consolidating loans to possibly secure a better interest rate. It can also simplify the process of paying off your student loans by consolidating them into a single payment, which might reduce your interest rate and monthly payments.

Improve Your Interest Rate

While student loans typically have moderate interest rates, you might find a better rate with a home equity loan, which currently averages around 9.27%. If the interest rate of the home equity loan is lower than your student loans, you can use it to pay off your student loan debt completely.

Then, you start repaying the home equity loan based on the terms your new lender sets. Even though using a home equity loan to pay off student loans might not be as attractive due to current rates, it can still be beneficial for consolidating other high-interest debts, like credit card debt.

Consolidate Multiple Loans

When you have student loans, it’s common to borrow from multiple lenders, and if you go to graduate school, you might add another lender into the mix. Managing repayments to different lenders with various payment schedules can be confusing and hard to track, even with automatic payments. However, by taking out a home equity loan, you can consolidate all your debts—including credit card debt—into one loan with a single lender. This makes it easier to manage, as you only have one monthly payment to worry about, simplifying your financial life.

Predictable Rate

While some student loans have fixed interest rates, others have variable rates that can change with the economy. Recently, interest rates have risen sharply due to Federal Reserve actions to combat inflation. If you have a variable-rate student loan and want more stability, switching to a fixed-rate loan could be a good move. Most home equity loans offer fixed rates, making them a potential option for paying off your variable-rate student loan and avoiding future rate hikes.

Risks of Using HELOC for Student Loans

Using home equity loans or lines of credit (like a HELOC) to pay off student loans might seem like a good idea because of the low initial rates, but there are risks:

  • HELOCs have variable interest rates, so even if the rate is low at first, it can go up over time.
  • Initially, HELOCs let you make payments on just the interest for about 10 years. After that, you’ll have to start paying back the principal too, which means higher payments.
  • If you don’t keep up with payments, you could lose your home because it’s used as collateral for the loan.
  • Switching from student loans to a home equity loan means losing any tax benefits from student loans, although you might get some tax deductions from the home equity loan.
  • Unlike many student loans, home equity loans might have penalties for early repayment.

Decide if Home Equity is the Best Way to Pay Off Your Student Loans

Consider carefully whether using a home equity loan or a HELOC to pay off your student loans is the right choice for you. If you’re juggling multiple high-interest loans, consolidating them into one manageable payment through home equity could simplify your finances and potentially lower your interest rates. Remember, this approach is not without risks, such as the potential for higher payments over time and the threat of losing your home if you cannot keep up with payments.

Weigh these factors along with the possibility of losing eligibility for federal forgiveness programs or benefits. It’s important to understand all the implications to make an informed decision that aligns with your financial goals and stability.

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