Student Loans: Should You Borrow Against Your House To Pay Them Off?

The question of taking a second mortgage or home equity loan to pay student debt is a complicated one.

American consumers currently owe around $1 trillion in student loan debt and many of them are paying it back at a higher interest rate than what they would pay on a home equity loan. So if you’re a student that’s having difficulty repaying a student loan, is it a good idea to repay it by borrowing against a house?

Well unfortunately, the answer isn’t black or white and experts are divided on the issue. Those who warn against using your home equity say it is foolish to trade an unsecured debt for a second one, while those in favor of using your home say there may be some advantages to refinancing a house to repay student loan debt but it involves great risk, especially for the student’s parents.

The Consumer Protection Financial Bureau (CFPB) says 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 line. CFPB issued a statement June 7th about the advisability of paying a student loan with a loan obtained by borrowing against a house. The CFPB discusses the issue using home equity loans to refinance student loans. Here are the pros and cons:

Cons

• You are putting your home up as collateral, putting it at risk for liens and possibly foreclosure if you have trouble keeping up with your payments.
• Some federal loans, such as Stafford and Grad PLUS, allow borrowers to apply for Income Based Repayment, which caps monthly payments at a percentage of the borrower’s income. The interest rate may be higher, but the payments could be lower, especially in times of hardship. There are also forgiveness options for borrowers who make regular payments. Conversely, a home equity loan will often have fixed monthly payments for the life of the loan and if you lose your job or take a cut in pay, you’ll likely still be facing the same payments each month.

Pros

• You will likely end up with a lower interest rate, as most government and private loans are currently charging borrowers higher interest than home equity lenders.
• It may be one of your few options to refinance. Some private lenders do offer student loan refinancing options, but they are currently not at rates as low as home equity lenders.
• It may improve your tax situation as the tax benefit of interest on an equity loan is often more than that for the interest on student loan payments. However, this is not always the case. If you’re considering using an equity loan to pay off your student debt, you should check with a tax expert to see how it changes things for you.

Needless to say, the question of taking a second mortgage or home equity loan to pay student debt is a complicated one. The CFBP doesn’t have any data on how often student loans are repaid by second mortgages or home equity loans. There also isn’t any data showing how many people have lost their homes because of this. So while using an equity loan to pay off student loan debt is indeed a viable option for some, this is definitely not a choice one should make without examining all the available options.

Westface College Planning can help you navigate the college saving and funding process from start to finish. To learn how we can help you call us at 650-587-1559 or sign up for one of our Tackling the Runaway Costs of College Workshops or Webinars.

Photo Credit: Tampa Bay Informer