Student loan debt is often a significant challenge for many Americans, impacting their ability to manage their lives beyond finances. Can you use a HELOC to pay off student loans?
For homeowners with built-up equity, a Home Equity Line of Credit (HELOC) may provide a strategic option for managing this debt.
Homeowners who use a HELOC to pay off student loans might reap the benefits of lower interest rates and simplified payments. If used to its full effectiveness, a HELOC can potentially save thousands in interest payments compared to most student loan rates.
However, it’s important to weigh the benefits and risks carefully. Let’s explore how to use a HELOC to pay off student loans and the pros and cons of this approach.
How a HELOC works
A HELOC allows homeowners to borrow funds against their home equity.
Like a credit card, HELOCs function as revolving lines of credit that allow you to draw funds as needed.
With many HELOCs, you’ll start with an initial “draw period” during which you only have to pay the interest on your loan—generally set at 5 to 10 years.
Following this “draw period,” you enter the repayment phase, paying both principal and interest.
Q: Can you use a HELOC to pay off student loans?
A: Yes, you can use a HELOC to pay off student loans by drawing funds from your HELOC to reduce or eliminate your student loan balance. This consolidates student debt into one HELOC payment, potentially providing lower interest rates and streamlined monthly payments.
Benefits of using a HELOC to pay off student loans
- Lower interest rates: A major benefit of using a HELOC to pay off student loans is the potential for a lower interest rate. Many student loans, especially private loans, carry high interest rates. HELOCs generally offer lower rates, allowing you to save on interest costs.
- Simplified payments: Consolidating student loans with a HELOC means managing just one monthly payment, simplifying your finances.
- Flexible borrowing and repayment: Because the HELOC allows you to borrow as needed during the draw period, you have flexibility in managing expenses and payments. Interest-only payments during this time can also keep monthly costs lower.
- Potential tax benefits: HELOC interest may be tax-deductible in some cases, especially if used for home improvements. Consult a tax advisor to confirm any tax benefits.
- Faster debt repayment: With lower interest rates and flexible terms, a HELOC can help you pay down debt faster, reducing the time spent repaying student loans.
Risks of using a HELOC to pay off student loans
While beneficial, there are risks to consider with this student debt repayment strategy.
Risk to your home
Remember that your home secures a HELOC; failing to repay could lead to foreclosure. With unsecured student loans, your property has no risk, so this additional risk should be carefully evaluated.
Variable interest rates
Many HELOCs have variable rates, meaning your monthly payments could increase over time. If rate increases are a concern, consider a fixed-rate HELOC.
Extended debt period
Using a HELOC may lengthen your repayment period. If the HELOC term is longer than the remaining student loan term, you could be paying debt for a longer time.
Loss of federal loan benefits
If you consolidate federal student loans into a HELOC, you might lose possible benefits like income-driven repayment plans, deferment options, or loan forgiveness.
Check out if these options might be available to you, and assess the odds that the programs would apply in time for you to meet your financial obligations.
Reduced home equity
Using a HELOC decreases your home equity, which could limit your financial flexibility in the future or impact home sale options.
Is using a HELOC to pay off student loans right for you?
Consider the following when deciding if a HELOC for student loan repayment suits your situation:
- Your equity: Do you have enough home equity to cover your student loan balance? Most lenders allow borrowing up to 85% of your home’s value.
- Interest rate comparison: Compare HELOC interest rates to your student loan rates—it may be beneficial if it offers a substantially lower rate.
- Repayment stability: Are you comfortable with variable rates, or would you prefer a fixed-rate option for stability?
- Federal loan benefits: If you have federal loans, evaluate the potential loss of benefits like income-driven repayment or forgiveness options.
Steps to use a HELOC for student loan repayment
- Assess your equity: Calculate how much home equity is available and confirm it’s sufficient to cover your student loan balance.
- Shop for a HELOC: Research lenders, interest rates, qualification requirements, and terms to find a HELOC that meets your needs.
- Apply for a HELOC: Apply with a HELOC lender, who will review your equity, credit, and income.
- Use HELOC funds to pay off student loans: Draw funds from your HELOC to repay student loans, consolidating them into one loan.
- Manage HELOC payments: Make consistent HELOC payments to protect your home and stay on track with debt repayment.
HELOC: A strategic approach to student loan repayment
Using a HELOC to pay off student loans can reduce interest rates, simplify payments, and accelerate repayment.
However, it’s essential to consider risks, such as the potential impact on your home and the loss of federal loan benefits.
Get fast HELOC approval with HomeEQ today
If you want to learn more about using your home equity to pay off your student loans, fill out our fully digital HELOC application.
There’s no paperwork involved. You fill out the form online, and you might have an answer to your student debt challenges within minutes. If approved, you could receive your funding in a few days.