Student loan debt can be a hefty financial burden for millions of Americans, especially those who owe $100,000 or more.
Home equity may not be the first thing to spring to mind as a means to deal with your debts. However, for homeowners, it can be a highly effective answer to how to pay off $100K or more in student loans.
Carrying student debt for the long term is no joke. It can delay major life milestones like starting a family or saving for retirement, not to mention the effects it can have on your credit score. Your health, too, can suffer from the stress of having all that debt hanging over your head.
A Home Equity Line of Credit (HELOC) offers an alternative solution for homeowners. Parents of students who own their homes also have this option available if they want to help their children out from under this debt.
Let’s explore how to pay off $100,000 in student loans quickly, its advantages, and how it can alleviate the negative effects of student debt.
The negative effects of student loan debt
Student loan debt can have long-lasting consequences, affecting nearly every area of a borrower’s life.
Delayed financial goals
Large student loan debt can limit your career choices, especially if you’re forced to prioritize higher-paying jobs over those that align with your passions or long-term career goals.
Many borrowers feel pressured to stay in positions they don’t enjoy because they need to meet their loan payments. This can result in job dissatisfaction and hinder career growth in fields where they might thrive.
High monthly payments also make contributing to retirement or building an emergency fund difficult.
High-interest accumulation
Interest can make repayment challenging for those with $100,000 in student loans. Private and federal PLUS loans often carry high interest rates, leading to years of payments that barely reduce the principal balance.
Mental health strain
The stress of carrying large student loan balances can affect mental well-being. A study found that 90% of borrowers with over $100,000 in loans report significant anxiety, which can impact other aspects of life, such as job performance and relationships.
Credit score impact
Large student loans may negatively affect your credit score by increasing your debt-to-income ratio, making it harder to qualify for additional credit. Missed payments or defaults can further damage your score.
How a HELOC can help pay off $100k in student loans
Using a HELOC to pay off student loans can be an effective strategy for homeowners.
A HELOC allows you to borrow against the equity in your home at a lower interest rate than most student loans.
Benefits of using a HELOC:
- Lower interest rates: You’ll typically find that HELOCs offer lower interest rates compared to most student loans—especially private loans. This can save you money on interest and help you pay off your loans faster.
- Simplified payments: Consolidating multiple student loans into a HELOC means one manageable monthly payment, reducing financial stress.
- Interest-only payments in the draw period: Most HELOCs give you an option for interest-only payments during the draw period, usually 5 to 10 years.
- Flexible repayment terms: HELOCs often have longer repayment periods, up to 20 years, giving you more time to pay off large loan balances.
Detailed steps to use a HELOC for student loans
Once approved for a HELOC, you’re just a few steps closer to chipping away at your student debt.
1. Assess the home equity you have right now
Evaluate the current market value of your home, then subtract any remaining balance on your existing mortgage from this value.
Lenders often allow you to borrow up to 85% of your home’s appraised value. Understanding your equity is very important, as it directly influences how much you can access.
2. Apply for a HELOC
Once you clearly understand your equity, the next step is to apply for a HELOC.
Several key factors will be assessed, including your:
- Home equity
- Credit score
- Income stability
Be prepared to provide documentation such as tax returns, pay stubs, and details about your financial history to facilitate a smooth approval process.
3. Pay off student loans
After securing the HELOC, you can use the funds toward your student loans, eliminating them if you have sufficient equity.
This approach consolidates the loans into a single payment and may offer lower interest rates than your original student loans.
NOTE: Communicate with your student loan servicer to ensure that you follow proper payoff procedures and obtain confirmation that the loans have been settled.
4. Make consistent HELOC payments
Establish a reliable plan for making monthly payments on your HELOC. Staying on top of your payments is crucial to avoiding default. This discipline protects your home and strengthens your financial standing, contributing to a more secure future.
Risks of using a HELOC for student loan repayment
Before using a HELOC, it’s important to consider the risks:
- Your home is collateral: Failing to make payments means your home could be at risk of foreclosure. Have a reliable repayment plan in place.
- Variable interest rates: Many HELOCs have variable rates, meaning your payments could increase if interest rates rise. Consider a fixed-rate option if you’re concerned about this.
- Increased debt: Consolidating student loans into a HELOC increases the overall debt secured by your home—make sure you can manage the HELOC payments along with your mortgage.
Accelerating student loan repayment with a HELOC
Figuring out how to pay off $100,000 in student loans can be daunting, but a HELOC provides homeowners with a practical solution.
With lower interest rates, simplified payments, and flexible terms, a HELOC can help you pay off student loans faster and improve your financial future.
However, weigh the risks carefully and have a solid plan to manage your new debt. To explore this option, speak with a financial advisor or lender to learn more.
Want to find out if you’re eligible for a HELOC? Fill out HomeEQ’s fast and fully digital application; we’ll get you approved in minutes!