Should I use a home equity loan to refinance my student loans at a lower interest rate?
Rohit Chopra, the Consumer Financial Protection Bureau’s Student Loan Ombudsman, looked at the option of using a home equity loan to refinance existing student loans. This would only apply to homeowners with significant equity, probably someone out of college ten years or more. The main advantage would seem to be the ability to swap a high-interest student loan for one with today’s enticing low rates. The window of opportunity for using this strategy may be closing soon, with expectations by some forecasters that an increase of interest rates is on the horizon.
Here are some important considerations.
- Your rate may be lower, but your home is at risk. Interest rates for home equity loans are generally lower than interest rates for student loans. (Lenders are willing to offer a lower interest rate because they know that if you don’t pay, they have a legal claim on your home.) If you can’t pay, you could end up in foreclosure.
- On your federal loans, you are giving up repayment options and forgiveness benefits. Federal student loans feature a number of protections for borrowers that run into trouble, including Income-Based Repayment (IBR). These benefits no longer exist when you pay off a federal student loan with a home equity loan.
- This may impact your taxes. The interest you pay on a home equity loan could equate to a greater tax benefit for some borrowers, when compared to the student loan interest tax deduction, especially if you have high income and itemize deductions. You may wish to consult with a tax advisor when considering your options.
Last year I wrote about this topic from a parent’s perspective, addressing the question of whether a federal Direct PLUS parent loan or a home equity loan is better for financing a child’s college costs.