As if graduating college isn’t stressful enough, the debt load graduates leave school with is massive. The average federal student loan debt is $37,338 per borrower, which can easily strain an already stretched budget.
For graduates who were able to buy homes and family members who own, equity could be a more affordable way to pay off debt.
The interest rate a student loan has depends on the type of loan, the borrower, and the time the loan was taken.
Before you yank equity out of your home to consolidate student loan debt, consider the following.
Interest rate
While there are other benefits to consolidating debt, the biggest is saving on interest payments. For this reason, you probably shouldn’t consolidate unless you can lock in a lower rate. Where this isn’t always true is in the case of variable rates.
If your student loan(s) have variable interest rates, it could make sense to lock in a slightly higher fixed rate loan. Check interest rates before you apply and see if the Fed is planning to raise or lower rates in the future. Having a variable rate loan in a rising rate environment just means you'll pay more and more on interest.
Interest deductions
Student loan interest up to $2,500 is tax deductible, though there are income restrictions – e.g. those who file as single or head of household can deduct the full amount only if their adjusted gross income is $65,000 or less – and the loan must be a qualifying student loan.
HELOC interest, on the other had, is now only deductible if used for home improvements1navigates to numbered disclaimer.
Ability to repay
If you find yourself in a situation where it's challenging to make your monthly payments and could potentially default, it's important to know what could happen. Student loans, federal loans in particular, offer more flexibility through deferment and forbearance. If you have to default, you will suffer a considerable ding on your credit report and may have your wages or tax refunds garnished, but your home won’t be at stake.
If you find yourself unable to repay a HELOC, on the other hand, you could lose your house. This is because your loan is secured by your home.
You won’t be debt free
Consolidating debt simply means you are getting a new loan to pay off old loans. The debt is still there, but if done well, you will pay less interest and will get out of debt sooner.
What type of loan is best to consolidate debt?
To consolidate debt, it’s best to choose a loan with a low, fixed interest rate, though some people have used variable interest rate loans to pay off student loans with success.
There are two loan types that use your home equity: a home equity loan and a home equity line of credit (HELOC). The Figure Home Equity Line is a HELOC that offers your full loan amount up front at low, fixed interest rates, making it a great option for consolidating debt2navigates to numbered disclaimer.
Using home equity to consolidate student loan debt may not be for everyone, but for some it can offer a savings benefit that could have a long-term impact on financial well being.
