Is It Worth The Risk To Pay Off Student Loans?
There is an option for you if you own a home to refinance your mortgage to pay off student loans. The question is whether or not it is worth the effort and the risk.
Here are three of a number of considerations to help you decide whether or not it pays to refinance your mortgage to pay off your student loan debt.
Pro: Deduct for Savings
Both student loan and mortgage interest payments are tax deductible. However, your interest payments via a student loan may not qualify if you had to take a deferment or forbearance during the year, or if you make over $80,000 per year (or $160,000 as a married couple).
On the contrary, there are no such limitations when deducting the interest of a mortgage payment. However, you will need a tax specialist to help you navigate this more complicated tax situation.
Pro: Lower Interest Rate
According to HSH.com, the interest rate of a 15-year fixed mortgage averages 3.32%, while Direct Subsidized student loans disbursed after July 1st, 2015 have an interest rate of 4.29%.
In this case, consolidating student loans into a mortgage would mean savings in interest payments. However, it is important to note that those low mortgage averages are only available to those who are financially secure, have stellar credit, and have demonstrated an ability to pay off debt consistently.
Con: Pay More Interest Over Time
Saving on the interest can be a huge pro, but before you jump, you have to look at the numbers a bit closer — especially in terms of how much time is left on the loan.
Say your loan has 11 years left to be paid; if you use a mortgage to pay off your loan, you may be extending that 11 into 15, 20, or even 30 years. You will most likely be paying much more over the extended period of time.
Can It Work For You?
This may be a new idea for you. Here’s a look at some of the numbers to help you decide whether or not to refinance your mortgage and pay off your student loans.
SoFi and Fannie Mae estimate that 8.5 million households are potentially eligible to pay down or pay off their student debt using the cash-out refinance option. About 41 percent are homeowners with their own student debt; more than a third are co-signers of student loans. The average homeowner with outstanding co-signed student loans has a balance of $36,000, according to Experian data cited by the companies.
“It’s a great opportunity for parents who co-signed on student debt,” said Jonathan Lawless, vice president of product development and affordable housing at Fannie Mae.
Consumer advocates cautioned, however, that exchanging student loans for mortgage debt carries risks that borrowers should consider.
The lender is able to offer a lower rate on the new, refinanced mortgage because unlike student debt, it is secured by collateral: your house. If you default on the mortgage, the lender ultimately has the right to foreclose on the home.
In contrast, defaulting on student loans means you may ruin your credit and face financial havoc, but you’re unlikely to lose the roof over your head, said Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center.
“This adds a new layer of risk,” Ms. Yu said.
Borrowers with federal student loans, in particular, should think carefully before making such a trade. Federal loans, unlike most private loans, come with protections, like the option to defer payments if you lose your job and flexible repayment programs that tie your monthly payment amount to your income. By refinancing federal student loans into a new mortgage, you’ll lose those rights.
“You’re essentially giving up your safety net,” said Ashley Harrington, counsel with the Center for Responsible Lending
Have you considered refinancing your home to pay off student loans?