Can I Use a HELOC to Refinance My Student Loans?

According to a recent poll, Americans said that taking out too much money in student loans was the financial mistake that took them the longest to recover from. And with student loans taking an average of 18.5 years to repay, this is no big surprise. 

All this to say: your student loans will follow you for quite some time. If you have a few of them, you may eventually find that repaying and managing each of those loans is not only confusing, but costly. One option for simplifying and reducing your student loan debt is to consolidate loans with the help of a Home Equity Line of Credit (HELOC), but is this the right choice for you?

Consolidating Debt With a HELOC

A HELOC is an open-ended, revolving line of credit available to homeowners that is based on — and backed by — the equity in your home. Once approved for a HELOC, you can pull from this line of credit as needed during the draw period, using the money to cover everything from unexpected expenses to a home renovation, family trip, or even paying off some of your higher-interest student loan debt.

Consolidating student loans can be a wise option for many borrowers. With a consolidation loan or line of credit, you can:

• Simplify your student loan debt repayment (no more juggling multiple minimum payments, due dates, or remaining balances)

• Adjust your monthly payment requirement (allowing you to match your household budget without defaulting on loans)

• Lower interest rates (saving you money and potentially getting you out of debt faster)

With the right loan, you could even accomplish all three! 

You’ll need to withdraw enough cash from your HELOC to cover the loan(s) you wish to repay, submit your payment to the lender(s), and enjoy seeing that $0 balance on your student loan portal. Then, you’ll make monthly payments on your new HELOC balance according to how much you borrowed and the terms you agreed to with your lender.

HELOCs are offered by a variety of different financial institutions including banks, credit unions, and online lenders. They are usually set up with a draw period of up to 10 years, and allow you to borrow anywhere from 70% to 90% of your home’s available equity. 

Disadvantages of HELOCS

While HELOCs can be a great option for many student loan borrowers, there are some possible disadvantages to consider.

• HELOCs are typically offered with a variable interest rate. While you may be able to snag a fixed rate on other consolidation loans, HELOCs tend to have variable rates. This means that they have the potential to go up (or down) over time, changing your overall loan cost.

• There may be fees involved. Some HELOC lenders charge origination, recording, and/or annual maintenance fees on home equity lines of credit. 

• You’re limited to a portion of your home equity. Since a HELOC is based on your home’s available equity (how much your home is worth minus what you owe to your mortgage lender), you’ll be limited to a portion of that value with a HELOC. If you only have $80,000 in home equity but owe $120,000 in student loans, you won’t be able to consolidate all of that debt.

Things to Keep in Mind When Consolidating Student Loans

Of course, there are also some things you’ll want to note about consolidating student loans in the first place, whether using a HELOC or other consolidation loan product. These are especially true with federal student loans, which are backed by the Department of Education (ED).

• You might lose borrower protections. Federal student loans have built-in protections for borrowers, including loan forbearance and deferment. If you experience financial hardship, these features enable you to pause your monthly payment requirement without defaulting. In some cases, you might not even accrue interest during that time! If you use a HELOC to pay off your federal loans, however, you will lose this protection.

• You can’t utilize income-driven repayment plans. Federal loans allow you to set your monthly payments based on your household size and income. HELOCs, on the other hand, won’t take those factors into consideration, so your monthly payment requirement might equate to a higher percentage of your available income.

• You won’t have access to loan forgiveness programs. Many federal loan borrowers could be eligible for student loan forgiveness programs, such as public service loan forgiveness (PSLF). If you might qualify for this, consider whether consolidating or refinancing your student loans is the right move.

A home equity line of credit can be a great way to consolidate or refinance various forms of existing debt, including credit card balances and student loans. With a HELOC, you can reduce your overall interest paid, simplify the loan repayment process, and even lower your monthly payment requirement, getting you out of debt sooner or for less money in many cases. 

However, paying off your student loans with a HELOC (or any consolidation loan, for that matter) may not always be the right move. It’s important to look at your unique loan situation and the benefits you need to utilize most before deciding to refinance or consolidate educational debt.