Student loans and mortgages are two of the primary drivers behind consumer debt. According to recent Federal Reserve data, Americans had $10.44 trillion of outstanding mortgage debt and $1.57 trillion of student loan debt at the end of June 2021. Borrowers with both types of debt might be considering rolling student loans into their mortgage.
Although this consolidation strategy is available, most borrowers benefit more from refinancing their student loans, separately. However, some student loan borrowers might still choose to reshuffle their debt using their mortgage.
Here’s what you need to know about rolling student loans into a mortgage.
Can you roll student loans into a mortgage?
You can roll your student loans into your mortgage if you have enough equity in your home.
The amount of equity you have is determined by taking your home’s market value and subtracting your outstanding mortgage loan balance. But instead of selling your home and walking away with cash from the equity, you can keep your home and roll your student loan debt into your mortgage.
There are three primary ways for rolling student loans into your mortgage debt:
- Traditional cash-out refinance. A cash-out refinance lets you use your home’s equity to refinance your existing mortgage into a new loan for more than what you owe. The excess funds are then sent directly to you. It’s your responsibility to use the money to pay off your student debt (or choose another purpose for the cash-out amount).
- Fannie Mae student loan cash-out refinance. Fannie Mae offers a cash-out refinance option that sends the funds directly to your student loan servicer, instead of passing it through your hands. It also waives the loan-level price adjustment that typically comes with a cash-out refinance.
- Home equity line of credit (HELOC) or home equity loan. A home equity loan or a HELOC can be used to pay student loans by borrowing against your home’s equity. However, both of these options require a separate loan than your mortgage, which means an additional monthly payment.
Remember that your student debt doesn’t just disappear when rolling student loans into a mortgage. Instead, it gets reshuffled under a different debt umbrella. You still have to repay it — just under different terms and conditions.
Pros and cons of rolling student loans into a mortgage
There are various pros and cons to weigh before rolling student loans into a mortgage.
- Consolidates your number of monthly debt payments. If you’re having trouble remembering to make student loan payments to multiple lenders, rolling your student loans into a mortgage gives you one payment to manage.
- You might qualify for a lower interest rate. If you have a good credit score, you might secure a lower interest rate compared to your existing federal or private student loan rate. However, you can also achieve this goal by refinancing with a private student loan lender.
- It might lower your overall monthly payment. Depending on the new repayment period and interest rate, you might reduce the amount you pay monthly for your student loans and mortgage combined.
- Your home becomes collateral for your student loan debt. Student loans are unsecured debt, meaning you don’t risk surrendering an asset if you can’t make your student loan payments. However, by rolling your student loans into your mortgage, you’re now putting your home on the line if you can’t afford the higher mortgage payment in the future.
- You might end up paying more interest over time. Even if you secure a lower rate, you’ll likely pay a lot more interest on your student debt over the life of the loan. This is due to the repayment period being extended to the new mortgage terms (e.g. up to 30 years).
- You might incur high fees. Depending on the new mortgage loan, you might have significant closing costs. Make sure your closing costs or other fees don’t outweigh the financial benefit of rolling student loans into your mortgage.
- You’ll lose access to income-driven repayment (IDR) plans and other federal borrower protections. Federal student loans come with perks like IDR plans that lower your monthly payment and options for various loan forgiveness programs (e.g. Public Service Loan Forgiveness). You’ll also forfeit federal student loan protections, like options for forbearance and deferment if you experience an economic hardship.
- You can’t claim the student loan interest deduction. This deduction can be claimed for up to $2,500 in paid student loan interest regardless of whether you itemize your deduction. Whereas, mortgage interest is an itemized tax deduction.
- You’ll instantly lose equity in your home. This can really become a problem if home values in your area decline, increasing your chances of being upside-down on your mortgage.
Bottom line: Should you roll your student loans into a mortgage?
Can you roll student loans into a mortgage and should you are two separate discussions. Although some borrowers choose to use this strategy, we advise against rolling your student loans into your mortgage.
By rolling your student loans into your mortgage, you’ll likely incur high fees in the process and pay more in interest over the life of the new loan. Plus, unlike with federal student loans, there’s very little relief available if you’re unable to make your new, larger house loan payment.
Instead, it’s better to refinance your student loans with a private lender, separately. You’ll lose federal benefits with a private refinance loan, but your home won’t be used as a collateral in the process.
Other alternative options include exploring:
- Federal, state and profession-based loan forgiveness programs,
- Federal loan consolidation, and
- Repayment assistance programs with your employer.