If you’ve borrowed money to pay for your college education, you might be wondering if there’s a better way to tackle your student loan debt. People once turned to HELOCs as a method for paying off student loans.
HELOCs offered certain benefits that made them advantageous for homeowners with student loan debt. More recently, though, the benefits that once existed have faded away. Here’s what to know about HELOCs and why applying for one might not be the best option for paying off student loans anymore.
How do HELOCs work?
A HELOC, or home equity line of credit, is a line of credit secured by your home. A HELOC gives you a revolving line of credit you can use toward large expenses. HELOCs traditionally offer lower interest rates than other loan types, including student loans, and in some cases, the interest might be tax-deductible.
With a HELOC, you borrow money against your home’s available equity. Your home is the collateral of the line of credit. A HELOC works more like a credit card than a loan. As you repay the balance, your line of credit goes back up so you can borrow against it again.
It comes with a predetermined “draw period,” which is the length of time you can draw funds. A repayment period follows the draw period, which is when homeowners repay the borrowed amount over time.
HELOC to pay off student loans: Pros and cons
Using a HELOC to pay student loans might sound like a good idea, and in some cases, that might be true. It’s not without drawbacks, though. Here’s a look at some of the pros and cons of using a HELOC to pay off your student loan debt.
- HELOCs traditionally come with lower rates than your current student loan rate.
- It might be easier to qualify for a HELOC than student loan refinancing because HELOCs are secured loans. It uses your home as collateral instead of a credit check.
- You can consolidate your debt into one monthly bill.
- You might end up with lower monthly payments.
- Interest on your student loan is no longer tax-deductible
- Student loan refinancing rates these days are comparable to, if not lower than, HELOC rates
- HELOCs don’t offer the cash bonuses you can get when refinancing your student loans
- You put your home at risk since it’s considered collateral for HELOCs
- You lose federal benefits like loan forgiveness, income-driven repayment plans, and deferment when transferring student loans to a HELOC
- Your loan term might lengthen, which could mean paying more interest over time
Although there’s potential for saving money and getting out from under your student loan debt, using a HELOC can be a risky proposition.
Why HELOCs aren’t a good option for paying off student loans
Once considered a good solution, using a HELOC to pay off your student loans no longer makes sense. In the past, HELOCs were considered a good student loan repayment strategy for two reasons:
1. HELOCs offered lower rates than refinance student loans. The rates on HELOCs and student loan refinancing aren’t that different now either. With good credit, you can secure competitive rates with many private lenders who offer refinancing. Many of the top private lenders offer cash bonuses when you refinance your student loans too.
2. It once offered tax write-off incentives. For example, SoFi used to offer a cash-out HELOC, specifically for consolidating student loan debt with your mortgage. There were tax benefits with a cash-out HELOC, like still being able to write off interest payments on your student loans at tax time.
Unfortunately, these tax write-offs no longer exist. Now, when you move your student loans to a HELOC, you’re no longer eligible for this tax benefit. Not only are there no tax write-offs, but a HELOC will likely extend your repayment period, considerably, meaning you’ll pay interest for a longer period.
There’s an element of risk with HELOCs, too. With a HELOC, your mortgage and student loan become one debt, and everything’s tied to your home. Future financial issues could lead to your home being foreclosed.
Nobody plans on having financial hardship, but it’s a possibility, and opening a HELOC adds additional risk that you might not be adequately prepared to handle.
Alternatives to HELOCs for paying off student loans
The good news is that there are other ways to save money and pay off your student loans. Here are a couple of options that may be available to you.
Income-driven repayment plans
Switching from a standard repayment plan to an income-driven repayment plan can help lower your monthly payments, depending on your discretionary income and family size.
Being on an income-driven repayment plan won’t necessarily help you pay off your student loan debt faster but can provide some financial relief. After 20 or 25 years, you might even qualify for loan forgiveness on your remaining balance.
Student loan forgiveness
Depending on your situation, you could qualify for beneficial loan forgiveness programs, like Public Service Loan Forgiveness (PSLF) or the Teacher Loan Forgiveness Program. You’ll need to meet specific criteria to qualify, but you could have your loan balance forgiven, tax-free, if you do.
Student loan refinancing
You can also refinance your student loans, which can help lower your monthly payments or let you pay off your debt faster. If you have good credit, you might qualify for a considerably lower interest rate than your federal loans. This alone can knock thousands of dollars of interest payments off your loan over time.
Just like with a HELOC, though, refinancing means losing access to government loan benefits like federal loan forgiveness, flexible repayment plans, and extended deferment or forbearance periods.
HELOCs used to be a popular option for student loan borrowers, but you might have better luck exploring other options first. Analyze your financial and loan situation to determine the right course of action.
Best option for paying off student loans
Ultimately, the best option for paying off your student debt depends on your unique situation, including your life goals, family, income and other factors.
If you’re not sure what to do, book a consultation with our team. We’ve helped thousands of borrowers just like you to come up with a customized plan to pay off student loan debt. We can do the same for you.