What is a HELOC?
HELOC stands for Home Equity Line of Credit. A HELOC allows you to tap into your home’s equity, which is the difference between what is owed and your home’s estimated value. When you borrow against the equity in your home, the home itself is used as collateral. That means if you default on your HELOC, you could potentially lose your home.
How to Use a HELOC to Pay Off Student Loans
Depending on your circumstances, a HELOC may give you access to a high line of credit; maybe even enough to cover all of your educational debts. And if the interest rates are low (assuming you qualify for a low rate that won’t skyrocket—some rates are fixed and some are variable), that could be to your advantage.
Should You Use Your Home’s Equity to Pay Off Your Student Loans?
It may not be a bad idea to use your home equity to pay your student loans, under certain conditions.
Some considerations include the amount of equity you have on your home, the state of the market, current rates and whether or not the rates are fixed or variable.
You need to do a full evaluation of your situation before you consider this option. For starters, be clear on how much equity you have in your home. The amount of equity you have in your home could significantly fluctuate based on the state of the market. If home prices are up, that means your home may fetch a high valuation. And conversely, if home prices are down your home may be valued at a lower amount. Now, take that into consideration when borrowing money using a HELOC. If something happens to the market and your home prices drops significantly, you need to understand what could happen. Could your bank reevaluate your borrowing ability based on these market changes, by freezing or reducing your HELOC? And what happens if you have already withdrawn funds for more than your home’s current value based on changes in the market?
Here’s something else to consider. If the current rates being offered on a HELOC are lower than the interest rates on student loans, you may be tempted to use a HELOC instead of a student loan. Just remember that a variable interest rate may change over the life of the loan, and with those changes your payment amounts may change as well. While more and more banks are now offering fixed rate options, generally you will see variable rates being offered.
If you do decide to tap into your home equity to pay off student loans, just remember that you’re simply transferring debt from one loan holder to another. You’ll want to consider not only the interest rate, and streamlined repayment benefits, but any other terms and conditions that may apply to the HELOC.
Before you make a decision, you should also consider the perks you will be giving up for any federal student loans you may have. There are a number of borrower benefits and protections that are available to you for the life of your loan. Things like income-driven repayment plans, the ability to utilize deferments, and possible federal student loan forgiveness which would be forfeited if you pay off federal student loans with a HELOC. You also want to do your research on the HELOC loans you are considering. For example, what happens if you are unable to repay your HELOC according to the terms and conditions you agreed to—are you risking your home?
Pros of Paying Student Loans with a HELOC
Despite the drawbacks of a HELOC, there are still some pros to paying off student loans with a HELOC. Here are some of the benefits to weigh.
Lower Interest Rate
The interest rate on a HELOC may be lower than that of your federal and private student loans. Using a HELOC may help you save money in the long run on the overall cost of the loan.
Loan Consolidation
Some borrowers use a HELOC to consolidate their debt. That is, roll all of their student loans into one new loan. In this case, you would be paying off your student loans with the HELOC and turning your attention to repaying the HELOC. Of course, you also have the option to refinance your student loans to accomplish the same thing.
Lower Monthly Payments
Depending on the terms of the HELOC, you may be able to lower your monthly payments. You may have a HELOC where you are only required to pay interest for a set period of time before you pay on the principal. This could help you save money month to month if you are strapped for cash. Just be sure to stay on top of all payments due and begin paying on the loan principal as soon as possible.
A HELOC May Affect Your Credit Score
A HELOC could actually have positive impacts on your credit score. If you pay off all your student loans at once, you may see an increase in your credit score because the number of open accounts on your credit report decreases, and your credit utilization will be scored differently by FICO®. The FICO Score “excludes HELOCs from revolving credit utilization calculations,” according to Experian. This is different than credit utilization for credit cards and other credit lines. Of course, this also assumes that you keep your credit line low.
Cons of Paying Student Loans with a HELOC
As with most things, there are pros and cons. The same applies to paying your student loans with a HELOC. Here are some of the cons of taking out a HELOC that you will want to consider.
You Could Lose Your Home
With a HELOC, your home is the collateral on the loan. That means if you default on repaying the HELOC, you could potentially lose your home. Consider emergency situations that may arise, and ensure you can cover them. Putting your house on the line is worth deep consideration regardless of the potential savings.
You Will Lose the Student Loan Interest Rate Tax Deduction
When you pay off your student loans with a HELOC you will not be eligible for the student loan interest tax deduction. This deduction is tied specifically to your student loans and will not apply to HELOC funds used to pay them.
Best Student Loan Refinance Lenders
College Ave Student Loans
- Variable rate range: 3.44% – 7.99% APR1
- Fixed rate range: 3.99% – 7.99% APR1
- No application or prepayment fees
- Apply in 3 minutes or less for instant credit decision
College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC.. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
1The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2This informational repayment example uses typical loan terms for a refi borrower who selects the Full Principal & Interest Repayment Option with a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
3$5,000 is the minimum requirement to refinance. The maximum loan amount is $250,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.
Information advertised valid as of 8/11/2022. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.
ELFI Student Loan Refinance
- Customers are saving an average of $309 every month and an average of $20,936 in total savings after refinancing their student loans with Education Loan Finance1
- Variable and fixed rates starting from 2.48% APR and 4.29% APR2
- Prequalify in as little as two minutes
- Award winning customer service from your dedicated Student Loan Advisor who is matched to you from the moment you sign up
1Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.
2Rates accurate as of 9/23/22. The interest rate and monthly payment for variable rate loans may increase after closing. Your actual interest rate may be different from the rates shown above and will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10 year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. To qualify for refinancing or student loan consolidation through Education Loan Finance, you must have at least $10,000 in qualified student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary Education Loan Finance institution. Education Loan Finance Parent Loans are limited to a maximum of the 10-year term.
SoFi Student Loans
- Rates as low as 3.24% variable and 3.99% fixed1
- No fees or prepayment penalties
- Unemployment protection
1Fixed rates range from 3.99% APR to 8.24% APR with a 0.25% autopay discount. Variable rates from 3.24% APR to 8.24% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.
Splash Financial Refinance Loan
- Rates as low as 2.49%1 Variable APR and 2.59%1 Fixed APR
- No pre-payment penalties, origination, or application fees
- See rates in 3 minutes without affecting your credit score2
1The rates displayed may include a 0.25% autopay discount.
2To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Earnest Student Loan Refinancing
- Variable rates starting at 2.49% APR (including 0.25% Auto Pay discount)*
- Fixed rates starting at 3.74% APR (including 0.25% Auto Pay discount)*
- Choose your own monthly payment
- No fees of any kind and exceptional customer service for the life of your loan
- Check your rate in under 2 minutes
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 3.99% APR to 8.74% APR (excludes 0.25% Auto Pay discount). Variable rates range from 2.74% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.
*Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance. Not all borrowers will qualify for our lowest rates, and your rate will be based on creditworthiness at time of application.
The information provided on this page is updated as of 8/25/2022. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
Student Loan or Home Equity: A Side-by-Side Comparison
| Feature | Student Loan | Home Equity (HELOC) |
|---|---|---|
| Secured loan? | No | Yes |
| Collateral | None, federal loans are backed by the government. |
Yes, your home! |
| Low interest rates | Yes | Possibly |
| Subsidized interest? | Yes, with some federal loans | No |
| Deferment options | Payments deferred while in school and during repayment, when needed. | Interest only payments are required during the draw period. Some lenders may require principal payments also. |
| Repayment begins | 6 months after graduation | Interest is due during the draw, which could last 5 or 10 years. Full repayment is required thereafter. In some cases, this may be a balloon payment. |
| Death/Disability Benefits? | Yes, included | Additional insurance required |
| Ability to transfer the loan? | Through a refinanced loan, parents may be able to transfer educational debt borrowed on behalf of son/daughter to that child. | Most HELOCs are non-transferrable. This is true for person-to-person and bank-to-bank transactions. Consult an attorney for further guidance. |
| Repayment benefits | No penalty for prepayment, may qualify for income driven repayment or public service loan forgiveness. | Ability to take advantage of a long draw period. Usually a long repayment term (which may help with monthly payment amounts). |
When it comes to swapping your student loan debt for a HELOC, we recommend making a list of what you want to accomplish with the HELOC (lower APR, fewer payments per month), and weighing all of your options, including student loan refinancing before you make a decision.
Refinance Your Student Loans
An alternative to using a HELOC to pay off student loans--and potentially putting your house at risk—is to apply for student loan refinancing. Student loan refinancing allows you to combine private and/or federal student loans into one new loan. You can easily compare lenders to find the best interest rate.
Benefits of Student Loan Refinance
With student loan refinancing, you may be able to accomplish the following without putting your home at risk:
- Lower your interest rate
- Lower monthly payments
- Extend your repayment term
- Consolidate many loans into one monthly payment
- Release a cosigner