Should You Use Home Equity to Pay Off Student Loans?

The math seems simple: Replace 7% student loans with 8% HELOC. Wait—that's higher. So why do people do this?

It's more nuanced than interest rates alone. Let's break it down.

The Current Landscape

Average Student Loan Rates

• Federal undergrad: 5.50% (2023-24)
• Federal grad: 7.05%
• Federal PLUS: 8.05%
• Private: 4-14%

Average HELOC Rates

• Current: 8-9%
• Variable, tied to Prime rate

At first glance, HELOC rates aren't compelling for federal loans. But there's more to consider.

When Home Equity Makes Sense

1. High-Rate Private Loans

If you have private loans at 10%+, a HELOC at 8% saves money.

Example:

• $50,000 private loans at 12%
• HELOC at 8%
• Annual savings: $2,000

2. Simplified Cash Flow

Multiple student loan payments → One HELOC payment.

3. Interest-Only Option

HELOCs often allow interest-only payments during draw period.

• $50,000 at 8% = $333/month (interest-only)
• vs. $500+ for amortized student loan payment

This frees up cash flow for other priorities.

4. Discharge in Bankruptcy

Student loans are nearly impossible to discharge in bankruptcy. Home equity debt can be discharged (though you may lose the home).

5. No Income-Based Restriction

Student loans have income-driven repayment caps. HELOCs don't affect these calculations.

When It Doesn't Make Sense

1. Federal Loan Forgiveness

If you're pursuing:

• Public Service Loan Forgiveness (PSLF)
• Income-Driven Repayment forgiveness
• Teacher Loan Forgiveness

Don't pay off these loans. You'd lose potential forgiveness.

2. Lower Federal Rates

Older federal loans at 3-4% shouldn't be replaced with 8% HELOC.

3. No Tax Benefit

Pre-2018, HELOC interest for any purpose was deductible. Now, only for "buy, build, or improve" home.

Student loan interest up to $2,500 is deductible (with income limits). You may lose this deduction by converting.

4. Risking Your Home

Student loans are unsecured. HELOCs are secured by your house.

• Miss student loan payments → Credit damage, wage garnishment
• Miss HELOC payments → Foreclosure

5. Variable Rate Risk

Most HELOCs are variable. If rates rise, your payment increases.

The Math: A Real Comparison

Scenario: $75,000 student loans

In this case, keeping student loans is probably better financially.

Scenario Where HELOC Wins

Scenario: $50,000 private loans at 11%

Here, the HELOC saves $13,000 over the loan term.

Cash-Out Refinance Alternative

Instead of HELOC, consider cash-out refinance:

• Fixed rate (no variable risk)
• Potentially deductible (if used for home improvement portion)
• Single mortgage payment

Downside: Closing costs, resetting loan term, possibly higher rate than existing mortgage.

Questions to Ask Yourself

1. What are my current rates? Only consider if HELOC is lower.
2. Am I pursuing forgiveness? If yes, don't pay off federal loans.
3. Can I handle the risk? Your home is collateral.
4. What's my rate outlook? If rates are rising, variable HELOC is risky.
5. Do I need cash flow relief? Interest-only HELOC can help short-term.

The Strategic Approach

If home equity makes sense for you:

1. Target only high-rate private loans
2. Keep federal loans intact for flexibility
3. Pay aggressively - don't extend repayment just because you can
4. Have emergency fund before putting home at risk
5. Consider fixed-rate options like cash-out refi or fixed-rate HELOC

Other Student Loan Strategies

Before using home equity, consider:

• Refinancing private loans with another lender
• Employer repayment assistance programs
• Side income dedicated to loan payoff
• Avalanche method paying highest rates first

The Bottom Line

Using home equity for student loans can make sense for:

• High-rate private loans (10%+)
• Borrowers not pursuing forgiveness
• Those who understand the risks

It doesn't make sense for:

• Federal loans with forgiveness potential
• Lower-rate loans than HELOC
• Anyone uncomfortable with home as collateral

When in doubt, consult with a financial advisor who can model your specific situation.

Explore Your Options

Learn more about HELOCs for debt consolidation or check your pre-qualification options.