Student loans have become a thing in America in recent years and by “thing,” we mean a political football. Student loan debt has taken over national conscience because of the large aggregated debt that current college students have obtained (an estimated $1 trillion – or 1,000 billion). The debate has sparked all sorts of potential solutions such as the push to introduce free college and aggressive student loan forgiveness options to name a couple.
The Student Loan Crush
Student loans drag down many. They often hang around your necks of college graduates like an anchor, partly because of other life-living expenses that push student loans off until later. Maybe people have come to accept that student loans are the “thing” to deal with in order to go to college, and many students don’t think about the cost of college and choose to deal with the price tag later. Instead of picking a school according to affordability, why sell yourself short with loans available, right? This often leads to a bit of creativity when it comes to finding ways to repay student loans.
What is a Home Equity Line of Credit (HELOC)?
What has started to become an attractive repayment option for some is the idea of refinancing a student loan using a home equity line of credit (HELOC). A HELOC, in short, is a line of credit (similar to a credit card account) where the family home is used as collateral to borrow money against the house (the equity) in order to pay bills, do renovations, or take a vacation. It is different than a credit card in that the interest rates are usually lower, and it has a finite payoff term.
In some cases, a student loan borrower could use a HELOC to write a check to pay off student loans. Afterwards, the debtor is on the hook for their debt through the HELOC.
The Pros of Using a HELOC for Student Debt
The idea of rolling student-loan debt into a HELOC seems attractive, and there are a couple of benefits to doing so. First of all, using a HELOC means you tend to have a fixed interest rate and a finite term of repayment (in other words, a HELOC can’t hang around for 40 years like a student loan could). Also, your interest rate may be lower than your loans (depending on whether you have a federal student loan or a private student loan), and you can file bankruptcy on a HELOC should you get in financial trouble which isn’t as easy for a student loan.
The Cons of Using a HELOC for Student Debt
Along with those benefits, there are challenges to using a HELOC as a student debt refinancing plan. The very first one that is probably the most important is the risk – if you move student debt to a HELOC, you are using your home (or your parents’) as collateral. If you get into trouble and can’t make a HELOC payment, you risk losing your home (or your parents’) to the bank to pay the debt. You would not have that risk if you had kept the student loan in its current format.
Second, there is no safety net should you get into trouble. If you keep your student loan and lose your job, you could ask for a forbearance or hardship deferral, which delays payments until you get back on your feet. Banks who hold HELOCs don’t have that kind of mercy; you will be expected to make your payment every month. You would also lose access possible student debt forgiveness programs; the HELOC is there until you pay if off, with no forgiveness options.
Is This a Good Option?
Depending on the circumstances, a HELOC could go one of two ways, but normally the risk might outweigh the reward. With interest rates currently ticking up on mortgages, there is no guarantee that a HELOC will provide a better interest rate than a student loan. You can only have one HELOC open at a time for a finite amount, so you can’t add additional graduate-school student loans onto it later until the HELOC is paid off.
Based on the risk of losing a $200,000 home over defaulting on a $20,000 student debt, the idea of using a HELOC to refinance is not worth the trouble and perceived convenience of consolidation. Your home and your equity are wealth-building assets, and using either of them (or both) to refinance student loans turns your home and equity into liabilities that will drag down your wealth-building potential. In the long run, you are better off pinning your ears back and attacking the student debt as quickly as you can. Leave your house out of it.
There are many private lenders and banks who offer student loan refinance rates that are typically just slightly higher than most HELOC rates. These are unsecured so they require no collateral - such as your home.