The Pros And Cons Of Using A Home Equity Loan To Pay Off Your Student Debt

American consumers currently owe around $1 trillion in student loan debt, and many of them are paying it back at a higher interest rate than what you’d pay on a home equity loan. Furthermore, many student loans don’t offer the ability to refinance at a lower rate. So does it make sense for homeowners with student loan debt to take out an equity loan in order to pay off that lingering college debt?

This is a question that Rohit Chopra, the Consumer Financial Protection Bureau’s Student Loan Ombudsman (and friend of Consumerist) says he’s hearing more and more, as consumers look for ways to shed that burden of higher-interest student loan debt in favor of something more manageable.

Chopra recently wrote a CFPB blog post on the topic, which we’ve broken down into some basic Pros and Cons:

PROS
-You will likely end up with a lower interest rate, as most private loans are currently charging borrowers higher interest than home equity lenders.
-It may be one of your few options to refinance. Some private lenders do offer student loan refinancing options, but they are few and far between.
-It may improve your tax situation, as the tax benefit of interest on an equity loan is often more than that for the interest on student loan payments. This is not always the case, but if you’re considering using an equity loan to pay off your student debt, you should check with a tax expert to see how it changes things for you.

CONS
-You are using your home up as collateral, putting it at risk for liens (and possibly foreclosure) if you have trouble keeping up with payments.
-You might be trading the monkey on your back for a gorilla. Some federal loans (like Stafford and Grad PLUS) allow borrowers to apply for Income Based Repayment, which caps monthly payments at a percentage of the borrower’s income. The interest rate may be higher, but the payments would be lower, especially in times of financial hardship, and there are forgiveness options for borrowers who make regular payments. Conversely, a home equity loan will often have fixed monthly payments for the life of the loan and if you lose your job or take a cut in pay, you’ll likely still be facing the same payments each month.

So while using an equity loan to pay off student loan debt is indeed a viable option for some, this is definitely not a choice one should make without first examining all available options.

“For student borrowers with plenty of savings for a rainy day, a good job, and a solid understanding of the risks and benefits, a home equity loan may offer an opportunity to pay off your student loans at a lower interest rate,” writes Chopra. “But again, there is always a risk of losing your home if you don’t make your payments.”