Should You Use a HELOC to Pay Off Student Loans? The Complete Guide

If you’re a student loan borrower—or a parent of one—who is also a homeowner, you may be able to use a home equity line of credit (HELOC) to pay off student loans faster and for less..

Tapping into your home’s equity through a HELOC can allow you to save money on interest, get out of debt sooner, or both. But be sure to consider the drawbacks before you take out a HELOC for student loans. Here’s everything you need to know.

Table of Contents

1. Can you use a HELOC to pay off student loans?
   1. Can parents use a HELOC to help pay off their child’s student loans?
2. Should I pay off student loans with a HELOC?
3. 5 steps to use a HELOC for student loans
4. How to repay your HELOC
5. Where to find HELOC lenders
6. Alternatives
7. FAQ

Can you use a HELOC to pay off student loans?

Yes, you can use a HELOC to pay off student loans. Similar to a credit card, a HELOC allows you to pull from the line of credit as needed and then repay that borrowed amount with monthly minimum payments. 

You could use a HELOC to pay off one or more student loan balances and then make regular payments on the HELOC instead of to your loan servicer.

Can parents use a HELOC to help pay off their child’s student loans?

Parents who own their home and have significant equity may consider using a HELOC to help their child pay off student loans. This approach could make sense if the HELOC offers a lower interest rate than the student loans and if parents are confident they can manage the payments.

However, there are risks to consider:

• A HELOC puts your home at stake as collateral, so missing payments could result in foreclosure.
• Diverting home equity toward student loan repayment might sacrifice retirement security or delay other financial goals.

Parents should explore alternatives before using a HELOC, such as cosigning a student loan refinance for their child. This allows parents to help their child secure a lower rate or better repayment terms while sharing responsibility.

It’s also worth evaluating whether the child qualifies for income-driven repayment plans or other forgiveness options that could make their loans more manageable.

Should I use a HELOC to pay off student loans?

Using a HELOC to pay off your student loans can be risky, but it may make sense in certain situations. Because HELOCs are secured by the equity in your home, they often have lower interest rates and more lenient eligibility requirements than student loans. However, your home is at risk if you can’t repay the debt.

When does using a HELOC to pay off student loans make sense?

A HELOC could be a solid option in these scenarios:

• High-interest private loans: If you’re paying high rates on private student loans, replacing them with a lower-rate HELOC could save you money on interest.
• Near the end of repayment: Borrowers close to paying off their student loans may want to use a HELOC to save on remaining interest, as the shorter repayment period could reduce total costs.
• No federal protections: Federal borrower benefits don’t apply to private or Parent PLUS Loans, making the trade-off of protections less of a factor for these borrowers.

Pros and cons

Pros

• Lower interest rates

  HELOCs may have lower rates than student loans, especially private loans, helping you save on interest.

• Dischargeable in bankruptcy

  Unlike student loans, HELOCs are dischargeable if you declare bankruptcy.

• Flexible repayment options

  Extending repayment with a HELOC could reduce monthly payments if you’re nearing the end of your student loan term.

Cons

• Risk to your home

  Your house serves as collateral, so missed HELOC payments could lead to foreclosure.

• Loss of federal protections

  Paying off federal loans eliminates access to income-driven repayment plans, forbearance, deferment, and forgiveness programs.

• Limited tax deductions

  HELOC interest is only deductible if the funds are used for home improvements, whereas student loan interest can be deducted up to IRS limits.

• Closing costs

  Fees for opening a HELOC can offset savings from a lower interest rate.

5 steps to use a HELOC to pay off student loans

If you’ve weighed the advantages and disadvantages and decided a HELOC is a worthwhile way to pay off your student loan debt, here are the steps you’ll need to take.

1. Determine your home equity

Calculate how much equity you’ve built in your home. Subtract the remaining mortgage balance from your home’s current market value. Lenders typically allow borrowing up to 80% of your combined loan-to-value ratio (CLTV), which includes your mortgage and the HELOC.

2. Review your credit score

Most lenders require a credit score of 620 or higher, along with a good history of on-time payments and a debt-to-income ratio (DTI) under 40%. Check your credit score and address any issues before applying to improve your chances of approval.

3. Compare lenders and offers

Shop around to find the best rates, terms, and fees. Look beyond the initial interest rate; variable rates could increase during repayment. Consider lenders with low or no closing costs to maximize your savings.

4. Submit your application

Once you’ve chosen a lender, gather the required documents, such as tax returns, pay stubs, and mortgage statements. Complete the application and prepare for a property appraisal if required. Once approved, your HELOC will be ready for use.

5. Use your HELOC responsibly

When you’re ready to draw funds to pay off your student loans, understand how variable rates and repayment terms affect your budget. HELOC interest rates can rise, increasing your monthly payment.

To manage this risk:

• Budget for potential payment increases during the repayment period.
• Consider making principal payments during the draw period to reduce future costs.
• Be cautious about using additional funds for nonessential expenses, as this could increase your debt burden.

Addressing variable rates and repayment risks upfront can help you make the most of a HELOC while protecting your financial stability.

How to repay your HELOC

HELOC payments are similar to credit cards: You can borrow against your line of credit as needed, and if you don’t borrow, you won’t have a monthly payment. Most HELOCs feature variable interest rates, which fluctuate with market conditions.

How to manage payments during the draw period

During the draw period, which typically lasts five to 10 years, payments are often interest-only. While this keeps monthly costs low, making larger payments or paying down the principal during this time can significantly reduce the overall cost of borrowing.

Doing so minimizes the balance you’ll need to repay once the draw period ends, saving on interest in the long run.

Repayment period strategies

Once the draw period ends, you enter the repayment period, which usually lasts 10 to 20 years. During this time, you’ll make monthly payments that include both principal and interest.

These payments can be higher than during the draw period, especially if you borrowed a significant amount and only made interest payments initially. Planning ahead and reducing your balance early can help keep these payments manageable.

When to refinance your HELOC

If interest rates drop during or after your draw period, consider refinancing your HELOC to secure a lower rate or convert to a fixed-rate loan. This can provide more predictable payments and could reduce your borrowing costs further.

By adopting these repayment strategies and staying proactive, you can use your HELOC to pay off student loans while minimizing financial risks.

Where to find HELOC lenders to pay off student loans

If you’re confident you can make payments on the HELOC and know it will save you money in the long run, this is a sound financial strategy worth considering.

Be sure to shop around for a HELOC to get the best deal. You should compare rates, closing costs and other fees, the reputation of lenders, and the terms offered.

An excellent place to start is our best HELOC lenders and rates guide, which dives into our top choices based on our editorial ratings and are summarized below:

When exploring HELOC options, check with lenders to see whether they offer products tailored to families or parents who are cosigners or guarantors on student loans; some may provide specialized solutions to meet these unique financial needs.

Alternatives to HELOCs to pay off student loans

Before you put your home on the line, weigh a HELOC against other options for paying off your student loans:

• Refinance student loans: Refinancing can lower your interest rate, reduce monthly payments, or shorten your loan term. It’s a solid option for borrowers with good credit who can qualify for better terms than their current loans. Refinancing federal loans will make you ineligible for benefits like forgiveness or income-driven repayment, so weigh the trade-offs carefully.. (Best companies to refinance student loans)
• Cash-out refinance: This mortgage refinancing option also uses your home’s equity, but it gives you the opportunity to reduce your mortgage interest rate (if rates have gone down since you first took out your mortgage) while also getting cash out to pay off debt. (Best cash-out refinance companies)
• Personal loans: If you have a small amount of student loan debt, a personal loan could help you knock it out with a low interest rate and quick repayment term. (Best personal loans)
• Income-driven repayment (IDR) plan: Federal borrowers struggling with high monthly payments may benefit from IDR plans. These adjust your payment to a percentage of your discretionary income and may lead to forgiveness after 20 or 25 years. For parents with Parent PLUS Loans, consolidating and enrolling in an income-contingent repayment plan could offer relief.

FAQ

How much can you borrow with a HELOC to pay student loans?

The amount you can borrow depends on your home equity, lender guidelines, and your financial situation. Many lenders allow up to 80% combined loan-to-value (CLTV), but this depends on your credit score, income, and debts.

What happens if you can’t repay the HELOC?

Failing to repay a HELOC could lead to foreclosure since your home is collateral. If you’re unsure about repayment, consider other debt management strategies to avoid putting your home at risk.

Are there tax benefits to using a HELOC to pay off student loans?

HELOC interest is generally not tax-deductible unless the funds are used for home improvements and you itemize deductions instead of taking the standard deduction. On the other hand, student loan interest can be deducted up to $2,500 per year, subject to IRS rules.