How to Use a HELOC to Pay Off Student Loans

If you’re a student loan borrower 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. Here’s everything you need to know.

Can you use a HELOC to pay off student loans?

Yes, you can use a HELOC to pay off student loans. A HELOC is a line of credit that uses a home as collateral to secure the note. The amount you can borrow with a HELOC depends on how much equity you’ve built in your home, as well as factors such as your credit score and income.

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. They have a finite draw period. Once this draw period ends (often around 10 years), no more draws can be made and repayment will begin on the remaining balance owed.

You could take out a HELOC and use the funds to pay off one or more of your student loan balances. You would then make regular payments on the HELOC instead of to your student loan servicer(s).

Should I use a HELOC to pay off student loans?

Using a HELOC to pay off your student loans can be risky. Because HELOCs are secured by the equity in your home, they tend to offer lower rates and may even have lower eligibility requirements. But because your house acts as collateral, you’re putting your property at risk if you can’t repay the debt for any reason.

Here’s more about the risks and benefits.

Pros and cons of using a HELOC to pay off student loans

Pros

• HELOCs may have a lower interest rate than student loans, helping you save on interest.

  This is especially true for private student loans, which tend to have higher rates than federal loans.

• Extending your repayment period with a new loan could help reduce your monthly payments if you’re near the end of your student loan term.

• HELOCs are dischargeable in bankruptcy, while student loans rarely are.

Cons

• Your home is at risk if you can’t repay.

• If you pay off federal student loans this way, you’ll lose borrower protections, including income-driven repayment plans, deferment, forbearance, and student loan forgiveness.

• HELOC interest is only tax-deductible if you use the funds for home improvement. Student loan interest is always tax-deductible up to IRS limits.

• You might pay closing costs, which will cut into or eliminate the savings from a lower rate.

How 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 next.

1. Figure out how much equity you have

The first step in determining how much you can borrow with a HELOC is calculating how much equity you have in your home. 

Your equity is your home’s current market value minus any liens on the property (such as a home mortgage loan). If your home is worth $400,000 and you owe $100,000 to your mortgage lender, you have $300,000 in equity. 

Your loan-to-value ratio (LTV) is 25%; you’ve borrowed 25% of what your house is worth. Calculate LTV by dividing the amount you owe by your home’s market value. This number is important in determining how much you can borrow with your new HELOC.

You can’t borrow 100% of your equity with a HELOC. Most lenders will not allow you to go above 80% combined LTV (CLTV). CLTV is the same as LTV, except it factors your HELOC amount into the equation along with your mortgage amount.

2. Check your credit

Because a HELOC is secured by your home’s equity, it can sometimes be easier to obtain than other types of unsecured products, such as personal loans. However, your credit score and credit history are still important, and you must qualify for your HELOC based on the lender’s requirements. 

These can vary from one lender to the next, but a credit score requirement of 620 or better is typical. Lenders will also want to see a positive history of on-time payments and a reasonable debt-to-income ratio (DTI)—often 40% or less.

Many lenders offer loan preapproval opportunities. Depending on where your credit score stands, you can see your offers and potential interest rates without harming your credit. 

3. Compare lenders and offers

Once you’ve gotten several preapproval offers, it’s time to compare quotes to see which lender is the best option for you. The interest rates are important, but so are other factors, such as closing costs and fees. 

Also, keep in mind that HELOC interest rates are variable, so they can change over time. 

4. Choose a lender and prepare your application

Once you’ve picked a lender, it’s time to start gathering the necessary documentation to submit your formal application and finalize the HELOC. This could include previous tax returns, current pay stubs, bank statements, and mortgage statements.

Lenders will consider many factors to ensure you meet their underwriting standards, such as your income level, credit score, overall debt burden, current LTV, DTI, and more.

5. Apply and receive your line of credit

Now that you have everything in order for your chosen lender, you can go ahead and submit your application. Its underwriting team will analyze your information and, ideally, approve your new HELOC. After that, you can draw on the funds as needed to pay down your student loan debt.

You’ll begin making payments to the lender once you borrow funds. Monthly payments are calculated based on the actual amount borrowed. More about that below.

How to repay your HELOC

HELOC payments are similar to credit cards. You can borrow against the line of credit as needed. If you don’t borrow money, you won’t have a monthly payment. Many HELOCs come with variable interest rates, which change with the market.

Your monthly payments will be interest-only during the draw period, which is usually five to 10 years. You can also make larger payments or pay off the entire balance each month, if you’d like, to save on interest costs.

During the draw period, you can use your HELOC as you see fit, borrowing up to your credit limit. For example, if you want to make home improvements in addition to paying off your student loans, you can.

After the draw period ends, you enter the repayment period, which can last another 10 to 20 years. During this time, you will make regular monthly payments as you would on any other loan, until the balance is paid off in full, and you can no longer draw from your credit line.

Where to find HELOC lenders to pay 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.

A great place to start is our best HELOC lenders & rates guide, which dives into our top choices based on our editorial ratings.

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: For private and federal loans, you may find a lower rate and reduce your cost of borrowing by refinancing with a private lender.
• Home equity loan: You could also use a home equity loan instead of a HELOC to pay off your student debt. Eligibility requirements are similar, but you get a lump sum and make regular monthly payments at a fixed rate.
• 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.
• 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.