How to Decide Whether to Use a Home Equity Line of Credit to Pay off Student Loans
Using a HELOC to pay off your student loan debt could save you a lot of money in interest, but you risk losing your home if you can't make payments. Only use this strategy if you are sure that you can afford the payments until the HELOC is paid off.
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Student loans drag down millions of borrowers each month. For many college graduates, the debt is like an anchor, stopping them from pursuing life’s major milestones.
If your monthly payments aren’t tackling your debt quickly enough, you may be ready to consider alternative strategies to pay the student debt off faster. One option is to use a home equity line of credit (HELOC), a revolving credit that could help you repay your loans with less interest.
But any kind of debt comes with drawbacks, as well. This guide will explain everything you need to know to determine whether using a HELOC to repay student loans is right for you.
On this page:
- Using a HELOC to pay off student debt
- Pros & cons of using a HELOC for student debt
- Deciding what is right for you
- Alternatives to HELOCs for student loans
Using a home equity line of credit to pay off student debt
A HELOC is a line of credit where a home is used as collateral. The amount you can borrow depends on the equity you’ve built in your home—i.e. the home’s value and how much of your mortgage you’ve repaid.
Unlike a home equity loan, where you receive funds as a lump sum, a HELOC gives you a revolving line of credit, much like a credit card. Interest rates are usually lower than for credit cards, and they have a finite draw period.
A student loan borrower could borrow a HELOC to write a check to pay off a student loan balance. You would then make payments on the HELOC instead of the student loans.
Pros & cons of using a HELOC for student debt
Pros
- HELOCs typically have a lower interest rate than student loans.
- An extended repayment period could help if you’re near the end of your student loan term.
- HELOCs are dischargeable in bankruptcy, while student loans almost never 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, 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.
Deciding what is right for you
Whether or not using a HELOC to pay off your student loan debt is dependent on your financial situation. If you only have a small amount of debt, it might be easier to just stick with your repayment plan. But if you’re dealing with $100,000 in student debt, you may benefit from alternative financing.
If you are confident you can make payments on the HELOC and know it will save you money in the long run, it may make sense. Check out our best HELOC lenders to compare interest rates and terms to understand your options.
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Alternatives to HELOCs for student loans
Before you put your home on the line, weigh a HELOC against other options for repaying student debt, including:
- Direct Consolidation Loan: If you’re having trouble repaying federal loans, start with this loan, which combines your loans into one monthly payment and makes it simpler to get an income-driven repayment plan.
- Refinancing 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.
- Personal loans: If you have a small amount of debt, a personal loan could help you knock it out with a low interest rate and quick repayment term.
- Cash-out refinance: This mortgage refinancing option also counts on your home equity, but it gives you the opportunity to reduce your mortgage interest rate while getting cash to repay debt.
