How to Use a HELOC 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, or if you want to save on repayment, you may be considering using a home equity line of credit (HELOC) to pay off your student loans.
Using a HELOC to pay off your student debt can save you money if you are eligible for a lower rate than what you are currently paying. There are, however, drawbacks to consider, as there is with any kind of debt.
On this page:
- How you can use a HELOC to pay student loans
- Pros & cons of using a HELOC for student loans
- Where to find HELOC lenders to pay student loans
- HELOC eligibility requirements
- Alternatives to HELOCs for student loans
How you can use a HELOC to pay student loans
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 take out a HELOC and use the funds to pay off a student loan balance. You would then make payments on the HELOC instead of the student loans.
Repaying your HELOC
HELOC payments work similarly to credit cards. To start, they usually come with variable interest rates that change with the market.
You are also only required to make monthly interest payments on your HELOC during the draw period which is usually five to 10 years. You can, of course, pay off the entire balance each month, if you’d like, to save on interest costs.
During the draw period, you can spend on your HELOC as you see fit up to your credit limit. So if you would like to make home improvements, for example, in addition to paying your student loans, you can do so.
After the draw period ends, you will enter the repayment period, which usually lasts 10 to 20 years. During this time, you will make monthly payments as you would on any other loan until the balance is paid off in full. During this time, you can no longer make additional purchases with your HELOC.
Pros & cons of using a HELOC for student loans
Pros
- HELOCs typically have a lower interest rate than student loans helping you save on interest costs. This is especially true for private student loans that tend to have high rates.
- An extended repayment period 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 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 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 will likely have to pay closing costs which may cut into or eliminate any savings from a lower rate.
Where to find HELOC lenders to pay student loans
If you are confident you can make payments on the HELOC and know it will save you money in the long run, it 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 that dives into our top choices based on our Editorial Ratings.
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HELOC eligibility requirements
The most important eligibility requirement for HELOCs is your loan-to-value ratio (LTV) and combined loan-to-value ratio (CLTV).
LTV is equal to what you owe on your mortgage divided by the current value of your home. For example, if you currently owe $100,000 on your home and it is worth $400,000, your LTV would be 25%.
CLTV is just like LTV except your HELOC is incorporated into the equation. Most lenders will not allow you to go above 80% CLTV. Using the same example, if you wanted a HELOC for $100,000, your CLTV would be ($100,000 HELOC + $100,000 mortgage)/$400,000 home value = 50%.
Lenders typically also require that you have a credit score of 620 or higher, a debt-to-income ratio of under 40%, and a history of making on-time payments.
Alternatives to HELOCs for student loans
Before you put your home on the line, weigh a HELOC against other options for paying off your student loans:
- 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.
- 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 are given a lump sum of money and make regular monthly payments at a fixed rate.
- 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.
- 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.
>> Read More: Home equity loans and line of credit uses
