How to Decide if You Should Use a Home Equity Line of Credit to Pay Off Student Loans

Student loans drag down millions of borrowers each month. They often hang around the necks of college graduates like an anchor, stopping them from pursuing things like purchasing a car or home and getting married.

There are many student loan repayment strategies, some of which include using a different type of financial product to pay the student debt off faster or at a lower interest rate.

One option is to use a home equity line of credit, or HELOC, for short.

While this strategy can potentially save you money in interest, there are pros and cons to consider before doing so.

On this page:

• Using a HELOC to Pay Off Student Debt
• Pros of Using a HELOC to Pay Off Student Debt
• Cons of Using a HELOC to Pay Off Student Debt
• Deciding What is Right for You

Using a Home Equity Line of Credit to Pay Off Student Debt

A HELOC, in short, is a line of credit (similar to a credit card) where a home is used as collateral to borrow money against the house (the home equity) in order to consolidate debt, do renovations, or take a vacation.

It is different than a credit card in that the interest rates are usually lower and it has a finite payoff term.

In some cases, a student loan borrower could use a HELOC to write a check to pay off student loans. Afterwards, the person would start making payments on the HELOC instead of the student loans.

Pros of Using a HELOC for Student Debt

The idea of rolling student loan debt into a HELOC seems attractive to many, and there are a couple of benefits to doing so.

• Lower Interest Rate: The main reason to use a HELOC to pay off student debt is that your interest rate may be considerably lower than your loans. Depending on whether you have federal student loans or private student loans your new interest rate could be anywhere from 1% – 10% lower.
• More Flexible Repayment: When you take out a HELOC, you can usually pay it off in as long as 10 to 20 years, and you can make payments as it suits you. If you need to only make the minimum payments for a few months, you can do so without going into default (though more interest will accrue).
• Dischargeable in Bankruptcy: Though hopefully you’re never in a situation where you have to file bankruptcy, if you are, you can include on your HELOC in what you discharge. Student loans typically cannot be included in bankruptcy.

Cons of Using a HELOC for Student Debt

Along with those benefits, there are challenges to using a HELOC as a student debt refinancing plan.

• Risk Losing Your Home: The biggest risk of moving student debt to a HELOC is that you are using your home as collateral. If you get into trouble and can’t make HELOC payments, you risk losing your home to the bank to pay the debt.
• Limited Financial Hardship Options: If you keep your student loan and lose your job, you could apply for income-driven repayment plans, forbearance, or deferment to limit or delays payments until you get back on your feet. Banks who hold HELOCs don’t have that kind of mercy; you will be expected to make your minimum payment every month.
• Lose Access to Federal Student Loan Benefits: If you pay off your federal student loans with a HELOC, you lose access to federal benefits and repayment plans including those previously mentioned as well as student loan forgiveness.

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 $100K in student debt, a home equity product could help.

If you are confident that you can make payments on the HELOC and know it will save you money in the long run, it may make sense. To compare HELOC lenders, check out our Best HELOC Rates & Lenders page.

If you aren’t financially stable or think that in the future you may lose your job or source of income, you might be better off keeping your student loans.

If you decide not to use a HELOC, there are many private lenders and banks who offer student loan refinancing rates that are typically on-par or just slightly higher than most HELOC rates. These are also unsecured so they require no collateral – such as your home.