How to Use a HELOC to Pay Off Student Loans

There’s no denying that student loan debt drags down millions of borrowers each month, acting like an anchor and stopping them from pursuing many of life’s major milestones. 

However, 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. Of course, as with any type of new debt, there are some drawbacks to consider before you take out a HELOC. Here’s everything you need to know.

In this guide:

• Can you use a HELOC to pay off student loans?
• Should I use a HELOC to pay off student loans?
• Pros and cons of using a HELOC to pay off student loans
• How to use a HELOC to pay off student loans
• Repaying your HELOC
• Where to find HELOC lenders to pay student loans
• Alternatives to HELOCs for paying off student loans

Can you 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.

Unlike a home equity loan, where you receive funds as an upfront lump sum, a HELOC gives you a revolving line of credit. Similar to a credit card, a HELOC allows you to pull from the line of credit as needed, then repay that borrowed amount with monthly minimum payments. 

Interest rates on a HELOC are usually lower than for credit cards, and 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.

With that said, you could absolutely 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 home equity line of credit to pay off your student loan debt can be a very attractive option, especially if it offers lower interest rates than you’re currently paying on your loan balances. However, using a HELOC might not always be the best idea. 

Since HELOCs are secured by the equity in your home, they tend to offer lower rates and may even have lower eligibility requirements. This is a double-edged sword, however, since the HELOC is secured by your home, you’re putting your property at risk if you suddenly find yourself unable to repay the debt.

Depending on the student loans you have, paying them off with a HELOC can also eliminate some of your student borrower protections. 

For example, federal student loans offer deferment and loan forbearance, if you experience a financial hardship and cannot make your scheduled payments. Federal loans are also eligible for loan forgiveness programs and income-driven repayment plans. HELOCs don’t have the same guaranteed protections. 

Most interest paid on your student loans is tax-deductible and can reduce your overall taxable income at the end of the year. If you use your HELOC to pay off those student loans, you won’t be able to deduct the HELOC’s interest payments.

Borrowers should consider all of these factors when weighing a HELOC for student loan repayment. For some borrowers, a HELOC is the perfect solution; others may find that alternative options could be a safer bet or might even pay off their student loan debt faster.

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

So, if you’ve weighed the advantages and disadvantages, and decided that a HELOC is a worthwhile choice for paying 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 figuring out how much equity you currently 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, then you have $300,000 in equity. 

This means that your loan-to-value (or LTV) is 25%, as you have borrowed 25% of what your house is worth. LTV is calculated by dividing the amount you owe by your home’s market value, and this number is important in determining how much you can borrow with your new HELOC.

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

So, using the same example above, if you wanted to take out a HELOC for $100,000 and you already had a mortgage for $100,000, your loan total would now be $200,000. Borrowing a total of $200,000 against a home that is worth $400,000 would give you a CLTV of 50%.

2. Take a look at your credit

Since 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’ll be expected to qualify for your HELOC based on the lender’s requirements. 

While these can vary from one lender to the next, a credit score requirement of 620+ is typical. Lenders will also want to see that you have a positive history of on-time payments and that you maintain a reasonable debt-to-income ratio (DTI), usually 40% or less.

Many lenders offer loan pre-approval opportunities. Depending on where your credit score stands, you can see your offers and potential interest rates without dinging your credit. 

3. Compare lenders and offers

Once you’ve gotten some pre-approved 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 like 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, mortgage statements, and the like.

Lenders will consider many factors to ensure that you meet their underwriting standards. They’ll look at things such as your income level, credit score, overall debt burden, current LTV, DTI ratio, 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. Their underwriting team will analyze everything and (hopefully) approve your new HELOC. After that, you can draw on the funds as needed to pay down your student loan debt, or whatever else you need.

You’ll begin making payments to the lender once you borrow funds. Monthly payments are calculated based on the actual amount borrowed, which we’ll talk about more in a moment.

Repay your HELOC

HELOC payments work similarly to credit cards. You can borrow against the line of credit as needed. If you don’t ever borrow money, you won’t ever have a monthly payment. They usually come with variable interest rates, which change with the market.

Your monthly payments will be interest-only payments during the draw period, which is usually five to 10 years. Of course, 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. So, if for example, you would like to make home improvements in addition to paying off your student loans, you can do so.

After the draw period ends, you will enter the repayment period, which usually lasts 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. 

While in repayment mode, you can no longer make additional purchases with your HELOC. However, you may be able to renew your HELOC and start a brand new draw period once your existing HELOC balance is cleared.

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, which dives into our top choices based on our Editorial Ratings.

Alternatives to HELOCs for paying off 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 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.