<p>"American consumers currently owe around $1 trillion in student loan debt, and many of them are paying it back at a higher interest rate than what youd pay on a home equity loan. Furthermore, many student loans dont offer the ability to refinance at a lower rate. So does it make sense for homeowners with student loan debt to take out an equity loan in order to pay off that lingering college debt?" ...</p>
<p>We originally took out an unsubsidized Federal loan for our son to attend college, but then realized that the much lower interest rate (and tax benefits) of a home equity loan seemed like a no-brainer option. After sending our son and daughter to a private college, we owe something like $60K on our home equity line of credit, and we are steadily paying it off. If you have the equity in your home, why not?</p>
<p>I must be getting old. The only down-side I see is that most HELOCs carry a variable interest rate (unlikely to move any direction but UP), whereas student loans are fixed-rate. Not even mentioned in the article.</p>
<p>That is true, But if something unforeseen/awful happens, that debt can also be discharged in bankruptcy can’t it? Whereas the student loan cannot?</p>
<p>^ Why would you need to discharge it? Your house is collateral, and until you hand over the keys you won’t pass the “inability to repay” criterion… by definition. I suppose if the lender refused to accept your home you could, in theory, keep the home and discharge the debt. But why wouldn’t they take the house?</p>
<p>NewHope - you’re right - equity lines are usually variable and based on Prime, which hasn’t budged for years but when rates go up, so will Prime. I guess it’s just another option to consider.</p>
<p>I opened a home equity line of credit before the kids went to college so that I can draw on that instead of taking out loans. I understand the interest is variable, but my plan is to pay it off in the next few years. I would not take out the full equity amount, so that if something unforseen happens, I can sell the house. I don’t see the downside. So far, I haven’t had to tap into it and I have one more year to go for undergraduate costs. Keeping my fingers crossed.</p>
<p>I would say it really depends on how much equity you have in your home. While home values are starting (slowly here) to creep up again, I lost 50% of the equity in my home from 2006 until 2012. I’d be very wary of putting myself at risk of being upside down.</p>
<p>one often overlooked pro is that the PLUS is discharged upon death of the 'rent, whereas a HELOC is not. (Yes, hopefully, it is a rare occurrence, but the actuarial value of the death insurance is worth something…)</p>
<p>Here is perspective from a CPA’s point of view:
First, $2,500 of student loan interest is deductible anyway if your modified adjusted gross income is under a certain amount. For single taxpayers it is 60K and starts phasing out over this. It completely phases out if your modified adjusted gross income is $75,000 or more. For most single people, this won’t be a problem at the beginning of their careers and for a number of years thereafter. If you are married, the phase out begins at $125,000 of MAGI and completely phases out at $155,000. See: [Publication</a> 970 (2012), Tax Benefits for Education](<a href=“Publication 970 (2022), Tax Benefits for Education | Internal Revenue Service”>Publication 970 (2022), Tax Benefits for Education | Internal Revenue Service)</p>
<p>Unfortunately, student loan debt has a much higher rate of interest than that of other loans. It is around 8% last time I checked. This translates into about $33,000 of total student loan debt. Thus, if your total student debt is under $34,000, you probably will be able to deduct the interest anyway and not have to take out a home equity loan and risk losing your home. Personally, I would rather pay the higher rate of interest then to put my home at risk. If your debt is much higher than $33,000, which frankly shouldn’t have been incurred to begin with), a home equity loan might make more sense. Even then, I would be leery about the risk of losing a home.</p>
<p>I cant believe this really applies to that many people. In order to do this you first need a home, which means you somehow came up with a down payment and qualified despite your debt. Second you have to have built up a significant amount of equity in what is still a pretty crappy real estate economy. How does that happen to someone just out of college ?</p>
<p>I have about 25-30 percent equity in my home, and if home equity loans were cheaper then my student loans I could see where a former student would have the idea of paying off their student loans with their equity. Even if I paid off my outstanding loans I’d still be at about 15-20 percent or so. That being said, home equity loans are higher interest then my student loans.</p>
<p>I do know my parents have taken out a HELOC over the years for various things.</p>
<p>If housing prices drop it’s quite possible that the second home equity loan can be stripped and discharged in bankruptcy. For example, home is worth $200,000.01 and there is a first mortgage with a $200,000 balance. The second cannot be stripped because of the one-penny rule. BUT, home is worth $199,999.99, then the second could be stripped because there is no equity in the mortgage.</p>
<p>In general, taking out one loan to pay off another just shifts the expense somewhere else. It doesn’t make economic sense to take out any kind of variable rate loan now with interest rates at an all time low, eventually they will go up regardless of all the fiddling the Fed it doing with QE.</p>
<p>Far too many people took out home equity loans in the past several years to fund a lifestyle beyond their means. Now that home prices have tended to drop all over the country, you could find yourself owing more then the house is worth (i.e. being underwater) and deeper in debt.</p>
<p>Banks obvioulsy market home equity loans since they make money from the origination fees and the interest on the loan. Their motives aren’t always in the best interest of the consumer.</p>
<p>I am assuming we’re talking either Parent PLUS loans here, or parents taking on their kids’ Staffords.</p>
<p>I’ve always been against using HELOCs in this manner, kinda like the marriage of church & state. Yes, the lower interest rate is tempting. In fact, last time I re-fi’d, my mortgage guy kept asking me, ‘don’t you want to use some of your equity to pay off some of those loans?’ with my home equity at that time not being near what it was in 2006. I declined, and I’m glad I did in that my home value subsequently dropped another 15%–had I done it for any substantial amount, I’d have been up against it. </p>
<p>And I’m afraid some people would just have agreed with him, saying ‘oh, he must know what he’s talking about’. NO. YOU are the only one who knows, not some rumdum mortgage guy who has looked at your financials for all of five minutes.</p>
<p>I’ve long ago rationalized, rightly or wrongly, that the exorbitant interest rates I’m paying for my PLUS loans is government ‘juice’ for flexibility if I have to defer some of them at some point, and keeping the solvency of my home intact.</p>