How to Pay Off Student Loans with a HELOC

Tapping home equity to pay off student debt

For some, it can take decades to get rid of.

Between high monthly payments, interest, and limited funds, trying to repay student loans can put you in a tight spot. However, there’s a solution that could ease the burden — a home equity line of credit (HELOC) or a home equity loan.

Here’s a look at how home equity options work, including the potential benefits of using these to pay off student loans.

In this article (Skip to...)

• What is a home equity line of credit?
• What is a home equity loan?
• Can tapping home equity to pay off student loans be beneficial?
• HELOC and home equity loan rules

Struggling to pay off student loans?

The Supreme Court ruled against President Joe Biden’s widespread student loan forgiveness plan, limiting relief options for borrowers. Student loan forbearance is set to end on Oct. 1, 2023, with interest resuming on Sept. 1, 2023.

Student loan debt affects approximately 43.6 million people, with the average debt roughly $37,000 per borrower, according to EducationData.org.

Loan repayment can be difficult for several reasons — such as the high cost of tuition and living expenses, steep interest rates, and limited job prospects/low wages after graduation.

What is a HELOC?

A home equity line of credit (HELOC) is a revolving credit line that’s similar to a credit card.

But unlike a credit card — which isn’t secured by collateral — HELOCs are tied to your home’s equity. You can borrow against this equity on an as-needed basis.

Equity is the difference between how much your home is worth and how much you still owe on your mortgage. So if your home is worth $350,000 and you owe $200,000, your equity is $150,000.

HELOCs feature draw periods and repayment periods, and you can usually borrow up to 80% of your home’s equity.

What is a home equity loan?

A home equity loan is also tied to your equity. But instead of accessing a line of credit, you’ll receive a one-time lump sum of money. Similarly, you can usually borrow up to 80% of your equity.

You’ll repay a home equity loan over a fixed term, ranging from five to 30 years. These loans typically have fixed interest rates, and they’re ideal for one-time expenses like home renovations, debt consolidation, or large purchases.

Why tapping home equity to pay off student loans can be beneficial

Debt consolidation is a common use for HELOCs and home equity loans. This involves taking out a new loan to pay off an existing debt.

Consolidation benefits borrowers because they’re able to simplify their finances, and potentially get a better interest rate and lower monthly payment.

But while some people will get a HELOC or home equity loan to pay off credit card debt, these are also useful for paying off student loans.

Possible advantages of using home equity to pay off student loans include:

• Lower interest rate: Home equity loans and HELOCs often come with lower interest rates compared to student loans. Therefore, you might save money on interest payments over the long term.

• Fewer loans to juggle: By using your home’s equity, you can possibly consolidate multiple student loans into a single loan. This can simplify your finances, making it easier to budget your money.

• Flexibility: Home equity loans and HELOCs offer flexibility in the forms of repayment options and loan terms. This can provide greater control over your monthly payments.

But while both can be a cost-effective way to pay off student debt, tapping your home equity has its risks.

Possible drawbacks of using home equity to pay off student loans include:

• Risk of foreclosure: Your home acts as collateral for a HELOC and home equity loan. If you don’t repay funds, there’s the risk of losing your home.

• Extended debt repayment: Consolidating student loan debt with a home equity loan or HELOC can possibly extend your repayment term, meaning you’ll have the debt for a longer period of time.

• Loss of Federal student loan benefits: Federal student loans offer unique benefits such as income-driven repayment plans, loan forgiveness programs, and deferment/forbearance options. Using a home equity loan or HELOC to pay off your loan means you’ll lose access to these benefits.

Rules and Stipulations for a HELOC

Before applying for a HELOC to pay off student loan debt, make sure you understand how equity options work.

Having equity in your home doesn’t mean you’ll qualify for a line of credit or a loan. You’ll first need to complete an application. From there, your lender reviews your financial history. They take into account several factors such as your creditworthiness, income, and the property’s loan-to-value ratio.

Keep in mind, too, that HELOCs often have minimum initial draw amounts and maintenance fees. The minimum initial draw can range from $10,000 to $25,000. Additionally, home equity loans typically have minimum loan amounts.

If your student loan balance is less than the minimum, tapping your home’s equity might not be the right choice.

HELOCs also have a draw period, which is the time in which you can access funds. This is typically around five to 10 years. During this period, your minimum monthly payments may only cover the interest.

Once the draw period ends, a repayment period begins, usually lasting 10 to 20 years. During this time you can no longer withdraw funds from the HELOC, and you’ll repay both the principal and the interest.

HELOCs also have variable interest rates that change based on market conditions. In other words, your monthly payment can increase or decrease over the years.

Home equity loans, on the other hand, have a fixed repayment term and a fixed interest rate from the start, resulting in predictable monthly payments.

The bottom line

A HELOC or home equity loan can be a useful tool for homeowners looking to pay off their student loans. But while you might be able to get a lower rate and monthly payment, your home acts as collateral for both options. In which case, there’s the risk of foreclosure if you don’t repay funds.

Additionally, your credit score, home value, and income ultimately determines how much you’re able to borrow. Remember, too, that HELOCs and home equity loans typically have minimum borrowing amounts.

Therefore, it’s important to carefully assess your situation when deciding whether a HELOC or home equity loan is the right choice.