Refinancing student loan requires careful consideration

Posted by on October 26th, 2018

With untapped home equity at an all-time high of $14.4 trillion, homeowners could be poised to start cashing in.

One way you can do that is to roll other debt into your mortgage. In 2017, Fannie Mae added the Student Loan Cash-out refinance option.

With Fannie Mae adjusting the loan level depending on risk, some borrowers may pay as little as 1 percent of the loan for this arrangement.

As of 2018, student debt in the U.S. totals a staggering $1.5 trillion. For many, rolling it into their mortgage seems like a viable option.

Also referred to as debt reshuffling, paying one loan with another may seem amazing – after all, you have seemingly made a big chunk of debt “disappear.” But it’s no magic trick. You still owe the money, you’ve just changed the terms.

Attaching student debt to your home in place of equity requires careful consideration.

Keep in mind that student loans tend to be for much shorter terms than a mortgage, which could add a lot more interest to service the debt over 15 or 30 years.

Then there’s the tax considerations. As of this year, home equity debt interest is only deductible if it’s used to buy, build or improve your home, not if it’s for student loans.

However, you still might be able to pay off the debt faster if the interest rate is lower than what you were paying. PLUS loans and private student loan borrowers can potentially save more than those with subsidized federal student loans.

Rolling student loans into a mortgage also means giving up the ability to defer the student loans during difficult financial times. Once they are part of your mortgage, it’s a required monthly payment.

Additionally, you give up any eligibility for potential student debt forgiveness programs down the road.

There’s no one-size-fits-all formula. For some people, especially those who have a stable income and can pay down debt fast, lowering their student loan interest rate through refinancing makes sense. For others, the benefits of refinancing may be an illusion.