How to Use Your Home Equity to Pay Off Student Loans

If student loan debt is costing you too much, one option may be to pay off your student loans with a home equity loan.

If you’ve built up some equity in your home, a home equity loan could be a relatively cheap and easy way to borrow. Under certain conditions, it might make sense to use it to pay off student loans.

Knowing how home equity works can help you figure out whether using it for student loans makes sense in your situation. It can also help you choose from three different methods.

What Is a Home Equity Loan?

A home equity loan is a mortgage. Instead of using it to buy a home, you could use the money for other purposes when you already own the property.

The equity in your home is the value of the property over and above what you still owe on your mortgage. For example, if your home is worth $250,000 and you owe $200,000 on your mortgage, you have $50,000 in equity.

Equity is always market value minus outstanding debt. You build equity when your home’s value increases and as you pay down your mortgage. Continuing with the same example, let’s say you’ve been making payments for a few years and your mortgage balance is now down to $180,000. At the same time, the home’s value has risen to $295,000. You now have $115,000 in equity. 

Home equity loans have two big advantages. They’re cheap and relatively easy to get, because they are secured loans. The home is the collateral. Collateral is a financial safety net for the lender. If you don’t repay the loan, you could lose your home because the lender can sell it to recover what you owe. This financial safety net lowers the risk for lenders. So home equity loans typically have lower interest rates than other kinds of loans, and in some cases have more flexible credit requirements. 

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How Can You Use a Home Equity Loan to Pay Off Student Debt or Pay for School?

If you have equity in your home, a home equity loan could be a source of financing to pay off student debt or to continue paying for your education.

Here are a few different ways you can do this.

1. Cash-out refinance loan

A cash-out refinance means taking out a new mortgage for more than you currently owe. You’d use the loan proceeds to first pay off your existing mortgage loan and then get the difference in cash. You could use the extra money you borrowed to pay for school or pay off student loan debt.

This kills two birds with one stone. It allows you to:

• Refinance what you owe on the home. That could make sense if you can get better terms on a new loan than you have on your existing loan.

• Use your home equity as a source of new financing. One use could be to pay off student loans.

2. Home equity loan

Home equity loans allow you to borrow without changing your current mortgage. That would make more sense than refinancing if the terms on your current mortgage are better than you could get on a new loan. 

With a home equity loan, you get the full amount in one lump sum. You then immediately enter the repayment period and pay off the loan in equal installments over a preset number of years.  

3. Home equity line of credit

A home equity line of credit (HELOC) works like a credit card. Once you’re approved for a home equity line of credit, you can borrow, repay, and borrow more, up to the limit, for the first few years of the loan. This is called the draw period. You don’t have to borrow the whole amount at once, and as you pay back what you’ve borrowed, you build the available line of credit back up so you can borrow again in the future. 

When the draw period ends, you’ll enter repayment and can’t borrow more.

Using a HELOC instead of an ordinary home equity loan could be an advantage if you need money at different times rather than all at once. With a HELOC, you only pay interest on the amount you borrow.  

For example, a HELOC might make sense if you’re continuing your education. You could use the HELOC to pay future school bills as they come up. 

With all home equity borrowing, lenders typically won’t allow you to borrow the full value of your home. For example, a lender might limit your combined total mortgage debt to 80% of what your home is worth. (Some lenders have higher limits.) So if you had a $295,000 home, the maximum total balance on your mortgage and home equity loan or HELOC would be $236,000. If you still owe $180,000 on your mortgage, you could apply to borrow another $56,000. 

Advantages of Using a Home Equity Loan to Pay Off Student Loans or Pay for College

There are some clear advantages to taking out a home equity loan to pay off student debt or pay for college.

1. You may be eligible for a lower interest rate 

Home mortgages and home equity loans are secured debt. That means they’re backed by collateral, or something you own of value. In this case, the value of your home is the collateral. This might allow you to get a lower interest rate on a home equity loan than your current student loans have. 

2. You may be able to repay your loan over a longer time

Using a home equity loan to pay off student loans could give you as much as 30 years to pay the money back.

In contrast, the standard repayment period for a federal student loan is 10 years. Private student loan terms vary, but are generally less than 30 years.

Paying a loan back over a longer time can reduce your monthly payment. This may mean you pay more over the long run, but it could make a huge difference for people struggling to make their monthly payments. 

3. You can consolidate payments

Combining multiple student loans into one, and possibly paying off other debt, can simplify monthly bill-paying. Streamlining bill payment can help you keep track of your obligations so you don’t miss a payment. 

Disadvantages of Using a Home Equity Loan to Pay Off Student Loans or Pay for College

Home equity loans may not make sense for paying off student loans in all situations. Here’s what to know about the potential drawbacks so you can make the right decision for your situation. 

1. Interest on home equity debt isn’t always deductible

When you use the money from a HELOC or a home equity loan to improve your home, the interest is generally tax-deductible. For tax years 2018 through 2025, though, home equity loan interest is not deductible if the loan is used to pay off other debt, like student loans.

Check with a tax expert before assuming that home equity loan interest is going to be deductible in your situation. It’s important, because whether that interest is deductible could make the difference in whether refinancing with a home equity loan is cost-effective.

2. The loan is secured by your home

Home equity loans are relatively cheap and easy to get because they use your home as collateral. Of course, that also means you have to be confident you can repay the loan.

Before you commit to a home equity loan, take a detailed look at how the payments will fit into your budget. Also, think about any future expenses you might have coming up. Don’t put your house on the line unless you’re confident you can make the payments.

If you’re struggling to make ends meet and aren’t sure you can make the payments on a home equity loan, there are other alternatives. Debt counseling or debt relief options might lead you to other solutions.

3. You may restrict future financial flexibility

Equity in your home is a valuable resource. Consider carefully how you want to use it.

Borrowing against your home equity to pay off a student loan will reduce the remaining equity in the home. At the very least, this is likely to mean it'll take longer to pay off the home. It's also likely to limit your ability to borrow against the home for other purposes until you’ve built the equity back up. 

If the value of your home should drop, having a home equity loan outstanding might even restrict your ability to sell or refinance the home. 

If you plan to stay in the home for a long time, these potential issues are less of a problem. They just underscore the importance of thinking ahead before you borrow.

4. You could lose out on borrower protections

With federal student loans, you have a variety of borrower protections available to you. These include forbearance and income-driven repayment plans. There are even conditions under which you can get a portion of your loan balance forgiven. 

If you use home equity to pay off federal student loan debt, you lose these protections. Look into federal student loan debt relief options before you conclude that refinancing with a home equity loan is the best choice. 

Is Using Home Equity to Pay for College or Pay Off Student Debt a Good Idea?

Let’s put it this way: It’s a good option to consider. Whether it’s the right choice depends on your situation. Ask yourself the following:

• How your monthly payments would be affected by refinancing

• How confident you are in being able to make those monthly payments, along with your other expenses

• How refinancing would affect the total you’d pay over the life of the loan

• Whether you plan on moving before the end of the loan term

• Whether there are other major financial needs likely to arise before the loan is paid off

• How you might benefit from the protections offered on federal student loans

• Whether your finances need a more comprehensive solution, like debt counseling or debt settlement

A good decision is one you make after thinking through all the outcomes and alternatives. These points can help you feel confident that using home equity to pay off student loan debt is the right decision.