Millions of Americans together owe more than $1.7 trillion on student loans, an amount that has jumped 30% from five years ago, according to Federal Reserve data.
President Joe Biden campaigned on canceling $10,000 in federal student loan debt for every borrower, and some Democrats want him to go to $50,000. But there’s been no movement toward broad student loan forgiveness, which was even left out of the $6 trillion federal budget Biden proposed on Friday.
If you’re a homeowner struggling with student loan debt, you don’t have to wait for Washington to do something. You may have a more immediate remedy.
You could use a low-interest cash-out mortgage refinance to pay off your college debt. Just be aware of the risks.
Rolling your student loans into your mortgage
Leveraging your mortgage to pay off student loan debt could help lower your overall monthly bills and help you catch up if you fell behind during the pandemic.
You’d wipe out your student loan balances by doing a cash-out refinance of your home loan, which means taking out a new loan at one of today’s historically low mortgage rates for more than the balance left on your current mortgage. The extra money would be applied to your student debt.
Essentially, you’d say goodbye to your student loans by borrowing from your house: dipping into the equity you’ve built up in your home. Equity is the difference between the value of your home and how much you have left to pay on your mortgage.
In the process, you’d swap your college debt for cheap mortgage debt. Thirty-year fixed-rate mortgages are currently averaging just 2.95%, according to mortgage giant Freddie Mac.
Fannie Mae, a government-sponsored mortgage company similar to Freddie Mac, offers a cash-out refi loan program that allows you to roll your student debt into a new mortgage without having to pay some of the fees that come with a standard cash-out refinance.
The program lets you borrow up to 80% of your home’s equity to pay off your student debt. At closing, the money owed on your student loans would go directly to your debt servicer, the company that collects your payments.
Is a cash-out refi right for you?
Cash-out refis have been on the rise. Borrowers who increased their mortgage balances by at least 5% represented 38% of all refinance loans during the first three months of this year, Freddie Mac says. That was up from 37% over during the final quarter of 2020.
But doing a mortgage refinance with cash out wouldn’t really make your college debt go away. It would just reshuffle your debt, which can have advantages and disadvantages.
Consolidating your student loan debt into your mortgage may help free up cash flow to pay other bills, and you’d have one less payment to keep track of.
But there are risks to paying off student debt through a cash-out refi.
First, you may give up protections. if you’re paying off a government loan, you’d lose the ability to switch to a flexible, income-driven payment plan if you’re laid off.
And if President Biden ever does forgive student loan debt, you wouldn’t get any of that relief since you’ll have folded your student debt into your mortgage.
But here’s the biggest risk: You’d be rolling unsecured debt — without collateral to support it — into a secured loan, namely your mortgage. If you default on what’s now your bigger mortgage {because of the money you took out to pay off your student loans), you could lose your house to foreclosure.
Other ways to make your student debt more bearable
If you decide a cash-out mortgage refi is not for you, you do have other ways of reducing the pressure from your student loan debt.
First, you’ll want to explore refinancing your student debt itself, into a new loan with a lower interest rate. Student loan rates have been at all-time lows, so moving your debt to a cheaper loan could help you pay off your balance more quickly.
The higher your credit score, the better the interest rate you’re likely to receive. If you haven’t seen your score in a while, today it’s easy to get a free peek at your credit score online.
Also, look for ways to cut your other expenses, including what you paying for homeowners insurance. If your current policy is expiring soon, shop around for a lower price before automatically renewing your coverage.
Finally, explore some methods for adding to your income. Find a side gig, or easily earn some returns in the record-breaking stock market by using an app that helps you invest your “spare change.”
