Paying Off Student Loans with Home Equity is a Risky Move

eCreditDaily writes: For many borrowers, these two trends are coinciding: growing student loan debt and the rebuilding of home equity through rising home values.

But is tapping into one (home equity) to pay off the other (college loans) a good idea? Generally speaking, there are more risks than rewards.

Rohit Chopra, of the U.S. Consumer Financial Protection Bureau, addressed this issue in a post on Friday.

“This can be risky. Student loan borrowers who have built equity in their homes may find that paying back outstanding student debt with a new home equity loan looks appealing, given today’s historically low interest rates, but putting more debt on your home can lead to problems down the road,” Chopra writes.

Congress is grappling with the July 1 deadline for preventing the doubling of the 3.4 percent rate on subsidized Stafford loans. Meanwhile, the bureau has received a significant number of questions from consumers who are looking for programs to refinance student debt or reduce payments owed.

Refinancing your student loan could possibly help you take advantage of improvements in your credit profile since your college days. But you may be able to lower your interest rate without some of the risks that come by tapping the equity in your home.

Income-Based Repayment (IBR) is a federal student loan repayment program that allows you to limit the amount you must repay each month based on your income. Many borrowers with federal Direct Loans can now enroll in IBR online.

The Bureau suggests that if you are considering an home equity loan to pay off a student loan, you should try to look for a student loan refinance product first and see what rate you can get.

Here are a few things to remember, according to the CFPB:

• Your rate may be lower, but your home is at risk. Interest rates for home equity loans are generally lower than interest rates for student loans. (Lenders are willing to offer a lower interest rate because they know that if you don’t pay, they have a legal claim on your home.) If you can’t pay, you could end up in foreclosure.
• On your federal loans, you are giving up repayment options and forgiveness benefits. Federal student loans feature a number of protections for borrowers that run into trouble, including Income-Based Repayment (IBR). These benefits no longer exist when you pay off a federal student loan with a home equity loan.
• This may impact your taxes. The interest you pay on a home equity loan could equate to a greater tax benefit for some borrowers, when compared to the student loan interest tax deduction, especially if you have high income and itemize deductions. You may wish to consult with a tax advisor when considering your options.