When students graduate from college, they begin to enjoy the fruits of their labors. Many land good jobs, and some buy new homes. After a few years of home ownership, if the market is rising, they may also eyeball their student loans, and consider the pros and cons of using a home equity loan to pay off their debts.
If you're a college graduate with student loans, you probably envision having to pay your debts for years to come. While the prospect of becoming debt-free seems like a pipe dream, it can happen much sooner if you manage your debt intelligently. But does smart debt management include using a home equity loan to pay off your student loans? Like anything in the financial world, this option has a variety of pros and cons.
Lower rate, tax deductible interest
At first glance, consolidating your student loans into a home equity loan seems like a no-brainer. Because a home equity loan uses your property as collateral, banks can offer it at a lower rate than most private student loans. The lower rate alone can save you thousands of dollars in long-term interest payments, and you also get added tax benefits. Interest paid on a home equity loan is tax-deductible, which will lower your overall costs.
A home equity loan is a fixed-rate, fixed-term loan. The fixed rate can be extremely appealing, as private student loans often include variable rates. If you're conservative with your money, eliminating uncertainty may help you sleep better at night.
A home equity line of credit (HELOC), which is a line of credit based on the equity in your house, will also help you pay off your student loans. As an added bonus, you can use the HELOC as an emergency source of funds if you get into a crunch. The interest is still tax-deductible, but be forewarned: the rate on a HELOC is variable, and can spike upwards.
Notice the rewards; consider the risks
Choosing a home equity loan to repay your student indebtedness has plenty of rewards, but you do need to be aware of the risks. First and foremost, a home equity loan uses your house as collateral. If you run into tough times, and have to default on your mortgage, you could lose your home.
While you'll gain a tax deduction for interest paid on your home equity loan, you'll lose the deduction that comes with student loan interest. You'll need to run the numbers to see which loan benefits you the most.
The future for most college graduates will include years of debt payments. Between mortgages and student loans, it may seem like you'll be mired in debt until the end of time. However, smart management of these debts-such as paying off your student loan with a home equity loan-can save you thousands of dollars. Understand your options, and you'll be on your way to a debt-free life.