Using a home equity loan or HELOC to pay off student loans safely

If you've built equity in your home, you could have a powerful option for managing student loan costs. A home equity loan or a home equity line of credit (HELOC) could offer a lower interest rate than certain private student loans, making it possible to reduce borrowing costs or combine several loan payments into one. 

This approach isn't right for everyone. The type of student loans you have, the interest rate you're offered, and your overall financial situation all play a role in whether it's a good idea to refinance with home equity.

How to use a home equity loan or HELOC to pay off student loans

Using a home equity loan or HELOC to pay off student loans doesn't reduce the amount you owe. It replaces your existing student loan debt, which is unsecured debt, with a new loan that’s secured by your home. The proceeds from the new loan pay off your student loans, and you'll make payments on the home equity loan or HELOC going forward. 

There are two common ways to do this:

• A home equity loan is a one-time loan with fixed monthly payments and typically a fixed interest rate. If you know exactly how much you need to borrow to pay off your student loans, this option offers predictable payments over the life of the loan. 

• A HELOC gives you access to a revolving line of credit. You can borrow, repay, and borrow again up to your credit limit during the draw period. Most HELOCs carry variable rates. Achieve Loans offers a fixed-rate HELOC, which means the interest rate stays the same throughout the loan term. 

In either case, the amount you could access depends on factors like the home's market value, the existing mortgage balance, and your financial profile. Many lenders allow a combined loan-to-value (CLTV) ratio of up to 80% to 90% of the home’s value. Limits vary by lender.

Why federal student loans require extra caution

If you’re considering a home equity loan to pay off student loans, one question should come first: Are your student loans federal or private?

Federal student loans include borrower benefits that you can’t get back after refinancing them with a home equity loan or HELOC. Once the student loan is paid in full, you’re no longer eligible for federal protections tied to that debt.

Those protections could include:

• Income-driven repayment (IDR) plans that base monthly payments on income

• Temporary relief through deferment or forbearance during financial hardship

• Federal loan forgiveness programs for eligible borrowers

These programs could provide valuable flexibility if your financial situation changes over time.

If you have private student loans, these federal protections don't apply. However, some private lenders might work with borrowers in need of temporary relief like deferment or forbearance on a case-by-case basis.

Before you pay off student loans with home equity, contact your student loan lender to see if you qualify for assistance that could make payoff easier without refinancing.

When it could make sense to use home equity for student loans

Refinancing with home equity could make sense if you have private student loans with relatively high interest rates. If you qualify for a lower rate with a home equity loan or HELOC, your borrowing costs could decrease over time. 

Compare the interest, total cost of the loan, and the repayment term before making a change. If your private student loans already carry lower rates than what’s available through home equity financing, keeping the private student loans would likely cost less overall.

Consolidating multiple private student loans into one payment is another reason to consider using home equity for student loans. If you’re managing several loans with different payment due dates, a single home equity loan could mean one fixed monthly payment that’s easier to track and budget for.

When comparing a home equity loan vs. a student loan, consider more than just the monthly payment. The best choice depends on your loan type, interest rates, repayment goals, and whether the long-term savings outweigh the costs and risks of borrowing against your home's equity.

Home equity loan vs. HELOC vs. student loans: How they compare

If you compare the three options, consider more than just the interest rate. Each option affects your repayment flexibility, borrower protections, and the risk of using your home as collateral.

What to know before using home equity to pay off student loans

Before you move forward, consider how home equity financing differs from the student loans you’re replacing. The structure, protections, and risks differ a lot between student loans and home equity borrowing.

Student loans are unsecured, meaning no collateral is required. A home equity loan or HELOC is secured by your home. If you don't repay the loan, the lender could foreclose on your home. 

A home equity loan or HELOC in place of a student loan doesn’t eliminate debt. It changes the type of debt you have. Refinancing with home equity may make it easier to pay your student loans if the interest rate is meaningfully lower or the term longer, but it isn't guaranteed. 

Compare the numbers carefully. If the available home equity rate matches or exceeds the student loan rate, you might not save much if any money on your loans. Similarly, if the rate is lower but the closing costs for a home equity loan or HELOC are high, home equity might not be the most cost-effective choice.

How to qualify for a home equity loan or HELOC with student loans

Student loans don’t automatically disqualify you from a home equity loan or HELOC. Your credit profile, other debts, and home value are also factors.

Debt-to-income (DTI) ratio

Lenders calculate your debt-to-income ratio (DTI), which compares your monthly debt payments to your gross (pre-tax) monthly income. That includes your mortgage, student loans, credit cards, and any other recurring obligations. 

A lower DTI typically shows lenders you have room in your budget to take on new borrowing. Many lenders prefer a DTI of around 43% or lower. Requirements vary by lender. You can use an online DTI calculator to find out where you stand.

Combined loan-to-value (CLTV) ratio

Lenders generally require you to maintain some equity in your home, even after you get a home equity loan or HELOC. How much you need varies by lenders. Most use your CLTV to determine how much you can borrow.

You can usually have a CLTV up to 80% to 90%, though each lender will have its own cap. 

For example, if your home is worth $500,000, an 80% CLTV cap would mean you could borrow up to $400,000 against your home including your primary (purchase) mortgage plus your home equity loan or HELOC.

Credit score and history

Your credit score is another qualifying factor. A score in the upper 600s is often considered a starting point, while stronger scores could improve your chances and terms. Some lenders work with borrowers with lower credit scores.

You can often check your credit score for free through your bank or credit card issuer, or on a free credit score website. Those sources typically also tell you the factors influencing your score. Credit scores aren’t permanent. Even small changes could boost your credit score over time.

Ready to explore your options? Find out if you qualify for a HELOC through Achieve Loans without risk to your credit score.