Could your home equity help lift student debt gloom?
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Could your home equity help lift student debt gloom?

As if graduating college isn’t stressful enough, the debt load graduates leave school with is massive. The average graduate holds almost $34,700 in student loan debt1, a $14,000 jump from just 13 years ago. This increase has pushed graduates’ monthly payments to almost $400, an amount which can easily strain an already stretched budget.

For graduates who were able to buy homes and family who own, equity could be a more affordable way to pay off debt.

The interest rate a student loan has depends on the type of loan, the borrower, and the time the loan was taken. For example, Perkins Loans have a fixed interest rate of 5 percent regardless of their disbursement date, while a Direct PLUS loan disbursed some time between July 2006 and June 2013 will have a 7.9% fixed interest rate, and almost any other loan issued prior to 2006, aside from a Perkins, will have variable interest rate2.

To compare, the average rate for a home equity line of credit is 5.51%, and homeowners with great credit may be able to get a fixed rate that’s even lower.

Before you yank equity out of your home to consolidate student loan debt, consider the following.

Interest rate

While there are other benefits to consolidating debt, the biggest is saving on interest payments. For this reason, you probably shouldn’t consolidate unless you can lock in a lower rate. Where this isn’t always true is in the case of variable rates.

If your student loan(s) have variable interest rates, it could make sense to lock in a slightly higher fixed rate loan. The Federal Reserve has recently halted interest rate hikes, but they have been transparent about moving back to raising rates should inflation start to climb. Having variable rate loans in a rising rate environment just means you pay more and more on interest.

Interest deductions

Student loan interest up to $2,500 is tax deductible, though there are income restrictions – e.g. those who file as single or head of household can deduct the full amount only if their adjusted gross income is $65,000 or less – and the loan must be a qualifying student loan.

HELOC interest, on the other had, is now only deductible if used for home improvements*.

Ability to repay

If you find yourself in a situation where it's challenging to make your monthly payments and could potentially default, it's important to know what could happen. Student loans, federal loans in particular, offer more flexibility through deferment and forbearance. If you have to default, you will suffer a considerable ding on your credit report and may have your wages or tax refunds garnished, but your home won’t be at stake.

If you find yourself unable to repay a HELOC, on the other hand, you could lose your house. This is because your loan is secured by your home.

You won’t be debt free

Consolidating debt simply means you are getting a new loan to pay off old loans. The debt is still there, but if done well, you will pay less interest and will get out of debt sooner.

What type of loan is best to consolidate debt?

To consolidate debt, it’s best to choose a loan with a low, fixed interest rate, though some people have used variable interest rate loans to pay off student loans with success.

There are two loan types that use your home equity: a home equity loan and a home equity line of credit (HELOC). The Figure Home Equity Line is a HELOC that offers your full loan amount up front at low, fixed interest rates, making it a great option for consolidating debt**.

Using home equity to consolidate student loan debt may not be for everyone, but for some it can offer a savings benefit that could have a long-term impact on financial well being.

2.* You should consult a tax advisor regarding the deductibility of interest and charges to HELOC.**The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.

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