Should you refinance your mortgage to pay off student loans?

Student loans can be a burden to pay off. You might be considering using a low-rate mortgage refinance to pay off your student loans if you can get a lower interest rate. You should only consider this if you have more than 20% home equity, as it may allow you to lower your payments and take advantage of additional tax deductions or credits.

Before paying off your student loans with a mortgage refinance, make sure to consider the risks and potential alternatives. You’re basically reshuffling your debt. Plus, you won’t have your home equity for another need or as a cushion if housing prices decrease. Additionally, you’ll lose potential federal student loan benefits, like income-driven repayment plans and loan forgiveness.

If you want to pay off your student loans faster and preserve your home’s equity, rather than refinancing them into your mortgage, you could pay more than the minimum each month or make two payments a month instead of one. Carefully consider the benefits and risks before refinancing your mortgage to pay off your student loans.

Key insights:

• If you have at least 20% in home equity, you may be able to extend your repayment terms, reduce your interest rate and lower your monthly payment by paying off your student loans with a mortgage refinance.
• Federal student loans come with many potential benefits, like loan forgiveness and income-driven repayment plans, which you’ll lose if you use a mortgage refinance to pay them off.
• Before using a mortgage refinance to pay off your student loans, consider other options, like applying for loan forgiveness or increasing your payment amount and frequency to pay off your loans more quickly.

How to pay off student loans by refinancing your mortgage

Paying off your student loans by refinancing your mortgage can be a way to lock in a lower interest rate for up to 30 years, reduce your monthly payments and improve your cash flow. Follow these steps if you decide that this might be the right decision for you:

1. Think carefully before making a decision. Moving around debt can be helpful, but there are pros and cons to every debt reduction plan. If you’re considering refinancing your mortgage to pay for your student loans, you’ll want to run the numbers beforehand to see if it makes financial sense for you.
2. Make sure you have enough home equity. Most lenders will require you to have at least 20% equity in your home, so you can't use a mortgage refinance if you have less than this amount.
3. Search for a lender and consider the terms you might receive. You’ll need to search for a cash-out refinance. Make sure to tell your lender that the purpose of the refinance is to pay off your student loans, as there are cash-out refinance programs designed for this purpose.

   Giovanni Acosta, a mortgage loan originator for the direct lender Equity Now, said, “If the student loan is paid directly by the lender, you may qualify for a student loan cash-out refinance, which has better pricing (rates and costs) than a traditional cash-out refinance.”

4. Check your credit score and debt-to-income (DTI) ratio. Besides having enough equity in your home, you’ll also usually need a credit score of at least 620 and a DTI ratio of 45% or less. You may be able to qualify with a score as low as 580 for some government-backed programs. However, you’ll need to demonstrate to your lender your credit issues aren’t ongoing.
5. Consider the types of student loans you have. If you refinance your student loans into a mortgage, you may lose any associated benefits. Make sure to do your research by considering the costs of a refinance, how much money you’ll save and whether it’s worth potentially losing any benefits associated with your student loans.

Advantages of paying off student loans with mortgage refinancing

Consider the possible improvements to your budget when you pay off student loans through mortgage refinancing. Some advantages of this strategy include:

• Reduction of your monthly payment: Mortgages often carry repayment terms of up to 30 years — compared with the standard repayment term for student loans of 10 years. Extending the repayment term on your student loan could reduce your monthly payment.
• Potential savings on interest costs: Depending on what kinds of loans you have, you may be able to reduce your interest rate by paying them off with a mortgage refinance. However, receiving a lower rate doesn’t always equate to reduced interest costs — you likely will spend more time paying off the balance. Before proceeding, do the math to see if the total interest costs will be lower.
• Ability to release a co-signer: If your parents or someone else co-signed with you to get your student loans, you could release them from this obligation by paying the loans off with a mortgage refinance solely in your name.
• Protection from rising interest rates: Unfortunately, not all student loans carry a fixed interest rate. If your student loans have a variable interest rate, you’ll be able to protect yourself from rising interest rates by paying them off with a fixed-rate mortgage refinance.

Ultimately, refinancing your student loans with a mortgage might allow you to do things such as reduce your monthly payment, lock in a lower rate, reduce your interest costs and even release a co-signer.

Alex Shekhtman, CEO of LBC Mortgage in Los Angeles, shared this additional insight into the advantages of using a mortgage to pay off your student loans: “Another advantage [for a mortgage refinance] is that you may be able to deduct the interest you pay on your mortgage from your taxes. This can further reduce the cost of refinancing your student loans.”

Although some taxpayers can write off some of the interest they pay on their student loans, the IRS sets strict limits and eligibility requirements for this type of tax write-off. By refinancing your student loans with a mortgage on your primary residence, you may be able to write off more interest on your taxes. You can check with a tax professional to see if and how your write-offs would change under each scenario.

Drawbacks of paying off student loans with mortgage refinancing

Before you decide you want to refinance your student loans with a mortgage, you should identify the problem points and make an informed decision. Key drawbacks to paying off your student loans with mortgage refinancing are:

• You still need to pay back the money you borrowed: Changing your loan servicer doesn’t mean your debt is canceled. Whether you keep your student loans or refinance them with a mortgage, you still need to repay the money you borrowed for your education. You’ve simply changed the loan type and the lender.
• You run the risk of losing valuable benefits: Depending on your student loan type, you might lose benefits if you refinance it into a mortgage. Some benefits of federal student loans include income-based repayment plans, loan deferment, loan forbearance and public service loan forgiveness. If you refinance into a different type of loan, you may no longer have access to these federal student loan benefits.
• You’ll have less equity in your home: Before you can refinance your student loans with a mortgage, you need to have built up sufficient equity in your home. By refinancing the student loans into your mortgage, you’re spending that equity, and you’ll no longer have it as a cushion. If home values fall, you could end up underwater.

Alternatives to paying off student loans with mortgage refinancing

Before you refinance your mortgage to pay off your student loans, you should look into alternatives. You don’t necessarily need to refinance your mortgage to pay off your student loans, as there are plenty of other options. Some alternatives to paying off student loans with mortgage refinancing are:

• Pay more than the minimum each month: You can shorten the time it will take to repay your loans and reduce your interest costs by paying more than the minimum on your student loans. The key to this strategy is to pay more than the minimum consistently. To help with this, many lenders will allow you to add an extra principal amount to your recurring monthly payment.
• Make biweekly or semimonthly payments: If you can’t pay more than the minimum, you can also pay your loan off faster by splitting your monthly payment in half and paying it every other week. Splitting your payments in half like this will allow you to make a full extra payment on your loans every year.
• Apply for student loan forgiveness: Before you refinance your student loans, it’s best to see if you qualify for any student loan forgiveness programs. Multiple programs are available, including public service loan forgiveness, teacher loan forgiveness, closed school discharge, Perkins loan cancellation and discharge and more. Your student loan provider or the U.S. Department of Education can share information about the options available to you.

Bottom line

If you have equity in your home, using a mortgage refinance to pay down your student loan debt may be beneficial. You’ll potentially be able to lower your rate, reduce your monthly payment and release any co-signers from your original student loans.

While paying off your student loans with a mortgage refinance can be a way to reduce your payment or lower your interest costs, it doesn’t come without risks. By refinancing your student loans into your mortgage, you're waiving your rights to potentially valuable student loan benefits, like loan forgiveness and income-based repayment plans. Plus, you can only use refinancing to pay off your student loans if you have sufficient equity in your home.

Refinancing your student loans into your mortgage doesn’t eliminate your debt. Rather, you’re simply repaying the funds to a mortgage lender versus a student loan provider. Before making a decision, make sure to consider alternatives, such as increasing your payment frequency or amount and seeking loan forgiveness.