By  Tue Jan 21, 2014

Simon Says: Bad Idea to Use HELOC to Pay Off Student Loans

weeklydig / Flickr | http://www.flickr.com/photos/weeklydig/6238712792/

weeklydig / Flickr source

With student loans representing a major financial burden among adults, Americans with college debt may think of ways to minimize the amount of interest that is paid. One way is to transfer the debt to a home equity line of credit (HELOC), but is that really a wise choice?

Q: I owe $45,000 in student loans and have an annual salary of about $50,000. I have a HELOC on a small property that I own, so I was wondering if I should borrow against it to pay off my student loans. My HELOC rate is 4.65% while my student loans are at 6.8%. Wouldn’t it save me a good chunk of change if I used it to pay off the loans?

- Anthony B.

A: When you consider tapping your HELOC to pay off your student loans, there are a couple of factors that should be taken into account.

Because HELOCs are secured loans, you must remember that you’ve agreed to use your home as collateral. In the event that you are unable to make the payments, you’ll find that the unsecured debt from your student loans could now cause you to lose your house.

Depending on your financial situation, you may not be able to stomach that type of risk, regardless of how much you’d save by having lower payments.

Without having the debt tied to your home, you could at least sell the home to pay off the student loans. And, if you lose your job or source of income, you may be able to apply for an income-based repayment plan or deferred payment program.

However, in addition to savings on interest payments, a HELOC can be discharged in bankruptcy while student loans stick with you even if bankruptcy is declared. But, that is a very extreme case. Furthermore, interest paid on a HELOC can be deducted from your taxes (up to $100,000).

Generally, when we’re talking about moving unsecured debt onto a secured credit line, the risks often outweigh the benefits. In this case, the amount you save on interest is not worth putting your home in jeopardy. It is a better idea to work on ways to increase the amount of discretionary income that you can use to pay down those student loans.

 

Related Stories:

Ways to Get Rid of Your Student Loans Without Paying

How to Get the Lowest Mortgage Rate

How to Properly Use a Debt Consolidation Loan

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