With the average student loan debt at an all-time high of over $30,000 per borrower, many homeowners are wondering if they can use their student loans to help pay their mortgage. On the surface, it seems like a convenient way to consolidate debts and simplify finances. However, this strategy does come with some risks that need careful consideration.
How Student Loan Debt Has Grown
Over the past decade, the total outstanding student loan debt in America has more than doubled from $675 billion in 2009 to over $15 trillion today Currently, there are 44 million borrowers who collectively owe an average of $37,000 each.
This massive debt burden is a result of the rapidly rising costs of college tuition combined with an increase in the number of students attending college. While a college degree is still considered crucial for boosting future earning potential, it has become prohibitively expensive for many families.
Student loans emerged as an indispensable tool to bridge the gap between college costs and family budgets. However, the ease of obtaining these loans has directly contributed to the student debt crisis today.
Why Borrowers Consider Using Loans to Pay Mortgages
For homeowners who also carry substantial student loan balances, the desire to consolidate these debts is understandable. Here are some of the motivations behind using student loans to pay mortgage:
- Simplify finances by consolidating multiple loan payments into one monthly payment. This reduces the risk of missing payments and improves budgeting.
- Potentially qualify for lower interest rates, especially if the mortgage rate is lower than the student loan rate. This could save money over the long run.
- Gain tax benefits since mortgage interest is tax-deductible, while student loan interest is not.
- Free up monthly cash flow by reducing overall monthly payments. This provides financial breathing room.
- Take advantage of already approved student loan funds instead of applying for a home equity loan. The home equity loan application process can be extensive.
How to Use Student Loans for Your Mortgage
While tempting, using student loans to directly pay the mortgage is logistically challenging. Since student loan funds must go toward education-related expenses, lenders likely won’t allow direct mortgage payments.
A better approach is the cash-out mortgage refinance. Here are the steps:
- Research cash-out refinance options and associated rates and fees. Compare to your current loan terms.
- Gather necessary documents like bank statements, tax returns, income details to show you can handle higher payments.
- Submit loan application to your chosen lender and provide requested documents promptly.
- If approved, complete the refinance closing process, appraisal, etc.
- When funds are disbursed, use them to pay off student loans as planned.
- Continue making the new consolidated mortgage payment going forward.
Essentially, you tap available home equity through a larger mortgage loan. Then you use those extra funds to eliminate student debt instead of taking cash-out for other purposes.
The Pros and Cons of Using Student Loans for Mortgage
As with any major financial move, using student loans for your mortgage has both advantages and disadvantages. Let’s examine them closely:
Potential Benefits
Lower interest rate – Mortgage rates are generally lower than student loan rates. This saves on interest charges over time.
Simplified finances – One monthly bill is easier to manage than multiple loan payments. Reduces missed payments.
Increased cash flow – A lower monthly payment from rate savings provides financial flexibility.
Tax benefits – Mortgage interest is tax-deductible, while student loan interest is not.
Possible Drawbacks
Closing costs – Refinancing involves closing fees of 2% to 6% of the loan amount. This upfront cost might outweigh interest savings.
Risk of foreclosure – Using home equity to pay student loans means default could result in foreclosure.
Loss of protections – Federal student loan benefits like deferment and alternative repayment options will be lost.
More interest costs – A longer mortgage term means more interest paid overall, despite a lower rate.
Less home equity – Paying student loans with equity reduces funds available later for other needs.
Key Factors to Consider Before Making the Move
As the pros and cons illustrate, using student loans for your mortgage is a very personal decision that requires examining your complete financial picture. Here are some key considerations:
- Will mortgage rate savings exceed ongoing student loan rate costs? Run the numbers for your situation.
- How much available home equity do you have to leverage? Sufficient funds are needed to pay off loans.
- Can you afford the higher monthly payment? Add up all new housing expenses.
- Are you willing to risk losing student loan protections and benefits? Know what you’ll forfeit.
- How close are you to paying off your student loans? The payoff date affects comparisons.
- Will refinancing trigger prepayment penalties on your current mortgage? Factor this cost.
- Does the timing align with your overall financial goals? How else can equity be utilized?
Thinking through questions like these will help assess if it’s financially prudent to use your student loans for paying mortgage. Be sure to consult financial and tax advisors as well.
Alternatives to Paying Mortgage with Student Loans
If using student loans doesn’t make sense in your situation, here are a few alternatives worth considering:
- Refinance just the student loans to get a lower interest rate and payment through a private lender.
- Research student loan forgiveness programs like Public Service Loan Forgiveness to discharge federal loans after a set period.
- Use a 0% introductory APR credit card to pay off student loans faster without accruing interest. Then pay off the credit card during the intro period.
- Apply for student loan repayment assistance from your employer if available. Some companies provide this as an employee benefit.
- Take out a home equity loan or home equity line of credit to access equity without refinancing main mortgage.
- Create a detailed student loan payoff plan focusing on highest interest rate loans first to pay down principal faster.
The Bottom Line
While using student loans to pay your mortgage may seem like a convenient debt consolidation tactic, proceed with extreme caution. The risks could easily outweigh potential rewards depending on your circumstances. Thoroughly investigate alternate options too.
With prudent planning and discipline, it is possible to pay off student loans faster through other means than putting your home at risk. As tempting as it is to find a quick fix, the smarter path is to make paying off student loans a top priority with your monthly budget.
FAQ
Can I use a student loan to pay a mortgage?
You’re not allowed to apply excess student loan funds toward your other debt, such as personal loans, credit cards, mortgage payments or auto loans. This also includes paying for someone else’s education. However, there are certain exceptions, such as paying for your child’s daycare while you attend class (see above).
What is the 7 year rule for student loans?
Both federal and private student loans fall off your credit report about seven years after your last payment or date of default. You default after nine months of nonpayment for federal student loans, and you’re not in deferment or forbearance.
What is the new FHA rule for student loans?
FHA Student Loan Guidelines 2024
If the actual monthly payment is zero or is less than what would be under regular amortizing payment terms, lenders must use the greater of . 5% of the outstanding loan balance or the monthly payment reported on the credit report.
Can I roll student loans into a mortgage?
The most common way to roll student loans into a mortgage is through refinancing, since this allows you to tap your home equity without selling your property.
Can student loans be included in a mortgage?
Student loans can be included in a mortgage if you have enough equity in your home. Rolling student loans into a mortgage generally requires the borrower to take out a cash-out refinance loan, which allows you to turn a portion of your home’s equity into cash. Once you have the cashout in hand, you can pay off your existing student loans.
How much does a mortgage cost if you have student debt?
The fee can range from 0.25% to 0.375% of the loan amount. As you look at getting a mortgage while you have student debt, consider the different types of mortgages available. Each has its own guidelines. The U.S. Department of Veterans Affairs (VA) provided this example of how to calculate a student loan payment for DTI purposes:
Should you roll student loans into a mortgage?
With home values rising steadily over the past five years, you may be able to pay off your student loan balances and still have home equity left over. However, It’s best to know the pros and cons of this strategy to make sure rolling student loans into a mortgage is the best plan for you. Can I combine my student loans and mortgage?
Can I get a mortgage if I have student debt?
This added cost only applies to those borrowing more than 60% of their home’s value. The fee can range from 0.25% to 0.375% of the loan amount. As you look at getting a mortgage while you have student debt, consider the different types of mortgages available. Each has its own guidelines.
Can I combine my student loan and mortgage?
Can I combine my student loans and mortgage? Yes, it is possible to combine your student loan debt and mortgage — as long as you have enough home equity. You can calculate your home equity by subtracting how much you owe from your home’s value.
Do student loans count as monthly payments?
Here’s what lenders are required to count as your student loan monthly payment as of mid-to-late 2023. Conventional loans sponsored by Fannie Mae and Freddie Mac make up the overwhelming majority of mortgages issued. Conventional loans allow you to get a mortgage with student loans with as little as 3% down and a credit score of 620.