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If you’re looking to get out from under your student loan debt, it’s important to think through any strategy that lowers your monthly payments. This especially applies to the prospect of rolling your student loans into a mortgage.
Though this practice is controversial and potentially risky, the concept is attractive to some student loan borrowers who want to capitalize on the possibility of lower interest rates and a single monthly payment.
So should you consider rolling your student loans into a mortgage?
Rolling student loans into a mortgage: 6 pros and cons
Rolling student loan debt into a mortgage — also known as “debt reshuffling” — allows you to refinance your mortgage with either a new loan or an additional home equity loan.
The money from this new loan can then be used to pay off your student loan debt. This can be very attractive, particularly to those with sufficient home equity. But before you sign on the dotted line of your new loan or refinancing agreement, make sure you know how debt reshuffling will affect your bottom line.
1. Pro: Reduce your number of payments
2. Con: Put it all on the line
3. Pro: Net tax deductions
4. Con: Give up the flexibility
5. Pro: Score a lower interest rate
6. Con: Pay more interest over time
Plus: Is rolling your student loans into a mortgage right for you?
Your two biggest bills each month are almost certainly your mortgage and your student loan payments. Staying on top of both these important bills can be daunting, especially if your student loans are divided amongst several lenders.
By using a mortgage to pay off student loans, you can effectively cut down your payments from many to the magic number of one. It’s one way to consolidate your student debt.
As a homeowner, you are aware that if you can’t pay for your home, it can be foreclosed on and seized. This is why it is called secured debt — the money owed is supported by an asset.
On the other hand, your student loan is unsecured. Even if you were to be declared bankrupt, the bank (or government) can’t come after you for your home, car or another asset besides garnishing your wages and federal benefits like tax refunds and Social Security payments.
Consolidating your student loans into a mortgage means your home becomes collateral for your student debt and is at risk if you are unable to keep up with payments.
On top of that, by increasing the size of your mortgage, you would decrease the amount of equity in your home.
Both student loan and mortgage interest payments are tax deductible. However, your interest payments via a student loan may not qualify if you had to take a deferment or forbearance during the year, or if you make over $80,000 per year (or $160,000 as a married couple).
There are no such limitations when deducting the interest of a mortgage payment. However, you will need a tax specialist to help you navigate this more complicated tax situation.
For those who have trouble paying off their student loan debt, there are many options out there to provide relief.
For instance, the federal government provides several income-driven repayment plans to help lower monthly payments as a percentage of borrowers’ incomes.
And when a hardship hits — if you lose your job, for example — you may be able to request a deferment of payments on your student loans. Even many private student loan companies offer assistance in such cases.
With your mortgage, however, you will still need to pay what is owed or risk losing the home.
The interest rate of a 15-year fixed mortgage averaged 3.32% in February 2020, according to Zillow. Meanwhile, federal Direct Subsidized and Unsubsidized student loans disbursed between 2018 and 2019 carried an interest rate of 5.05%.
In this case, consolidating student loans into a mortgage would mean savings in interest payments. However, it is important to note that those low mortgage rates are only available to those who are financially secure, have stellar credit and have demonstrated an ability to pay off debt consistently.
To guarantee savings, also consider:
- Opting for a fixed rate, as a variable-rate mortgage could be costlier down the road
- Account for any fees, such as closing costs, charged by your lender for the new mortgage
Saving on interest can be a huge pro, but before you jump, take a closer look at the numbers — especially in terms of how much time remains on the loan.
Say your student loan has 11 years left to be paid; if you use a mortgage to pay off your loan, you may be extending that 11 into 15, 20 or even 30 years. You will most likely be paying much more interest over the extended period.
Wanting to reduce your interest rate, lower the number of payments and qualify for tax incentives are all great reasons to consider rolling your student loan into a mortgage.
However, with the risks and extra costs that come with rolling student loans into a mortgage, it’s probably not worth it. You’re better off exploring federal repayment programs or student loan refinancing to make payments more manageable.
Andrew Pentis contributed to this report.