Using a Home Insurance Payout to Repay Student Loan Debt

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Eiman Jahangir never imagined cashing in on his homeowners insurance policy.

Still, he acknowledged, “Everyone says to insure for the worst.”

Then it happened, the destructive Tubbs fire of October 2017. Jahangir awoke after 1:30 a.m. to a knock at the door of his Santa Rosa, Calif., home. When he swung it open, he was mesmerized by flames.

Jahangir, his wife, son and dog jumped in the car, fleeing to a friend’s house with nothing but their wallets and some clothing. Two hours later, at about 3:30 a.m., Jahangir received a phone call telling him that the heat alarm in his home’s attic was sounding.

“I realized our home was gone and, with that, so much of our stability — in fact, all of our stability, except for our finances,” said Jahangir, a cardiologist with savings, but also $170,000 in student loan debt. “I also realized I was well-insured for my home.”

With a large insurance payout in his future, Jahangir faced a question that’s not uncommon in situations like his: Should any of the money from the insurance go to paying off other liabilities, such as student loans?

Putting a home insurance payout to good use

There are three areas of coverage of homeowners insurance: structure (the house itself), belongings (everything inside it), and liability (accidents happening inside).

The Tubbs fire — the second-costliest in American history, according to the Insurance Information Institute — that raged through Jahangir’s home was, fortunately enough, covered. The family’s insurance didn’t require a policy extension the way you might for floods and earthquakes.

Photo courtesy of Eiman Jahangir

In the aftermath, the Jahangirs lived in four places in two years. They found themselves distracted during the day, and their son stopped sleeping through the night.

With no home to return to, they elected to pay off their mortgage, cash out their policy, and move on. And yes, with some of the funds, Jahangir also repaid his student loans.

“The insurance payment put my debt and savings plan forward by 10 years,” Jahangir said.

Eiman Jahangir

Photo courtesy of Eiman Jahangir

How to decide whether to use your insurance payout on debt

Jahangir enjoyed low interest rates on his debt — so low that he considered carrying it with him when his family left their demolished California home for a fresh start in Tennessee.

After all, he could invest his insurance payout. Jahangir, who authors the Dads Dollars Debt blog in his spare time, considered chasing a higher return on his money than the interest rate he would be paying to his debtors.

Looking back, Jahangir easily recites his medical degree debt number as if it had been rattling around his brain daily: $170,000 at 3.10%.

After the insurance payout, he made a debt decision that went against the math.

“I paid all of it off, even though they were low-interest loans,” said Jahangir, who also decided to cover his $30,000 car loan despite its 0.00% rate. “I wanted to … be truly free from the shackles of debt.”

If you’re not in the fortunate position of having a high-paying career and some savings in the bank, your plan could look different. But having lived through it, Jahangir has a recommendation for consumers at all income levels. He suggests “sitting on the money for a few months — let life settle out.”

“You are getting an insurance check because something bad has happened, something really bad. So take the time you need to recover,” he said.

When your head is in a better place, you might consult a certified financial planner (CFP) like Brad Ruttenberg. He advises a two-step approach before deciding to use your payout on debt:

  1. Ensure you have an emergency fund with at least one month’s worth of essential expenses. You’ll likely want a larger fund if you lack job security.
  2. Brainstorm other potential expenses and save ahead for those too. Include living expenses that wouldn’t be immediately reimbursed through your policy’s liability coverage.

“Paying off debt is great,” Ruttenberg said, “but it doesn’t do any good unless you’re prepared to cover future expenses in cash.”

What to consider when using your payout on student loan debt

A windfall of any kind — whether it comes from your home insurer or your generous grandma — could be a boon toward your student loan debt. You can get an idea of exactly how helpful by using our loan prepayment calculator.

Say you owe $57,000 in student loans — about a third as much debt as Jahangir had — and a higher, more realistic 5.05% collective interest rate, which is the current rate for federal Direct Loans for undergraduates. By paying off the debt entirely, you could save more than $15,000 in future interest changes.

But you can also run another cost-benefit analysis to go beyond dollars and cents: Jahangir decided, for example, that the peace of mind of being debt-free was worth forfeiting potential investment gains on his insurance payout.

Unlike Jahangir, however, you might not have a high-paying career and savings account in your back pocket. In that case, consider Ruttenberg’s advice: Ensure you have enough cash to meet your immediate and near-future needs. Otherwise, you mind find yourself borrowing again, perhaps in the form of a higher-interest personal loan, to make the same ends meet.

If you elect not to employ your payout on your education debt — or if you don’t receive a substantial payout — consider other ways to manage your federal and private loans in the aftermath of natural disaster.

Federal student loans

If you’ve suffered a major misfortune like the loss of your home, the Department of Education recommends reaching out to your federal loan servicer at your earliest convenience. Use the National Student Loan Data System to find your loans and servicer.

Once your servicer’s on the line, you can request to reduce or pause (not skip) your payments for between three and 12 months via forbearance. Keep in mind that interest will continue to accrue during this period.

Also, if your loans were already in default, you could ask your servicer to suspend collections on your debt, including wage garnishments, for up to 90 days.

Private student loans

Similarly, it’s wise to contact your private lender as soon as possible if you find yourself in a rough spot. Although protections vary from lender to lender, many banks, credit unions and online companies offer economic hardship forbearance. Through this measure, you can pause your payments, although interest will continue to add to your balance.

If a disaster has proved disastrous to your finances, you’re going to have more to worry about than just your student loans. The Federal Emergency Management Agency, known more commonly as FEMA, might also offer financial support in your case.

If at all possible, don’t wait to manage your debt. At the very least, you can pause your payments via forbearance to keep your credit intact and focus on what matters most in your life.

Using an insurance payout to repay debt isn’t always possible

Keep in mind that whether you could use your potential home insurance payout for student loans or other debt depends first on whether you plan to walk away or stay put.

If you plan to leave your home…

For the Jahangir family, departing California meant leaving the rubble behind. The family’s insurer, Allied, a subsidiary of Nationwide, helped Jahangir with the logistics of collecting on his claim. Once he paid the balance of his mortgage, the bank gave him what was left of the insurance payout.

This “cash out” policy isn’t standard, although high-end insurers like Chubb and Private Client from Forest Agency Insurance also offer it, according to insurance analyst Matt Timmons at ValuePenguin. (Note: Both Student Loan Hero and ValuePenguin are owned by LendingTree.)

And in fact, the average homeowner might leave money on the table by walking away from their home.

“For a typical homeowners insurance policy with replacement cost coverage, you’re usually paid in two parts,” Timmons said. “First, you get the depreciated or actual cash value immediately; then the remainder after the repairs are complete.”

In Jahangir’s case, his settlement offered the cash reserves necessary to cover his mortgage and pay off his debt — but he didn’t come to the latter decision easily.

If you plan to repair your home…

Ruttenberg doesn’t just know about this issue from his work as a CFP — he too received an insurance claim payout not that long ago. But unlike the Jahangirs, Ruttenberg and his family didn’t lose their home. In their case, Hurricane Irma knock over three trees, damaging their house and fence in September 2017.

Brad Ruttenberg

Photo courtesy of Brad Ruttenberg

Ruttenberg was cut a $5,000 check to make repairs after meeting his hurricane insurance policy’s deductible. He handled the home improvements himself for $1,200 — then considered using the remaining cash on his wife’s student loan debt.

“We could have paid down some of that debt with the excess funds, but I knew we had an impending expense coming that needed to be covered,” he said. “Our AC unit was outside of its warranty and on its last legs. Instead of financing a new unit, we were able to use our excess insurance funds plus additional savings to pay in cash.”

Ruttenberg wasn’t alone: About 668,000 homeowners filed insurance claims in Irma’s wake, according to the Florida Office of Insurance Regulation.

For homeowners who stay in their homes, using a claim payout to cover debt isn’t always feasible, according to ValuePenguin’s Timmons.

“If you borrowed to finance your home purchase, your lender will want the home completely repaired as it serves as collateral for your loan,” Timmons said. “If you do have leftover money after an insurance claim — either because you repaired your home yourself or your contractor came in under budget — you will often be able to keep the money, and that can be used for whatever you want.”

Plus, unless you choose a DIY approach like Ruttenberg’s, you might not ever see the claim award, since some insurers will pay your contractor directly.

Checklist for processing your home insurance payout claim

If you stand to receive a homeowners insurance settlement, expect a process similar to Jahangir’s. Here’s a rundown of the main tasks you’ll need to take care of:

Contact your insurance company

Jahangir called his insurer the day after evacuating. Within a week, they offered an initial payment.

“That eased some of the pain of purchasing clothes, etc.,” he said. “I imagine for those who do not have any savings (that) this would be a huge relief.”

When speaking with your insurer, have your policy number handy and be ready to provide details.

Itemize your losses

A personal property insurance adjuster recorded an interview with the Jahangirs, reviewing all the material items they’d lost.

“This was probably the most painful part of the process,” said Jahangir, who created a shared Google Drive document for him and his wife to organize. “To go through each room and categorize what was lost … even down to our socks.”

The Insurance Information Institute recommends taking pictures of the damage to your home, even if they don’t capture what you once owned. Your adjuster might also visit your property to inspect damages or repairs.

Gather paperwork relating to your home

A home insurance adjuster also interviewed the family about their lost home. Jahangir pored through his email account, gathering information about the home he’d purchased just 11 months earlier. He forwarded Zillow pictures and appraisal documents to detail the condition of the house.

“This process was slow and took months to finish,” he said of the back-and-forth with the adjuster.

The liability portion of your insurance would cover living expenses if you’re forced from your home and need to shack up somewhere else, as Jahangir did. Keep a record of expenses to make it easier to get reimbursed.

Double-check the adjuster’s work

Finally, the adjuster sent Jahangir a line-item estimate for damages that spanned 80 pages. He reviewed it room by room to ensure its accuracy.

“My diligence increased the amount of money we received, as some things were missed by the adjuster,” he said.

As painful as it might be to look back, putting in time could ensure you’re properly compensated for your lost items.

Collect your checks

Over seven months, the insurer sent 17 payments covering different damages, from the dwelling itself to other structures on the property and personal items. Once Jahangir paid off the destroyed home’s mortgage, all of the checks were sent directly to him, not his bank.

With a more straightforward claim, Ruttenberg waited less than 30 days for his check. Talk to your insurer about when and how you’ll be paid and what, if any, restrictions are placed on the funds.

Debt repayment: Make the best of a bad situation

Redirecting an insurance payout to repay debt isn’t the best decision for every borrower.

Jahangir’s advice? Review your options carefully.

“I see no problems paying down debt, but everyone’s situation is different,” he said. “Take the time you need to figure it out.”

If you’ve been through the trauma of natural disaster, take even more time. You might not be ready to look for silver linings like debt payoff.

More than a year after orange flames appeared beyond his front yard, however, Jahangir doesn’t have to look too hard.

“Oh, yeah, big silver lining,” he said. “I took the money, paid off debt, invested some, and saved some for a down payment for my next place. Plus, it let us revisit what we wanted in our lives, how we wanted to live, where we wanted to live — all of those big decisions.”

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1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.

2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

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Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

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This information is current as of September 9, 2020. Information and rates are subject to change without notice.

3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.

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The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

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5 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 10/15/2020 student loan refinancing rates range from 1.98% APR to 8.55% Variable APR with AutoPay and 2.99% APR to 8.77% Fixed APR with AutoPay.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.