Paying off Student Loans with a Home Equity Loan

[mikelo22]

I apologize if this has been asked before, but I did a couple searches and didn't find any recent topics relevat to the current interest rates. 

As background, I am in Law School and once I graduate next year I am looking at probably around $55,000 in accumulated student debt. Almost all of this debt is Graduate Stafford Unsubsidized loans, with most at an interest rate of 6.21%.

So I was thinking of a way to pay off my loans at a cheaper rate, and I was considering talking to my parents about having them take out a Home Equity Loan in one of our two houses to completely pay off my student loans. Then I would make payments pay off the Home Equity loan with my salary. Local Credit Unions are offering Equity Loans at around ~3%, so I would be cutting my interest in more than half. I haven't done much hunting this regard, so perhaps I could find an even lower rate.

I'll admit that I haven't researched this too much yet, but I thought it appeared to be a pretty intriguing option. I already have a job waiting for me at a law firm. I don't have that much student debt (in my opinion), so I don't see how the possible benefit of student loan repayments being capped at a max amount of your income is worth the crazy high unsubsidized loan APR of 6.21%. I also would not be going into public service, so I would not be able to benefit from the Federal government's 30-year forgiveness plan for working in public service (and with my small amount of debt relative to other law students, I don't think I would ever need it anyway).

So what do you guys think? Any comments on this idea? Obviously, it's a long talk I would have to have with my parents because it's a very serious undertaking. But any comments or opinions on this idea would be appreciated. Thanks!

[SCF]

There are some important benefits that you give up if you effectively refinance your loans by borrowing against your home:

- If you pass way or are permanently disabled, student loans will be discharged.  With a home equity loan, the bank would take the asset to pay it off.

- If you ever find yourself in a period of unemployment, or wanting to take a lower paid position (perhaps for more advancement opportunities, or in order to relocate), the payment on the home equity loan will not change, but IBR or an economic hardship deferment could give you important financial flexibility and safety

What would the repayment term be on the home equity loan?  With federal loans, you also have flexibility in choosing your repayment period (I believe you could go up to 30 years with your balance).  You should also know that Public Service Loan Forgiveness takes effect after only 10 years, much sooner than the 25-year period that applies if you make your IBR payments while working in the private sector.

I wouldn't do it unless you knew for sure that the loan would be paid in the event of your passing or serious illness.  The extra interest is going to be well worth it if you need those benefits, plus I suspect that your home equity loan would have a higher payment than your student loan - so you are effectively already planning to pay down these loans faster to save interest.

[Anonymous]

Personally, I wouldn't do it. FYI, this is my first post.

Your loans are relatively low for a law student. I too graduated from law school. But even though your loans are low as far as law school loans go, they might as well be a million dollars if you lose your job or have health issues or are otherwise not working. The forbearance and deferrement will come in handy at that point. When I started working as an attorney, I worked for a couple years and then left my firm because of frustration and issues there. But then the economy went sour and I had money problems. I oculdn't pay my loans and credit cards. The forbearance was helpful but I still got some negative marks on by credit report for just ignoring my loans and letting them become late.

I returned to working for fimrs and cleared up most everything negative on my credit report now. I was able to clean up the negative marks for late payment of my student loans. My impression is that it's easier to do this with student loans.

Since you have a job lined up, you might think about tryinng to sacrifice early and pay more toward the loans before starting on other large purchases, such as a new car, or saving for a house.

Right now, I have a car loan that's a lower interest than my student loans. But I plan on paying my car loan off first, not just because the principal is lower than my student loans but if something happens with my job, loss of work or whatever, I will still have to make monthly payments on my car loan.

But with my student loans, I can hold off for a long time if I lose my job or become sick. I had may loans consolidated and I can still get a deferrment or forbearance if I ever need it. I also pay much more than my minimum payment. In 2012, I had gotten very sick and took a medical leave for 5 months. But I had been paying much more every month that I didn't have a minimum payment for several months. So I didn't have to pay anything while I was sick. Then when I went back to work, I just stepped up the payments again.

Anyway, I hope that helps you in considering your decision. 

[Anonymous]

Are you going into biglaw or taking a position with the government or a pro bono group? One of the benefits of the student loans is that you may qualify for debt forgiveness if you're choosing not to work in biglaw. Additionally, if you are in biglaw, you might run a higher risk of termination. I'm but a lowly 2L, but that is my understanding, anyway.

Rather than a HELOC, you might look at consolidating your loans. You can probably find a bank or service that is willing to repackage your loans into a lower interest rate. Good luck!

[Pat94108]

I agree with everyone who's contributed thus far. In my opinion, don't do it, at least not right away. My advice is "enjoy" your student loans for a few years and try to make bigger payments than the minimum, which will, in turn, push your due date back in case you'd need it. I personally appreciated reading ravenlot's story as it sums up pretty well the benefits that come with federal student loans. 

I graduated with about 38k after getting a Master's degree and took a job that I ended up not liking much so after about 15 months I quit, but it took me about 9 months to find another one. During that time my loans were in deferment and the government paid interests on the subsidized ones so I didn't have to worry about payments (I did pay the interests on the unsubsidized ones during my unemployment). 

As of now, I have about 13k left and I am paid ahead by a year (again, result of paying more than the minimum). Of course, I continue making monthly payments despite the next due date currently being January 2016, but it's good to know that should I lose my job or need to take a medical leave for any reason, I wouldn't have to worry about my student loan and I wouldn't even have to ask for a deferment or forbearance, at least not for a year. 

My advice to you is not to do it right away, settle into your new life, pay your student loans for a few years, see how you like your job, life etc.,  and maybe a few years down the line, you can reconsider the home equity option. I have, myself, been thinking about putting the last 5k-8k on an interest-free credit card and pay it off during that time frame, but I'll see how I feel about it when my balance reaches these amounts and reconsider then.

Hope that helps you in making a decision.