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Do I have to refinance my home to pay off my student loans?


Mortgage lenders can allow you to use the equity in your home to pay off your student loans. This type of loan is called “student loan withdrawal refinance” and it would eliminate debt from your life.

But that convenience could come at a cost: If you leverage your home to pay off student loans, you’re putting your home at risk if the larger balance ends up overwhelming you.

What is student loan repurchase refinancing?

A student loan repayment refinance is a type of mortgage that allows you to use the equity in your existing home to pay off student loans. To benefit from this option, the money you receive must:

  • Pay off at least one student loan in full.

  • Pay off a loan in your name – you can’t invest the money in a child loan, for example.

  • Be sent to your student loan manager on closing.

For example, let’s say your house is valued at $ 300,000, your mortgage is $ 200,000, and you owe $ 40,000 in student loans. You could take out a student loan refinance loan totaling $ 240,000, and the mortgage lender would provide the additional $ 40,000 to your student loan manager.

Disadvantages of refinancing a student loan with cash

Your student debt won’t really go away

Of course, cash-out refinancing will pay off your loans. But you will still owe this money as part of a larger mortgage. This loan, hopefully, comes with a lower payment than your previously separated debts. But your new mortgage can cost you more overall if it doesn’t offer a lower interest rate, a shorter repayment term, or both.

You waive the benefits and protections of the student loan

Federal loans offer options such as income-based repayment plans if you fall behind on your payments. If the loans default, the consequences can be serious, such as garnishment of your salary. But these penalties are not as severe as foreclosure, which would be possible if you cannot afford a refinance loan in cash.

You can lower your rate in other ways

If your goal is to save money on your student loan payments, consider refinancing these loans on your own. The best APRs for mortgage refinancing and student loan refinancing are comparable, and only refinancing your student loans would not put your home at risk.

Who should consider this option?

You should generally not add unsecured debt, such as student loans, to loans linked to collateral, such as mortgages. The main reason for doing so would be if the savings outweigh the risks.

This may only be the case if you have a small student loan balance or federal PLUS or high interest private loans. But if you’re planning on paying off your loans, other reasons to consider refinancing a student loan could include:

  • Your debt excludes you from other options. Your monthly mortgage and student loan bills could make your debt-to-income ratio too high to be approved for other types of loans. By combining them into one lower bill, you may qualify for a better interest rate now, as well as additional loans in the future.

  • You don’t trust yourself to use the loan money to pay off the debt. Since the student loan cashing refinance funds go directly to your service agent, you won’t be tempted to spend that money elsewhere. Plus, if you’re done borrowing student loans, you probably won’t increase your overall debt. This might not be the case if you’ve used cash-out refinancing to pay off high-interest credit cards, for example, to accumulate more credit card debt.

Which lenders offer student loan cashing refinancing?

Student loan cash refinancing is available on loans guaranteed by Fannie Mae. But few lenders advertise this option.

Most notable is SoFi, which started offering this program in 2016, and allows you to receive up to 80% of your home equity. SoFi Mortgages are not available in all states, and you will need to meet the lender’s eligibility criteria to qualify.