So you got out of college with a boatload of debt, like most students. And, you have a mixture of Federal and Private Student Loans. Studies have shown that recent college grads are putting off buying homes because of the huge student debt obligations. So, Fannie Mae, the government-backed home lender (not the candy maker!) created new rules to help homeowners. Homeowners will now be able to refinance, and, if there’s enough equity in their home, roll some of their student loan debt into a new mortgage. Great, right? Not so fast! Do the math first, and watch out for traps!!
First the math. If you have federal student loans, like Stafford and Perkins, those rates are already low, as fixed by the Federal Government. So, with rising home mortgage rates, this may not make sense, because the home loan may be at a higher interest rate than you are paying. If you have private loans, those interest rates might be a lot higher than a home mortgage. So, it MIGHT make sense and lower your payment. But, you need to watch for traps, and problems as I will talk about below. And, you may be able to deduct the mortgage interest on your tax returns as well.
Next, the traps. This is what you don’t hear about. This article from CBS News, mentions some of the pitfalls. First, you can only use this program if you are paying back YOUR student loans. So, it won’t work for parent-plus loans. Second, refinancing this way eliminates any repayment plans offered on Federal Student Loans, such as the Income Based Repayment, or IBR, or Pay as you Earn (PAYE), or Revised Pay as you Earn (REPAYE). Unless the rules change, these are some of the best plans available for student debt. Third, and this is a huge trap, it changes one type of debt for another, and uses your house as collateral. What does that mean? You might think, “I want to stay in my house, so that’s no big deal.” Well, it is a BIG DEAL! Think back to the housing crisis that started in about 2007. What happened? House prices dropped. Right now, you have enough equity in your house to support a larger mortgage or home equity loan. But, if your house price drops, you won’t be able to sell your house to pay off the debt, or refinance it later. Then, you are stuck in your house without many options.
The most important take-away from this is to think carefully before you use the home refinance to pay off student loans. Talk to a professional and look at your options. Ask questions, look at the consequences before you act. I’ve been helping people in Chicago and Northern Illinois with student loans and financial problems for over 25 years. I’d be happy to answer your questions and see what I can do to help.
Daniel J Winter
Offices in Chicago, Gurnee, Oak Lawn, and Skokie, Illinois