Thinking About Refinancing Your House To Pay Off Student Loans? Read This First

Refinancing your house to pay off student loans means taking out a larger mortgage and using the extra cash to wipe out your federal or private debt. I did exactly that — using a cash-out refinance to eliminate tens of thousands of dollars in student loans.

There are real benefits to this approach, including combining payments, adjusting your timeline, and potentially lowering your interest rate. Those advantages convinced me — but the tradeoffs are serious, and they won’t make sense for everyone.

Here’s why I made the decision, what it cost me, and who should — and shouldn’t — consider doing the same.

Current student loan refinance rates

Why I refinanced my home to pay off student loans

The primary reasons I chose to refinance my home to pay off student loans were:

• A lower interest rate: I had both federal and private student loans, and some of them had pretty high rates (upwards of 10%). Since I was able to get a mortgage at a lower rate, I reduced the financing costs I was paying. 
• Simplified repayment: I was paying multiple student loans and a mortgage each month. When I refinanced my mortgage and paid off all those loans, that was no longer the case. Now I only had a single monthly payment to make. 

Since I lowered my student loan repayment costs, made my life simpler, and reduced the interest I was paying each month, I decided refinancing was a no-brainer — and others may find the same is true for them. 

“Refinancing can be a great way to accomplish a debt consolidation and decrease your monthly payment,” says Domenick D'Andrea, a certified plan fiduciary adviser (CPFA) and co-founder of DanDarah Wealth Management.

Trade-offs I made in refinancing my home to repay student debt

While there were plenty of reasons refinancing made good sense, there were also some big trade-offs I had to accept. Here were some of the  biggest disadvantages of tapping home equity to pay my student loans:

• I extended my repayment time: Since I was on the standard 10-year repayment plan, my student loans would have been paid off in 10 years. I chose a 15-year mortgage when I refinanced, adding five years to my payoff schedule. A longer repayment term can raise your total cost — even with a lower rate — since you’re accruing interest over an extended period of time.
• I had to pay closing costs: Refinancing a house is expensive. Closing costs usually run between 2% and 6% of the loan amount. This meant I had to come up with a good amount of cash up front. 
• I gave up my federal borrower benefits: I had some federal student loans that I included in my refinance. By repaying those loans with home equity, I was giving up the benefits only federal loans offer — including any possibility of future loan forgiveness or the ability to pause payments by putting my loans into deferment or forbearance. 
• I took on added risk: A mortgage is a secured debt. By tapping my equity, I was putting my home on the line. If I didn't make the payments, I could lose the house.

For me, the trade-offs were worth it. The closing costs were annoying, but since I was lowering the rate on both my student loans and the mortgage I was refinancing, the savings in my monthly payment made up for the up-front costs in a pretty short period of time. 

I was also very unlikely to be able to take advantage of any federal borrower benefits. My income didn't qualify me for forgiveness programs, income-driven repayment, or the student loan interest tax deduction. Since my husband and I both owned our own reliable businesses, I probably would never be able to take advantage of these benefits, or need deferment or forbearance in the future.

The biggest downside was the fact that extending my payoff time meant I'd potentially owe more over time — but since I planned to make extra payments to pay off the cash-out refinance loan early, that wasn't a huge issue. 

What I gained and gave up by using home equity to pay off student loan debt

So, why did I go through this process, and what did I gain and give up by using home equity to pay off debt?

Flexibility and simplicity were the biggest gains. With my lower monthly payment, I had more options for what I wanted to do with my money. I could pay extra toward my loan, or I could do other things like invest more for retirement. I also didn't have multiple loans to manage anymore, which had been a major hassle. 

The biggest downsides were losing any possible future forgiveness benefits, however unlikely it was that I'd take advantage of them, and putting my house at risk. I was essentially making a big bet on myself that I'd continue to earn enough to pay the bills and not need to pause payments or cap them based on a percentage of income. 

Who benefits most from home refinancing to repay student loans?

So, should you follow my example and consider refinancing to repay your student loans? Here are circumstances under which you would benefit most from doing so:

• You plan to stay in your house a while: “Most home equity loans have closing costs, so you want to plan on living in the house for many years to offset those additional costs,” explains D'Andrea.
• You definitely won't use any federal benefits: If you know you will not take advantage of income-driven repayment plans, forbearance, deferment, or forgiveness, then giving up these benefits won't be a big issue. 
• You can qualify for a low-interest loan: It only makes sense to refinance your house to pay off your student loan debt if you can qualify for a lower interest rate than the rate on your current mortgage and student loans. 

Who should not use home equity to pay off student loans?

Some people definitely shouldn't try to use their home equity to pay their student loans. Here are scenarios where it’s not a smart move:

• You don't have much equity: D'Andrea explains that there are loan limits, so you'll need enough equity to borrow enough to pay for your student debt. “You need to have more than 20% of your equity in your house,” he says. You'll also need to make sure you don't need the equity for something else. “Refinancing your house would reduce the equity that may be needed for other purposes, such as home renovations,” explains Jack Wang, a wealth adviser and college planning strategist.
• You'll increase your taxes: If you qualify for the student loan interest deduction, you would give that up by paying off your student loans with mortgage debt. This wasn't the case for me, as I didn't qualify for this deduction anyway. Cash-out refinance loans, HELOCs, and home equity loans only come with deductible interest if you tap into equity to buy, build, or substantially improve your home.
• You can't qualify for a new loan at an affordable rate: You don't want to increase your borrowing costs by taking a cash-out refinance loan with a higher rate than your current home loan. You could still use a home equity loan or line of credit to refinance student debt without affecting your current mortgage, but the rates on those would need to be lower than your student loans for that to make sense.
• You aren't 100% confident you can make payments: “If you default on student loans, you may have wage garnishment and other collection activities, but if you default on your mortgage, you can lose your house,” Wang warns. “As painful as bad credit may be, at least you have somewhere to live!”
• You may need federal borrower benefits: Giving up income-driven payment options, flexibility in payment plans, and potential future forgiveness can be big downsides if you qualify for those things now. 

Risks and pitfalls of a cash-out mortgage refinance to repay student debt

The bottom line is, there are big risks to using a cash-out mortgage refinance to repay student debt, including:

• Taking too much equity out of your home: If you reduce your equity by borrowing against it for student loans and then property values fall, you could end up owing more than your house is worth.
• Losing your house: Not being able to pay can lead to foreclosure. 
• Paying more over time: If you increase your interest rate, extend your loan term, or both, you may increase the total amount you have to spend to pay your debt. 
• Not breaking even: If you have to move before you've saved enough to cover up-front closing costs, then you could lose money on the refinance effort. 
• Losing federal benefits: If the government forgives student loans on a broad basis in the future, you won't benefit. You also won't be able to pursue forgiveness if your income falls later or if you decide to do public service work in the future. 

You should think these risks through carefully to confirm you're making a smart choice. 

What I’d consider before making this decision again

If I were making this decision again, I'd consider:

• The political climate: When I paid off my student loans with a cash-out refinance, broad forgiveness for most borrowers wasn't under consideration. When lawmakers began talking about forgiving debt, I thought I might miss out if that happened.
• Unexpected changes in income: Student loan payments were paused during the pandemic, but my mortgage wasn't. If I had experienced a sudden and unexpected drop in income (which couldn't have been predicted), I would have had a problem. 
• The hassle involved in the process: I had to get an appraisal, submit a lot of paperwork, and spend time shopping for the right loan. If I didn't realize significant savings, the effort wouldn't have been worth it. 

Student loan refinance loans are another alternative I could have used to lower my rate on educational debt without affecting my home loan. If I were ever to face this choice again, I would compare those with mortgage loan offers to better understand all of my options.