Should you use a HELOC to pay off student loans?

Being a homeowner could unlock new ways to reach your financial goals. If one of those goals is paying off student loans, a home equity line of credit (HELOC) may be an option.

A HELOC could lower interest costs on some student loan debt and allow you to consolidate your loans. The tradeoff is that it turns unsecured education debt into debt secured by your home. This strategy may make sense if you have high-interest private loans. But it can be risky with federal student loans, as you’d give up key borrower protections.

It's smart to weigh the potential pros and cons before making a decision. Let's learn more about how home equity credit lines work, as well as when it might—or might not—make sense to use one to pay your student loans.

How a HELOC works compared to student loans

These are two very different types of loans. Here’s a HELOC vs. student loan comparison:

• Loan structure. A HELOC is a revolving line of credit that lets you borrow, repay, and borrow again during the draw period. A student loan is generally a lump sum you borrow all at once.

• Collateral. A HELOC is secured debt with your home as collateral, meaning your home secures or backs up the loan. Student loans are unsecured debt without any collateral.

• Interest. Many HELOCs have variable interest rates that can change over time, though some may offer fixed rates. Student loans typically have fixed interest rates that don’t change.

• Repayment flexibility. HELOCs could have interest-only payments to start, during the draw period, or full payments from the beginning. With student loans, you typically make full payments of the interest and principal from the beginning. If you have federal student loans, you may qualify for repayment plans like income-based repayment.

• Differences in collection efforts. If you default on a HELOC, the lender could foreclose on your home. Lenders of private student loans may sue you and try to garnish your wages if you default. The federal government has more collection options with federal student loans, which can include wage garnishment without a court order and taking your tax refund.

Can I use home equity to pay student loans?

Yes, if you have enough home equity, you could get a home equity loan or HELOC that you use to pay your student loans. Home equity loans and HELOCs can generally be used for almost anything, including paying off student loan debt. 

Just because you can do something doesn't mean you necessarily should, however. Take a look at some of the pros and cons.

Benefits of using a HELOC to pay off student loans

Here are the potential benefits of using a HELOC to pay off student loans:

• You may lower your interest rate.

• You could consolidate debt if you pay off multiple student loans with a HELOC.

• You could borrow from your HELOC again as you pay it down to help with other financial needs.

If you have private student loans with interest rates above 10%, a HELOC could be an opportunity to pay less interest. Because HELOCs use the borrower’s home as collateral, rates are often extremely competitive.

Risks of using a HELOC vs. a student loan

It's not all roses. Here are the biggest HELOC student loan risks:

• If you don’t repay the HELOC, you could lose your home.

• Your rate could increase over time if you get a variable-rate HELOC.

• You close off the possibility of student loan forgiveness and income-based repayment plans.

• Borrowing against your home equity reduces the amount of equity you have for other needs.

• HELOCs have closing costs and may have ongoing usage fees.

Another thing to consider is that you'll need to pay off the HELOC if you sell your home. If your property doesn't sell for more than you owe, you'll need to make up the difference.

Federal vs. private student loans when considering a HELOC

While a HELOC could be worth considering to pay off private student loans, it’s rarely a good idea for federal student loans. You’d lose federal student loan protections, which can include:

• Income-driven repayment. Plans with payments that are based on your income.

• Deferment and forbearance. The option to temporarily pause or lower your payments.

• Student loan forgiveness programs. Programs to cancel your student loan debt.

• Death/disability discharge. Both circumstances could result in student loan forgiveness.

Many borrowers have a mix of federal and private student loans. If you're considering a HELOC to pay off student loans, consider paying just the private loans with the HELOC and keeping the federal loans as is.

Should parents use a HELOC for college debt?

Parents are generally better off using savings, scholarships, grants, and federal student loans to help their kids pay for college. A HELOC could be a valid option, but it’s arguably riskier, because it requires putting up your home as collateral. You and your kids may want to look into other options first and only use a HELOC if necessary.

When using a HELOC to pay off student loans might make sense

You might want to pay off your student loans with a HELOC if:

• The loans are private.

• You’ll get a meaningfully lower interest rate.

• You have stable income and an emergency fund with at least six months of living expenses.

• You’re borrowing a reasonable amount that won’t push your debt-to-income (DTI) ratio too high.

If you want to learn about your HELOC options, check your rate with no credit impact.

When using a HELOC to pay off student loans is probably a bad idea

You probably shouldn’t use a HELOC to pay your student loans if you:

• Have federal student loans, as you’ll lose out on their potential protections.

• Can’t get a meaningful interest rate reduction.

• Have unstable income that could impact your ability to make your HELOC payments.

• Are tight on cash and you don’t have much money left over after paying your bills.

If you're not 1,000% certain you can make all of your HELOC payments, consider other options instead.

Alternatives to consider before using a HELOC

Instead of using a HELOC, you could refinance your student loans. Student loan refinancing is when you get a new loan to pay off your existing loans. You may be able to get a lower interest rate, a lower monthly payment, or both.

It’s usually still a good idea to leave your federal loans alone and only refinance your private loans. Refinancing federal loans with private loans has the same downside of paying them with a HELOC—you lose federal student loan protections.

Another option is to start paying extra toward your student loans. If you have the money, an additional monthly payment can speed up the payoff process quite a bit. By law, federal and private student loans can’t have prepayment penalties, so you’re free to pay them back as early as you want.

If you're struggling to make your student loan payments, contact your loan servicer. Federal student loans offer a lot of repayment options, like income-based repayment plans. Private loans may also offer hardship programs that could help you get back on track.

Paying off student loans with a HELOC can make sense in very specific situations. But often, it’s more trouble than it’s worth, especially when you have federal student loans with valuable borrower protections.