Student Loan Debt: An All Too Familiar Struggle
Student debt is affecting the lives of so many individuals and families today. Nearly 44 million Americans collectively owe over $1.6 trillion in student loans — $1.5 trillion in federal student loan debt and $119 billion in private student loans.1 Counting loans taken out by both students and parents, 51% of families borrow to pay for college.2 And the average level of debt for each borrower is $29,000, according to the College Board. An undergraduate education is expensive, graduate programs are even costlier, but in today’s technological age, a college degree is more important than ever, and not getting one is an even costlier scenario over a lifetime.
It takes most people over 20 years to pay off their student debt, affecting their lifestyle and financial stability for decades. Even for people who don’t struggle to make their debt payments, this level of debt can delay saving for other important goals, such as starting a business, retirement or their own children’s education.
To lessen the struggle and potential long-term impact on their financial well-being, borrowers are exploring every alternative that can help relieve or reduce the costs of student debt and shorten the time to repayment.
Using a HELOC to Pay Student Loans
One popular creative way to pay off student loans is to transfer the debt to a low-interest home equity line of credit (HELOC).
Home equity is, basically, the portion of a home’s value owned outright by the homeowners. It is the difference between a property’s full market value and any outstanding loans against it. Homeowners build equity by paying down their mortgage principal, completing improvements that raise the home’s value or riding the tide of a market increase in home values.
A HELOC is a revolving line of credit secured by home equity. As with other lines of credit, borrowers use and pay interest only on the money they need. They can make a single withdrawal or multiple withdrawals and make payments as low as interest-only during the borrowing or draw period (typically 10 years), completing repayment during the subsequent 5, 10 or 20-year repayment period.
There are basic differences between student and HELOC loans. The main one is that student loans are unsecured, meaning that there is no collateral backing the loan, just the borrower’s promise to pay. HELOCs are secured loans, backed by residential property. This difference accounts for the most significant pros and cons of each type of loan.
The biggest reason to use a HELOC to pay off student debt is to save money over the life of the loan. Secured loans, because they present less risk to a lender, tend to have lower interest rates. A borrower who can secure a HELOC with lower rates than their student loans and pay it off can save thousands of dollars in interest and perhaps get out of debt sooner.
The differences between an unsecured and secured loan also come into play in the consequences for nonpayment. Borrowers who fail to pay their student loans are likely to have their wages garnished or, for federal loans, their tax refunds claimed by the government. Failure to pay a secured loan, however, also puts the collateral in jeopardy. In other words, for borrowers who fail to pay their HELOC, the worst case scenario is losing their home. This is a risk that should be considered carefully before taking out a HELOC.
There are additional pros and cons to consider. Homeowners can consolidate multiple student loans into a single HELOC, making payment simpler and more convenient. Once student debt is transferred to the HELOC, borrowers have much more flexibility in repayment. They can choose to make regular monthly payments from the beginning, increase or decrease payments in response to changing financial circumstances, or delay repayment of the principal to a time when their income is higher and their financial position more stable.
Borrowers should be aware, however, that by transferring federal student debt to a HELOC, they can lose the benefits of student loan hardship programs and forfeit federal forgiveness opportunities. They should always check first into any special programs they may qualify for that could reduce or eliminate their debt.
Some recent graduates who haven’t yet had an opportunity to become homeowners use their parents’ home equity to help them pay off student loan debt. In these cases, it’s important that children and parents agree on a repayment plan and fully understand all the benefits and risks.
Adjustable Rate or Fixed Rate?
Home equity loans are available in fixed-rate and adjustable-rate versions. With a fixed rate home equity loan, the interest rate and monthly payment remains constant throughout the life of the loan, offering predictability and stability to homeowners who want to borrow a specific amount for a specific length of time.
HELOCs, on the other hand, are adjustable-rate loans, although they may have an introductory fixed rate. This means that rates are likely to fluctuate over time, although they can only increase by a legally mandated amount over the life of the loan. However, adjustable-rate HELOCs offer more flexibility than fixed-rate loans in borrowing and repayment terms, making them very attractive to young borrowers whose financial picture may still be evolving.
A Bethpage HELOC allows members the additional option to borrow against the equity in their homes with a flexible revolving credit line and still have access to the stability of a traditional fixed-rate home equity loan. A Fixed-Rate Loan Option (FRLO) gives HELOC borrowers the opportunity to lock in an interest rate at any time during the 10-year draw period, for any part or all of their balance. The fixed rate provides protection from the possibility of rising interest rates. Borrowers may have up to three FRLOs open at any one time, with a maximum of $10,000 in each.
Apply for a HELOC From Bethpage Federal Credit Union
If you’re considering using a HELOC to pay off student debt, Bethpage is ready to help. Our members are more than customers, they are our partners. We’re dedicated to guiding you and keeping you informed so you feel comfortable every step of the way through our loan process.
We make it simple to apply for a Bethpage HELOC. Why not check out our competitive current HELOC rates and explore this flexible, low-cost loan option today?
1 Center for American Progress. "Addressing the $1.5 Trillion in Federal Student Loan Debt."
2 Sallie Mae. "How America Pays for College."