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Alternative Payment Methods for Student Loans

Restructure student loan debt into your parents' home equity loan for better interest rates

If you just graduated with student loan debt, you may be wondering how you're going to pay it all off. If your parents are willing to back you, one option might be to use their home equity loan or line of credit since home equity interest rates are generally lower than student loan rates. The better home equity rates are an enticing offer since they mean you may have more affordable monthly payments.

However, student loans are structured to make repayments more feasible for recent graduates. You'll want to review both the risks and rewards before transitioning from student loans to home equity borrowing options.

If your parents decide they want to help you repay your student loans with a home equity loan or line, you'll probably want to set up a repayment system. Consider drawing up a loan agreement between you and your parents outlining how long it will take you to pay them back and what your monthly payments will be.

Consider the benefits of repaying student loans with home equity

First, look into any federal student loan forgiveness programs you may qualify for and how your private student loan rates are structured. If you consolidate your debt with a home equity loan, you'll forfeit federal forgiveness opportunities. Meanwhile, paying off private student loans with a home equity loan or home equity line of credit may provide lower interest rates and a reduction in the number of payments.

If you have private student loans with a variable interest rate, paying them off with a home equity loan provides the opportunity to move from a variable rate to a fixed rate. Using a home equity line of credit would keep your interest rate variable but may provide you with a lower rate which could be beneficial if interest rates remain low.

If you have been out of college a few years and have built up equity in a home, you could borrow on your own home equity instead of your parents' home equity. You would be able to consolidate your debt in your own name and only worry about repaying your lender rather than your parents. This allows you take care of the last few years of student debt with a lower interest rate.

Be aware of the risks when transitioning student loans to home equity loans

While the benefits of low home equity rates are appealing, it's important you and your parents understand the risks that accompany this decision. Even if you have worked out a repayment plan with your parents, it's important to identify the factors associated with this borrowing structure that could affect their credit and financial situation. Be sure to work with tax professionals regarding the IRS rules for loans to family members and managing interest income as well as tax considerations for gifts. Below are other risk factors associated with paying student loan debt with home equity loans or lines of credit:

  • Your parents' credit scores may go down due to increased utilization of their available credit.
  • If you use a home equity line of credit (HELOC) rather than a home equity loan, be aware that it has a variable interest rate. This means the home equity rate fluctuates with the market, and while it may start out low, it could rise during the term of the loan.
  • A HELOC requires interest-only payments during the initial draw period, usually 10 years. Then, payments of both principal and interest are required on the remaining balance for a term of 15 years. This payment increase at the end of the draw period may not be beneficial to your parents.
  • Your parents' home serves as security for a home equity loan and may be at risk if they default.
  • You forfeit any tax deductions available on student loans. However, your parents may be able to get tax deductions on a home equity loan or line of credit.
  • Many student loans grant you the ability to make early payments without penalty. Home equity loans and lines of credit may not have the same conditions.

Borrow off your home equity with a trusted lender like Citizens Bank

If you decide to apply for a home equity loan or line of credit to pay back your student loans, start the application process with a reputable establishment like Citizens Bank. We understand your lending needs and will help you choose the best option to manage your debt. Talk to a Citizens Bank Home Loan Originator to learn more about home equity rates.

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