Alternative payment methods for student loans

If you are preparing to pay off student loans, one repayment option to consider is using a home equity loan or home equity line of credit (HELOC) since 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 graduates. You'll want to review both the risks and rewards before transitioning from student loans to home equity borrowing options.

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 HELOC 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.

While the benefits of low home equity rates are appealing, it's important to understand the risks associated with paying student loan debt with home equity loans or lines of credit:

• If you use a 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. Having this payment increase at the end of the draw period is something to keep in mind if you choose to use a HELOC.
• Your home serves as security for a home equity loan and may be at risk if you default.
• You forfeit any tax deductions available on student loans. However, you 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.