Should You Refinance Your Student Loans by Taking Cash Out of Your Home?

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Mortgage lenders may let you use your home’s equity to pay off student loans. This type of loan is called a “student loan cash-out refinance,” and it would eliminate a debt from your life.

But that convenience could cost you: If you leverage your house to pay off student loans, you put your home at risk if the larger balance ends up overwhelming you.

It may make more sense to refinance your student loans separately. It won’t get rid of that debt, but it could help you pay off student loans faster.

Have you considered tapping into your home equity to pay off your student loans? This strategy is known as a student loan cash-out refinance It allows you to roll your existing student debt into your mortgage

While it may seem tempting to consolidate your loans this way, there are some major drawbacks to consider. In this comprehensive guide, we’ll explain what a cash-out refinance is, who it might make sense for, and alternatives you may want to consider first.

What is a Student Loan Cash-Out Refinance?

A student loan cash-out refinance lets you leverage your home equity to pay off student debt Here’s how it works

You take out a new mortgage that’s large enough to pay off your existing student loans.
The lender sends the payoff amount directly to your student loan servicer(s).
You end up with a single new mortgage instead of separate student loans and a mortgage.

For example, let’s say you have $200,000 left on your mortgage and $50,000 in student loans. You could do a cash-out refinance for $250,000. The lender would pay your servicer the $50,000 to pay off your student loans, and you’d end up with just the new $250,000 mortgage.

The main appeal is rolling all your debt into one convenient payment at a lower interest rate. But as we’ll explain, there are some significant risks to weigh first.

Pros of Student Loan Cash-Out Refinances

Lower interest rate: Mortgages often have lower rates than student loans. Your new blended rate could save money.
Single payment: One monthly bill is easier than tracking multiple student loan payments.
Pay off loans faster: Shorter mortgage terms equal less interest paid over time.
Tap available equity: Access cash to pay down high-rate debt.

Cons of Student Loan Cash-Out Refinances

Risk your home: Your home secures the debt, so you could face foreclosure if you default.
Lose student loan benefits: Federal loans offer options like income-driven repayment and forgiveness programs.
Higher long-term costs: Even with a lower rate, a bigger mortgage could mean paying more interest over the full term.
Difficult to qualify: Lenders have stricter approval criteria for cash-out refinances than student loan refinancing.

Who Should (and Shouldn’t) Do a Cash-Out Refi?

This option requires careful consideration of your financial situation. Here are some cases where it could make sense and others where student loan refinancing may be better.

When a Cash-Out Refi Might Work

You have strong credit and income to qualify.
The savings from a lower rate are significant.
Your student loan term is long (10+ years).
Your mortgage has 10-15 years left.
Your student loan balance is relatively small.

When Student Loan Refinancing Is Better

You have federal loans you don’t want to give up.
Your income is unstable.
You have limited home equity.
You plan to move soon.
Your loan term is short (5 years or less).

A general rule of thumb is to choose the option that will save you the most money in the long run. Do the math to see if the lower rate outweighs closing costs and the higher mortgage amount.

Alternatives to Cash-Out Refinancing

Here are a few other ways to pay off student loans faster and save money:

Refinance just the student loans – This allows you to get a lower student loan rate without putting your home at risk.
Pay extra each month – Making additional principal payments directly to your student loan servicer can slash interest costs and payoff time.
Change repayment plans – Income-driven plans like PAYE and REPAYE can lower federal loan payments to 10% of discretionary income.
Apply for student loan forgiveness – Teachers, nurses, government workers may qualify for federal or state forgiveness programs.
Consolidate with a personal loan – An unsecured consolidation loan would leave your home equity untouched.

Questions to Ask Before Refinancing Student Loans

If you decide a cash-out refinance is right for you, here are some important questions to consider:

What are the rates and fees? Make sure the savings outweigh the costs.
What loan term makes the most sense? A shorter term usually means more monthly savings.
How much equity will you have left? Don’t drain all your home equity.
Can you still afford the payments if your income changes? Factor in a safety net for hard times.
Are you giving up valuable protections and benefits? Federal perks can provide peace of mind.

The Bottom Line

While a student loan cash-out refinance can help tackle education debt, it also takes a gamble with your home equity. Look closely at all your options to find the most strategic repayment strategy for your situation.

Refinancing federal loans privately should also be done carefully, as you will lose access to federal benefits and protections. Weigh the pros and cons for your own loans, and consult a financial advisor if you need guidance on the best approach.

You give up student loan benefits and protections

Federal loans have options like income-driven repayment plans if you fall behind on payments. If the loans do default, the consequences can be serious, like having your wages garnished. But those penalties aren’t as severe as foreclosure, which would be possible if you can’t pay a cash-out refinance loan.

Drawbacks of a student loan cash-out refinance

Sure, the cash-out refinance will pay off your loans. But you’ll still owe that money as part of a bigger mortgage. That loan hopefully comes with a smaller payment than your previously separate debts. But your new mortgage may cost you more overall if it doesnt offer a lower interest rate, shorter repayment term or both.

Student Loan Cash Out Refi

FAQ

What is a student loan cash-out refinance?

A student loan cash-out refinance is a type of mortgage that lets you use your existing home equity to pay off student loans. To qualify for this option, the money you receive must: Repay at least one student loan in full. Pay off a loan in your name — you can’t put the money toward a child’s loan, for example.

What is the 12 month cash out rule?

When paying off a first lien mortgage, at least 12 months must have passed between the note date of the mortgage being refinanced and the note date of the cash-out refinance mortgage.

What are the rules for a cash-out refinance?

To get a cash-out refinance, lenders usually require: Home equity of at least 20% An LTV ratio of no more than 80% A current appraisal of your home to verify its value.

Is it smart to take out a home equity loan to pay off student loans?

The bottom line While you can’t wave a magic wand to make your debts go away, you can make it easier to pay them off by using a home equity loan. You can lower your rate, consolidate your debt and get a fixed rate, all of which could make paying off the debt easier in the long run.

How does a cash-out refinance work?

Here’s how cash-out refinance works: You get a mortgage loan that allows you to tap into your home’s equity to pay off your student loan debt. You consolidate your mortgage loan and your student debt. You also get a lump sum of money upon closing, which comes out of your home’s equity, and can be put toward your student loan debt.

Can you refinance a student loan if payments paused?

With federal student loan payments paused, consider all options before you refi. Here’s how to refinance student loans, in a nutshell: Find lenders that will offer you a lower interest rate. Compare them. Apply. If you’re approved, the new lender will pay off your existing lender. Going forward, you’ll make monthly payments to the new lender.

How does student loan refinancing work?

Student loan refinancing lets you combine multiple loans into one, thereby simplifying repayment. You’ll work with a private lender that pays off your old student loans and issues a new one in their place. There’s typically no fee to refinance student loans, but you’ll need to meet the lender’s requirements for credit and income.

How do I refinance my student loans?

To refinance your student loans, you must apply with a new lender and provide your contact information, employment details and financial statements. The lender will run a credit check and verify your income before approving you. Some lenders may require a co-signer if you don’t meet the credit score and income minimums.

How long can a student loan be refinanced?

Many student loan refinance lenders offer loan terms of five, seven, 10, 15 and 20 years. Be sure to review how much is left on your current loan’s term—if you refinance and extend your loan term considerably, you will likely end up paying more in interest over the life of your loan.