Should I combine my mortgage and student loans? – Bankrate
- September 15, 2020
- By: Greenpath Financial Wellness
Bankrate regularly shares advice about personal finances, and recently looked to GreenPath for our expertise. Financial expert Katie Bossler weighs in.
Bankrate looks at whether homeowners paying off student loans should take advantage of current low-interest rates, refinancing their mortgage and using cash to pay off any education debt.
The strategy may seem like a good idea on the surface, but what are the long term implications?
Many experts point to potential pitfalls to putting student and home debt into one bucket, and that there are other, more effective ways of reducing your payment burden.
It is useful to consider some of the downsides and alternatives to this strategy.
First off, paying off student debt with proceeds from a mortgage refinance means you’ll lose student loan-specific protections.
Many student loans — especially those issued by federally backed programs — have special conditions meant to help the borrower.
These range from repayment options based on income to possible loan forgiveness for people who go into government or nonprofit work after graduating. Some other professionals, like teachers, doctors and nurses also qualify for certain types of loan forgiveness.
Anyone who applies their refinance proceeds to pay off student loans loses those very important protections.
“The big downside of refinancing federal student loans is that you’ll have to do so with a private lender,” says Chelsea Wing, loans editor at Bankrate. “This means sacrificing many of the benefits of federal loans, including income-based repayment plans, the potential for student loan forgiveness and deferment options like we’re seeing now — through the end of 2020, federal borrowers aren’t accruing interest, and they’re not required to make their student loan payments. Many private lenders have their own deferment and forbearance options, but not at this scale.”
Forbearance programs are important if you’re considering refinancing your student loans. If you refinance that debt into your mortgage and close before the end of the year, you’ll need to start paying that debt again immediately and will also start accruing interest again away.
You’re more at risk of losing your house.
Wrapping different kinds of debts together can create unintended consequences if you one day struggle to make your payments.
Rolling student loans into a mortgage means you’re putting your house up as collateral against the debt. If you can’t make the payment, the bank might foreclose and you could lose your home.
It could be more expensive overall.
Mortgage rates are at record lows, but low rates aren’t the only thing to consider when calculating the true expense of student loans.
“You want to look at an amortization calculator because you may pay more for that student loan over time if you stretch it out for a longer period,” says Katie Bossler, quality assurance team lead and a certified credit counselor at GreenPath Financial Wellness, a financial planning firm headquartered in Farmington Hills, Michigan. “It may not be as simple as it appears, swapping rates. That term matters.”
Typically, student loans are paid off over 10 years, while the most common mortgage term is 30 years. That means, even if you get a lower rate on your mortgage than you currently have on your student loans, you may pay more in interest because you might be carrying some of the debt for an extra two decades.
Low-interest rates aren’t limited to just mortgages.
A good approach is to see if you can refinance student debt separately.
“You can compare rates on student loan refinance options,” Bossler says, adding that you may be able to find student loan refinancing options with interest rates comparable to a mortgage right now, while maintaining a shorter repayment period.
Also, it’s important to keep your goals in mind. If your primary aim is to lower your monthly payments, you may be able to achieve that just by speaking to your loan servicer.
“They may have a lot of options available to lower that monthly payment,” Bossler says. Even privately financed student loan providers may offer some repayment flexibility.
“Overall, there’s just a lot of reasons why this may not be a great idea,” Bossler says. “Take it on with a lot of caution.”
GreenPath Is Here To Support You
What’s the best strategy for you? Our financial counselors are available to talk. They will walk through your whole financial picture to help you identify options that can relieve financial stress and make it easier to manage debt.