Home Equity Loans for Student Loan Consolidation?
It is quickly becoming a trend for people to take out loans to pay off the majority of their schooling. When it's undergraduate debt you're talking about, the burden is not as big. When graduate school debt is thrown into the mix, the numbers can become staggering. For some people, the burden of paying off these loans is a significant one. Those individuals are looking at big payments each month with few resources to cushion the blow. How should these individuals cope with their large debt load? Some are leaning to taking out home equity loans to pay off their college loans. Is this a good idea? That depends upon your own situation and where your finances sit.
Is it wise to tap into home equity lines of credit?
The first question you should ask yourself is whether it's smart to use such a valuable resource. Home equity is something that you have to work very hard to build. As a result, it should be protected and you should only use it if you have to. It is wise for individuals considering this option to think their way through it and not act hastily. Though it can be wise to use home equity to pay off student loans in certain circumstances, it might not be the right move for everyone. Home equity is something that can be nice to have in case of an emergency situation, so using it up can have some consequences down the road.
Why home equity loans might make sense
With college loans, the interest burden can be large. This is especially true for people who had to take out privately funded loans as a source of financial aid. This financial aid comes with 10% interest in some cases and if you are paying down $200,000 in loans, the amount dedicated to interest can be very high. Likewise, there are few other options out there for people who are paying off government-funded student loans. Defaulting on these loans can have serious consequences and can leave a person without the ability to get further funding for later education down the road.
Student loans and non-discharge
Student loans generally cannot be discharged under bankruptcy law except in very extreme circumstances. This means that 99% of the people who take out these loans will have to pay them off one way or another unless they leave the country or pass away. The government and private lenders will get their money, which is one of the reasons why financial aid is so easy to get for so many people. The nice thing about student loan consolidation with an equity loan is that individuals can get rid of this problem. Though you don't plan to default and you don't plan to struggle financially, there is always the possibility. Home equity loans can generally be discharged through bankruptcy, so this adds a nice back door to avoid the difficulties of the system.
Though this might not seem relevant to you, it is another factor in favor of consolidating with home equity. You never know what can happen later in life, and it is always better to have more options rather than fewer.
Before taking out a home equity loan for student loan consolidation, you might consider the other options. There are debt counseling programs and specialized consolidation programs, but these can leave a scar on your credit report. They are also quite expensive and don't really provide enough relief in many instances. Likewise, many of these programs are capped at certain amounts, so they don't help people who have accrued a lot of debt in the graduate school process. The inadequacy of these options is important to note as you make a decision on how to handle the debt.
The big time saving potential
Whenever you decide to use the all-too-valuable home equity line of credit, you should make sure it's used for a good purpose. You don't want to waste that life line without getting something in return for it. The return, at least for most people, is significant savings in interest payments. Most individuals with good credit can get a home equity loan for somewhere in the 4-6% range depending upon other factors. Student loans generally come in at 8.9% at the very least, with some of them topping 10%. As mentioned previously, when former students are paying down hundreds of thousands of dollars, this can amount to tens of thousands in savings. Even for those who have smaller loans, it can amount to significant savings.
Student loan consolidation makes sense for many and can be a big money saver for the wise. It is something to consider carefully if you are looking at overwhelming payments from a variety of government and private lenders.