Several years ago, I refinanced my home, borrowing more money than I currently owed on the mortgage. By using this cash-out refinance loan, I secured the funds needed to repay my remaining student loan balance. With this move, I essentially converted educational debt into additional mortgage debt.
For me, there were four advantages to doing so.
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1. My student loan interest became tax-deductible
Student loan interest is tax-deductible for many people, up to $2,500 of the interest. However, there is an income limit to claim this deduction, and I was above that. This meant I was getting no tax benefits at all.
But I was itemizing on my taxes and claiming a deduction for mortgage interest. By refinancing my home loan to pay off my student loans, I made my student loan interest tax-deductible when it wasn't before. This provided generous savings.
The reverse could also be true for some people, though. If you are below the income limits for student loan interest to be deductible but you don't itemize on your taxes, then refinancing your house to pay off student loans could actually end up costing you the ability to deduct student loan interest. So be sure to consider your tax situation when deciding what's best for you.
2. I reduced my interest rate
I qualified for a lower interest rate on my mortgage than I was paying on my student loans. This enabled me to reduce the cost of borrowing.
I did convert my student loans into a loan with a longer payoff time, though. My student debt had a 10-year repayment plan, and I refinanced to a 30-year fixed-rate mortgage. So, even with lowering my interest rate, there was a risk I would end up paying more total interest over the longer repayment period.
I didn't mind this, though, as I intended to pay off a portion of my mortgage ahead of schedule to account for the fact I had refinanced my student loans into it.
3. I was left with just one monthly payment
My student loan debt and mortgage debt were the only money I owed. But I had several different student loans, so I was dealing with multiple payments each month. I decided I would rather have just one loan to focus on rather than have to divert my attention to multiple obligations.
4. I wasn't taking advantage of student loan benefits
The last reason for my move was that I was certain I was not going to take advantage of any special benefits that student loans sometimes provide.
The bulk of the loans I paid off with my home loan were private student loans, which meant I wasn't eligible for the favorable terms federal loans offer (like options for deferred payments or Public Service Loan Forgiveness).
I did pay off some federal student loans, though. Often, it's a bad idea to do this because federal loans have so many borrower benefits. But I only owed a small amount on these loans and I knew I wasn't going to be eligible for or interested in any of those benefits that the Department of Education offered.
If you are considering paying off federal student loans with a mortgage refinance (or if you are thinking of refinancing student loans with a private lender), be aware you do risk losing these valuable benefits, so only do so if you are 100% sure you won't take advantage of them. If you are refinancing only private loans, this isn't a concern.
Ultimately, I'm very happy with my decision. It's not the right choice for everyone, but a cash-out refi loan could be the solution to help deal with student loan debt if you're in a situation like I was.
