Should you pay off your student loans with home equity?

Student loans can cripple your finances for years long after earning that diploma. Many people are still able to be a home even saddled with all of that student loan debt. For anyone with equity, using it to pay off their student loan with a second mortgage would be a good idea for many.

Convention wisdom says the earlier you pay off your student loans, the better off. Paying off the loan will not only save interest and but it will improve your debt-to-income ratio, a factor lenders consider when deciding whether to offer you credit. A second mortgage, also known as a home-equity loan, is a good option for paying off big debts.

The biggest advantage to using a second mortgage to pay off a student loan is that the home equity loan will usually have longer terms than the student loans. This could lower your monthly payments and improve your debt-to-income ratio. A huge incentive for anyone who can itemize deductions on your federal income tax return, is that you will most likely be able to deduct all the interest you pay on your home equity loan.

A good thing to remember is that interest rates for home equity loans are often higher than those for student loans. And whether you qualify to itemize or not, you're allowed to deduct a portion of the interest you pay annually on your student loan in many cases.

The other important point to keep in mind is that student loans are unsecured debts. If you can’t meet your student loan payment, the worst thing that can happen is that you’ll ruin your credit. Your home secures a home equity loan, and if you default on it you can lose your home.