Rolling your student loans into your mortgage

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Leveraging your mortgage to pay off student loan debt could help lower your monthly bills, which — let’s face it — have been piling up for many Americans during the pandemic.

Here's how a cash-out refinance could wipe out at least some of that debt: You'd take out a new home loan at one of today's historically low mortgage rates for more than the balance left on your current mortgage.

In other words, you'd be dipping into the equity you've built up in your home. (Equity is the difference between the value of your home and how much you have left to pay on your mortgage.) You would take the cash you're borrowing from your house and use it to pay off or pay down your student loans.

Cash-out refis have been on the rise. Borrowers who increased their mortgage balances by at least 5% represented 38% of all refi loans during the final quarter of 2020, according to mortgage giant Freddie Mac. That was up from the previous three months.

Fannie Mae, a government-sponsored mortgage company similar to Freddie Mac, offers a cash-out refi loan program that allows you to roll your student debt into a new mortgage without some of the fees that come with a standard cash-out refi.

The program lets you borrow up to 80% of your home’s equity and roll your student debt into the amount. At closing, the money you owe on your student loan goes directly to your debt servicer, or the company that collects your payments.

Is a cash-out refi right for you?

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Using a cash-out mortgage refinance doesn't really make your college debt go away. It just reshuffles your debt, which can have advantages and disadvantages.

Consolidating your student loan debt into your mortgage may help free up cash flow to pay other bills, and you’ll have one less payment to keep track of.

But there are risks to paying off student debt through a cash-out refi.

First, you may give up protections. if you’re paying off a government loan, you'd lose the ability to switch to a flexible income-driven payment plan if you were laid off.

And if President Biden does, in fact, use his executive authority to forgive student loan debt, you'd still be on the hook for yours, since you'll have folded it into your mortgage.

But here's the biggest risk: You’d be rolling unsecured debt — without collateral to support it — into a secured loan: your mortgage. If you default on your mortgage because you took money out to pay off your student debt, you could lose your house to foreclosure.

Other ways to make your student debt more bearable

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If you decide a cash-out mortgage refi is not for you, you do have other ways of reducing the pressure on your budget from your student loan debt.

First, you'll want to explore refinancing your student debt separately, into a new loan with a lower interest rate. Student loan rates have hit all-time lows, so moving your debt to a cheaper loan could help you pay off your balance more quickly.

Also, look for ways to cut your other expenses, including what you're paying for homeowners insurance. Before your current policy expires, shop around for a lower price before automatically renewing your coverage.

And if your existing mortgage isn’t brand-new, you could leave your student debt alone and check to see if you can score a super-low interest rate on a traditional mortgage refi, without the cash-out angle.

Refinancing could save you hundreds of dollars per month, especially if you’re willing to do some comparison shopping.

The higher your credit score, the better the interest rate you’re likely to get. If you haven’t seen your score in a while, today it’s easy to get a free credit score online.

Finally, explore some methods for adding to your income. Find a side gig, or easily earn some returns in the record-breaking stock market by using an app that helps you invest your "spare change."

About the Author

Nancy Sarnoff

Nancy Sarnoff

Freelance Contributor

Nancy Sarnoff is a freelance contributor with MoneyWise. Previously, she covered commercial and residential real estate for the Houston Chronicle where she also hosted Looped In, a podcast about the region’s growth, development and economy. Her work has been recognized by the National Association of Real Estate Editors and the Society of American Business Editors and Writers.

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