Author Topic: HELOC to Pay Off Student Loan  (Read 6669 times)

MacAttack7

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HELOC to Pay Off Student Loan
« on: September 15, 2014, 11:16:07 AM »
I have a good deal of equity in my house, and I'm wondering if it's wise to get a Home Equity Line of Credit in order to pay off my student loan.

The interest rate with the Line of Credit will be lower than my current student loan interest rate, so that's my motivating factor.

I believe the interest is deductible with both a student loan & a HELOC, so that comes out in the wash (although I believe the max allowable is higher with a Line of Credit... the max interest you can deduct with a student loan is $2500, whereas I think it's around 10k on a Line of Credit). 

Am I on the right track in wanting to consolidate and pay off student loans with the equity in my home? Thanks!

guitar_stitch

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Re: HELOC to Pay Off Student Loan
« Reply #1 on: September 15, 2014, 11:47:42 AM »
Who are your loans through?  You might be better off looking at a consolidation through your loan handling agency.

GoldenStache

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Re: HELOC to Pay Off Student Loan
« Reply #2 on: September 15, 2014, 12:46:12 PM »
I did it a few months ago and am very glad I did.  Right now I have an adjustable 4.75% rate for the HELOC and had a 6.8% for the student loans.  Something else to consider once your income goes above 75K (I think) you no longer get the deduction on your taxes but you will be able to get the mortgage deduction. 

kite

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Re: HELOC to Pay Off Student Loan
« Reply #3 on: September 15, 2014, 04:36:47 PM »
Are you the sole owner of the house?   

MacAttack7

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Re: HELOC to Pay Off Student Loan
« Reply #4 on: September 15, 2014, 05:24:27 PM »
Are you the sole owner of the house?
Yes.

MrsPete

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Re: HELOC to Pay Off Student Loan
« Reply #5 on: September 15, 2014, 05:24:53 PM »
Keep in mind that you're putting your house on the line.  While it's not likely, a job loss or a serious injury could potentially lead to losing your house.  You'd be trading an unsecured (though essentially un-dischargeable) loan for a secured loan. 

 


kite

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Re: HELOC to Pay Off Student Loan
« Reply #6 on: September 16, 2014, 05:59:36 AM »
Are you the sole owner of the house?
Yes.
Then I don't see a problem with locking in a lower rate, so long as it can't go back up before you'll pay it off.  I know too many people who used a loan secured by the family home to cover the school debt incurred by one partner or one of their children.   That backfires all the time.

Gone Fishing

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Re: HELOC to Pay Off Student Loan
« Reply #7 on: September 16, 2014, 01:59:04 PM »
What type of money/rates are we talking about here?

Cheddar Stacker

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Re: HELOC to Pay Off Student Loan
« Reply #8 on: September 16, 2014, 02:21:13 PM »
Discussed here previously with 16 replies for more discussion:
http://forum.mrmoneymustache.com/index.php?topic=20294.msg338070#msg338070

I'd like to re-post my comment from that thread here though. There are big distinctions between the way you deduct these two different types of interest. If the difference in interest rate is high enough it won't matter and using a HELOC could be the clear winner, but just keep all this in mind:

Here are a few facts a lot of people don't know, or don't think about:

1) SL interest has an income limit, Mortgage interest doesn't (although itemized deductions can be limited overall).
2) SL interest reduces your AGI, Mortgage interest doesn't.
3) SL interest has deduction limit of $2,500, Mortgage interest has deduction limit of approximately $55K *.
4) SL interest can be taken in addition to standard deduction, Mortgage interest can't as it's part of itemization.
5) SL interest is disallowed when MFS (married filing separate), Mortgage interest can still be deducted.

Technically mortgage interest is only allowed to be deducted if it was used to purchase or improve a home. I have no idea if the IRS has ever successfully proven otherwise, and I think many people deduct it no matter what it was used for.

* Limited to $1M mortgage, plus $100K HELOC. Given current interest rates, it equates to somewhere in the $40-70K range depending on rates, so I just put it in the middle.


So my point here is you might want to consider all of this. If you don't itemize you're better off keeping it as SL interest. If you need to reduce AGI (maybe to get a T.IRA deduction) you might be better off keeping it as SL interest. This is definitely a case by case analysis.

MacAttack7

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Re: HELOC to Pay Off Student Loan
« Reply #9 on: September 17, 2014, 10:59:37 AM »
Cheddar,

So please bear with me here... I've only been a home owner for 3 months. I though you HAD to itemize when you own your home? That's why I figured that I would be itemizing and then the mortgage interest would be usable. Do many homeowners not itemize? That seems to the deciding factor here... if I'm not itemizing then I'd stick with the student loans as they are now. If I'm itemizing, then I'd get the HELOC.  Thoughts?

Thanks!

Cheddar Stacker

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Re: HELOC to Pay Off Student Loan
« Reply #10 on: September 17, 2014, 06:05:41 PM »
You don't have to itemize. You should if your deductions exceed the standard deduction. Since you will only own the home around half of 2014 you might not have enough deductions to itemize. If state income tax, real estate tax, personal property tax, mortgage interest (without heloc) and charitable contributions exceed the standard deduction, moving the sl debt to heloc debt will likely be close to a wash for tax purposes. If all that stuff falls short of the standard deduction, you will likely be losing out on some deductions by switching.

If you want help with the analysis you'd have to provide a lot more details. Married? Income? 401k? Ira, sl interest, mortgage interest, charity, re and pp tax, etc. Also, interest rate on sl's. Heloc interest should be ~4%.

GoldenStache

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Re: HELOC to Pay Off Student Loan
« Reply #11 on: September 24, 2014, 08:18:52 AM »
Don't forget your closing costs.  Even if someone else paid for them you can write them off.

Dezrah

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Re: HELOC to Pay Off Student Loan
« Reply #12 on: September 24, 2014, 04:12:11 PM »
For the three years my husband and I owned a home, we never itemized our taxes.  We only borrowed about $93k so the amount of interest per year was low, we didn't have any dependents, and we were scraping by such that we didn't make any notable charitable donations.  Each year Turbo Tax found taking the standard deduction was a clear winner.  Surprised me too, but it can happen.

coffeefueled

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Re: HELOC to Pay Off Student Loan
« Reply #13 on: September 26, 2014, 10:17:26 AM »
I looked at doing the same thing and found a better option. There are a few companies that consolidate student loans now. No closing costs, you're not tying your house to your student debt, and you keep whatever tax incentives from home/student loans you have now.

I went with SoFi. It worked pretty much like a consolidation. My grad loans went from 6.8% to 4.75%. They gave me a couple options for payoff timeframes and variable vs fixed rate. I picked 10 years, but should be finished in 2 years (I wish I had gone with variable instead of fixed because I'll be done before interest rates rise too much and it would've save me a percent or two).

I'd love it if you use this referral link since it would earn us both $100, but do check them out either way... http://friends.sofi.com/3CBNq 

SpareChange

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Re: HELOC to Pay Off Student Loan
« Reply #14 on: September 27, 2014, 06:44:02 PM »
I also refinanced my grad loans through SoFi. I had about $14-15k at the time, a few months ago. Went from 6.8% to 4.285% variable on a 10 year term. Pleased so far with the experience. Can't speak to HELOCs as I don't own a home, but as Cheddar was saying, many home owners use the standard deduction...it just depends on your individual tax situation as to which is better.

Wile E. Coyote

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Re: HELOC to Pay Off Student Loan
« Reply #15 on: September 27, 2014, 06:55:24 PM »

Technically mortgage interest is only allowed to be deducted if it was used to purchase or improve a home. I have no idea if the IRS has ever successfully proven otherwise, and I think many people deduct it no matter what it was used for.



That rule only relates to home acquisition debt.  Interest on home equity debt (up to a limit) can be deducted regardless of what the money is used for.

There is a good discussion here with examples:

http://www.irs.gov/publications/p936/ar02.html#en_US_2013_publink1000230008

Wile E. Coyote

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Re: HELOC to Pay Off Student Loan
« Reply #16 on: September 27, 2014, 07:02:58 PM »
Don't forget your closing costs.  Even if someone else paid for them you can write them off.

Are you thinking of seller paid points?  There are very specific rules that you have to satisfy in order to be able to deduct those as a buyer.  However, in the context of a HELOC, there is no seller, so I am not sure how that would apply here.

Unkempt Stash

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Re: HELOC to Pay Off Student Loan
« Reply #17 on: September 27, 2014, 07:08:11 PM »
If you go the refi path, I did a discover student loan refi and got a 3% variable. No fees or transfers problems and it's still defined through my old servicer so I didn't even have to set up direct pay again.