Student Debt Hacks

These tricks work for any kind of debt but can be especially useful for student loans.

If you have owned your house for a few years and it has appreciated, you may have a sizable amount of equity. Depending on the amount you owe on your student loan(s), the amortization schedule, interest rates, your income, and home equity, it may make sense to cash out refinance your house to pay off some or all of your student loans.

Benefits

Like student loan interest, mortgage interest is tax deductible. However, the tax deduction for student loan interest phases out when your taxable income exceeds $80k single/$160k joint. You also can only deduct up to $2500 of student loan interest. So, if your career is doing well, or you married someone who’s career is doing well, you may see your student loan deduction phase out. Mortgage interest deduction doesn’t phase out (unless mega rich).

Mortgages typically amortize over 15-30 years which is longer than a typical student loan these days. While stretching out your student loan that long does mean you pay on it longer, it also reduces the amount paid each month, freeing up cash flow.

Mortgages often (not always) have lower interest rates than student loans.

Student loan interest is generally not dischargeable in bankruptcy. While I definitely don’t recommend refinancing your house to pay off a student loan and then declare bankruptcy, it is nice to know that if you DO end up legitimately bankrupt, your student loan won’t follow you. Say for example you’re a doctor and a malpractice suit destroys your finances and your practice. Well, you can give the keys to your bank and forget about that $150k student loan you rolled into it years ago.

Risks

If your home’s value declines significantly, you may end up underwater which can complicate things for you if you need to move. If you need to sell an underwater house, you need to bring cash to the close to pay off your mortgage or get the bank to agree to or a short sale. Or let the bank foreclose, etc. Not a lot of good choices. By cashing out equity, you reduce your safety cushion if you need to sell.

If a socialist gets elected and forgives all student debt, you’ll miss out.

How to Decide?

You’ll need:

  1. Current home value
  2. Current mortgage balance, interest rate, and payment
  3. Current student loan balance, interest rate, and payment
  4. Your current marginal tax bracket and whether or not you qualify for student loan interest deduction

Steps to decide

  1. Add your student loan debt balance to your mortgage debt balance. Divide that number by your current home value to find your new loan to value (LTV). This is how much equity you would have in your home if you rolled in your student loan. If you are in the 75%-80% range, like ($70,000 mortgage + $10,000 student debt) / $100,000 home value = 0.80, or 80%, you’ll probably be fine. However, if your new LTV will be more than 80%, it’s probable you won’t get the best interest rate.
  2. Check current mortgage interest rates available on the market – check the 15 year and 30 year rates
  3. Use an amortization calculator to find your monthly payments, total payments, and total interest paid over the life of your existing mortgage and student loans. In other words, how much will you pay in the long run if you leave it as is?
  4. Add together your mortgage balance and student loan balance and do the same calculations as #3.
  5. Compare your new payment vs. your old payment and your interest.
  6. If your payment goes down and your total interest goes down, you should really look into this.
  7. If your payment goes down but your total interest goes up – especially possible if you’ve been paying on these loans for a long time – it’s a more subjective choice. This indicates you would have a lower payment in the present, but you’ll be paying on the loans longer. In other words, your current payments are high, but the end may be in sight for them. If you are paying $1000 per month now but only have 6 months left, do you prefer biting the bullet and being done in 6 months or do you prefer a $43 payment for 15 years? Up to you.

What if your LTV is too high?

Depends on how many student loans you have. If you have one giant student loan, I don’t really have a trick for that. However, you may have a few smaller loans. Check how many of those smaller loans may fit within an 80% LTV. You may be able to pay off a few small loans even if you can’t do your whole student debt.

Other Methods

You could do this trick a number of ways and with other kinds of debts. My other main way to do this would be if you have a sizable brokerage account. If you have, say, $100k+ invested in a margin account at a low-cost broker like Interactive Brokers, you can withdraw funds on margin at low rates like ~1.5-3% and pay off your student loan without selling stock. Just don’t over leverage yourself.

You can use a HELOC to do this as well. However, HELOCs are floating interest rates that do change over time. So this adds another consideration. If your student loan is low interest, in the 3-4% range, a HELOC isn’t going to save you on interest. It will reduce your payment by virtue of stretching the loan out – as long as interest rates don’t go up significantly. Also, only interest from the first $50,000 borrowed from a HELOC that is not spent on home repairs/improvements is tax deductible. So, interest on the first $50,000 you borrow is deductible, and the rest isn’t. You’ll just need to factor that in.

You can pay off any other kind of debt with this method. But if you’re looking at something like car debt, consider selling the car and downsizing. It can make sense for credit card debt, but if you have a lot of credit card debt, maybe you don’t qualify for the best mortgage terms – but the lender may take into consideration that your goal is to pay off the credit card debt.

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