When it comes to paying for higher education or repaying student loan debt, tapping into home equity may appear to be a good option. There are advantages and disadvantages to consider before proceeding.

Here's everything you need to know about how to utilize home equity to pay off student debt, as well as whether it's a good idea.

How Can You Use Home Equity to Pay Off Student Debt or Pay for School?

Paying off debt with home equity is only an option if you have equity in your house. You have equity in your home if it is worth more than what you owe on it. If you have a $200,000 property but owe $180,000 on it, you have $20,000 of equity.

You can tap into your home equity by:

Taking a cash-out refinance loan

A cash-out refinance entails taking out a new mortgage for more than you owe now. You'd use the loan funds to pay off your current mortgage and then apply the surplus toward education or student debt.

Taking out a home equity loan

You may use a home equity loan to access equity without changing your mortgage. You'd borrow a set amount of money and could spend the loan cash on student debt or education.

Taking out a home equity line of credit

Home equity lines of credit allow you to borrow up to a set amount of money, which is called your line of credit. You don’t have to borrow the whole amount at once, and as you pay back what you borrowed, you can borrow more. Again, you’d use the money available on your line of credit to cover school costs or repay an existing student debt.

Typically, lenders will not allow you to borrow up to the full value of your property. Many lenders would prefer that you maintain your total mortgage debt at 80% of the value of your home. The maximum total balance on your mortgage and home equity loan or line of credit would be $160,000 if you have a $200,000 house.

However, home equity lenders may allow you to borrow up to 85% of the value of your house. You'll typically pay a greater interest rate and need excellent credit to obtain this sort of loan.

Advantages of Using Home Equity to Pay for College or Pay Off Student Loans

Here are some advantages of taking out a home equity loan to pay for school or repay student loan debt:

You may be eligible for a lower interest rate

Home equity loans and home mortgages are secured debt, so you may qualify for a lower interest rate than student loans.

You may be able to repay your loan over a longer time

Some mortgage loans, for example, may have terms as long as 30 years. The majority of personal student loans must be paid back within five to 15 years, however, there are a few lenders who will accept repayment over 20 years. Being able to pay off your loan over a longer period might result in lower monthly payments.

You’ll have fewer payments to make

If you can tap into enough equity in your home to repay and consolidate multiple existing student loans, you won’t have as many creditors to deal with or as many monthly payments to make. This can save you a lot of time and stress, as well as reduce the chance that you'll forget to pay your bill.

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