Student loan debt is a major burden for millions of Americans. In 2023, the total outstanding student loan debt in the United States is over $1.6 trillion. The average monthly payment for those with outstanding student loans is over $300.
The student loan payment pause during the COVID-19 pandemic has provided some relief to borrowers. However, the payment pause is set to end on October 1, 2023, at which point borrowers will have to resume making payments on their student loans.
Some borrowers are considering rolling their student loans into their mortgage as a way to reduce their monthly payments and/or consolidate their debt. As with anything, there are both potential benefits and risks to consider before making this decision.
Potential Benefits of Rolling Your Student Loans into Your Mortgage
- Reduce monthly obligations: A mortgage typically has a lower interest rate than a student loan, so refinancing your student loans into a mortgage could lower your monthly payments.
- Can also pay off other debt and have a single monthly payment: If you have other debt, such as credit card debt or car loans, you can also refinance these debts into your mortgage. This can give you a single monthly payment and reduce your overall debt burden.
- Could lower average interest rate of your total debt: If you have a high interest rate on your student loans, refinancing into a mortgage could lower your overall average interest rate.
- Record house prices: Home prices have reached record highs in recent years. If you purchased your home prior to COVID, you may have a significant amount of equity in your home. This could make you eligible to refinance your student loans into a mortgage even if you don’t have a lot of income.
- Average equity gain for homes purchased prior to COVID: According to Investopedia, “Home equity in the United States is at a record, with the average mortgage holder now owning $185,000 in accessible home equity. That figure increased by 35% in 2021, fueled by a similarly rapid increase in house valuations. This is the fastest rate at which average U.S. home equity has ever grown—more than twice the rate of 2020, the previous high.”
What are the Consequences of Defaulting on Student Loans?
The consequences of defaulting on student loans can be severe and long-lasting. They include:
- Damage to your credit score: Defaulting on a student loan will have a negative impact on your credit score, which can make it difficult to qualify for loans and other forms of credit in the future. This can make it harder to buy a car, house, or even get a job.
- Loss of eligibility for federal financial aid: If you default on a federal student loan, you will no longer be eligible for any federal financial aid, including grants, loans, and work-study. This can make it difficult to afford to go to college or finish your education.
- Wage garnishment and tax refund withholding: If you default on a student loan, the lender can garnish your wages and withhold your tax refunds to repay the debt. This means that a portion of your paycheck or tax refund will be automatically taken and sent to the lender without your permission.
- Lawsuits: If you default on a student loan, the lender can sue you to collect the debt. This could result in a judgment against you, which could lead to the seizure of your assets or even bankruptcy.
It is important to note that the consequences of defaulting on private student loans can vary depending on the lender. However, they are generally similar to the consequences of defaulting on federal student loans.
According to Inside Higher Ed, “The rising delinquencies mean that more borrowers will be at risk of defaulting when payments turn back on later this summer after a three-year pause. Nearly 20 percent of borrowers, about 5.9 million, have two or more risk factors that indicate they’ll struggle with making their student loan payments. That’s up from the estimated 5.1 million borrowers who were at risk in April 2022.”
https://www.insidehighered.com/news/government/student-aid-policy/2023/06/12/nearly-20-percent-student-loan-borrowers-risk
Potential Risks of Rolling Your Student Loans into Your Mortgage
- You may lose some of the benefits if they are federal loans: Federal student loans offer a number of benefits, such as income-driven repayment plans, loan forgiveness, and forbearance options. If you refinance your federal student loans into a mortgage, you will lose these benefits.
- You will be extending the term of your loan: When you refinance your student loans into a mortgage, you are essentially extending the term of your loan. This means that you will be paying interest on your student loans for longer.
When Would It Make Sense to Roll Student Loans Into Your Mortgage?
It may make sense to roll your student loans into your mortgage if:
- You have a low interest rate on your mortgage and a high interest rate on your student loans.
- You have a lot of equity in your home.
- You are not currently on an income-driven repayment plan for your student loans.
- You are able to afford the higher monthly payments that come with a mortgage.
Talk to a Loan Officer to See if Rolling Your Student Loans into Your Mortgage is Right for You
Rolling your student loans into your mortgage is a complex decision with both potential benefits and risks. It is important to carefully weigh the pros and cons before deciding. If you are considering rolling your student loans into your mortgage, be sure to talk to an Embrace Home Loans® professional to get their expert opinion.
We’re here to help you assess your financial situation and determine whether refinancing is the right move for you. We can also help you find the best mortgage program for your needs and budget.
Click here to contact an Embrace Home Loans office near you. We’ll get right back to you.
