Should You Pay Off Student Loans when Refinancing Your Home?

Refinancing your home gives you the ability to do a lot of different things financially. Much of the time, you will be in better shape if you pay off other loans with your refinance money. One type of loan that is very common is student loans. Many people would love to get rid of these loans all together. However, paying them off with your refinance may not be to your advantage. Here are a few things to think about before you pay off your student loans with refinance money.

Interest Rate

Student loan interest rates are usually one of the lowest interest rates around. The interest rates that are given out on student loans will usually be lower than any other type of loan you could get. With a home refinance, your interest rate in most cases will be higher than the rate you were paying for you student loans. While you may like the thought of having all of your debt in one place, it can cost you a lot of money over the life of your loan if you pay a higher interest rate than you need to.

Longer Term

Most of the time, your student loans are designed to be a shorter loan than your mortgage. When you lump your student loans into a mortgage, you are essentially going to be paying them off over the course of 30 years. Spreading out your loan, means that you will be paying for them much longer than you should have to. When you throw in the higher interest rate, you could end up paying much more for this education than you thought.

No Tax Advantage

Most of the time a refinance is a great time to take advantage of tax law. Your mortgage interest is tax-deductible which can save you a large amount of money each year. Therefore, it is common practice to throw in other types of loans into the mortgage to gain tax-deductible status. However, with a student loan, you are not gaining this advantage. Student loan interest is already tax-deductible according to current tax law. Therefore, you can already deduct the interest that you pay on your student loans. You are trading one tax-deductible form of interest for another.

Flexibility

With a student loan, you have a lot of flexibility. For example, with most student loans, you can get what is called a forbearance. If you come across hard economic times and cannot afford to pay your student loans, you can call the company and get a forbearance. This means that you can essentially put your payments on hold while you get back on your feet. The interest still accumulates, but the payments will be stopped. With a mortgage, you do not have this ability in most circumstances. If you miss your payments with a mortgage, your house will go into default and it may be foreclosed upon. Therefore, trading a flexible form of loan for a non-flexible one may not be in your best interest.