College Money Guru,
My daughter and son-in-law are considering taking out a home equity loan to pay off his student loans. They think the interest rate
will be lower. Is this a good idea, or should they try to work with the student loan people to consolidate as best they can? These
are private student loans.
By all means, they should consider refinancing those loans with a home equity loan.
I'm not surprised to hear that
your daughter and son-in-law can find a home equity
loan with better terms than what his current loans
carry. Banks will usually offer a lower interest
rate when the loan is secured by the equity in
real property. A private student loan typically
has no security other than the personal guarantee
of the borrower and (often) a co-signer.
Furthermore, home equity loans are often available at a fixed rate of interest, whereas private student loans are usually
variable-rate. For many borrowers, a fixed rate is more appealing if they wish to avoid the possibility of interest-rate
increases in the future. In comparing options, be sure to consider the upfront costs of a refinancing or loan consolidation.
Your daughter and son-in-law should
also consider the income tax consequences of refinancing
the student loans. They may currently claim a
federal tax deduction for up to $2,500 in student
loan interest paid each year, although the deduction
phases out above a certain income level. For 2008,
the phaseout range for joint filers is $115,000
to $145,000 in adjusted gross income.
Interest on up to $100,000 of home-equity
indebtedness is deductible regardless of income,
but only if the taxpayers are itemizing their
deductions and are not subject to the alternative
minimum tax, or AMT.
There is a downside of going with the home equity loan. Your daughter and son-in-law risk losing their home if their finances
go sour and they are unable to keep up with their payment obligations. On the other hand, such an outcome is unlikely if your
son-in-law sticks with private student loans.