As Bernie Sanders‘ charge toward the White House made clear, student loan debt is a huge problem for millennials, who are struggling to pay off the cost of their education and launch their careers at the same time. Everyone agrees it’s a big challenge. Not everyone agrees what to do about it.
Now, there’s a solution that will help homeowners saddled with school debt to pay down their student loans by tapping their home equity—while refinancing at a lower mortgage rate. But some experts question whether it’s financially prudent.
Social Finance Inc. (SoFi), a San Francisco–based online lender, is teaming up with Fannie Mae to offer the exclusive mortgage product, a variation on a “cash-out refinance” mortgage that it estimates could benefit as many as 8.5 million households.
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The SoFi–Fannie Mae program is a pilot that is available to homeowners in all U.S. states except Nevada.
The typical homeowner with an outstanding co-signed student loan is carrying a $36,000 balance, according to Experian data. Students and parents who have borrowed money to pay for the rising costs of a college education are typically paying down loans that charge interest rates topping 6%. Meanwhile, the national average for a 30-year fixed-rate mortgage loan is 3.64%, a little over half that rate.
The SoFi Student Loan Payoff ReFi offers a rate that’s about 0.50% lower than that of a traditional cash-out refinance mortgage, says SoFi spokeswoman Laurel Toney. That’s because the lender knows that the cash-out is going directly to the student loan provider, reducing the borrower’s debt and improving her creditworthiness.
Consider a typical young homeowner with a $300,000 home and a $40,000 student loan balance. The interest rates are 3.9% on the mortgage and 6.5% on the student loan. The homeowner has been making payments of $1,271 every month for a few years and now has the mortgage balance down to $200,000.
By refinancing with this program, the homeowner could wipe out her student loan debt and see those house payments drop to $922, saving almost $350 a month.
“People can pay off student loan debt and are left with one loan at the low rates that mortgage borrowers are enjoying in today’s market,” Michael Tannenbaum, a SoFi senior vice president for mortgage, said in a release.
The thing is, as debts go, student loans are pretty good: They offer benefits not available for mortgage loans, including caps on monthly payments based on your income and, in some cases, eventual forgiveness. So erasing your student loan debt while reducing your home equity comes with its own set of risks.
“It’s not innovative; it’s poor financial planning,” says Sylvia M. Guitierrez, a Miami-based mortgage broker and author. “If you stop paying the mortgage, the lender can take your home away. If you fall behind on a student loan, no one is going to take your home, nor your education away.”
Greg McBride, chief financial analyst for Bankrate.com, was equally skeptical.
“In the case of federal student loan debt, it is better to leave it separate so you can benefit from provisions such as deferment, forbearance, income-based repayment, and possible debt forgiveness,” he says. “No other debt obligation is so flexible.”