How to Save On Student Debt With a Mortgage
According to Fannie Mae, these initiatives could help as many as 8.5 million U.S. homeowners save on their mortgage and student loan payments.
Debt of any kind is not always ideal, but it can provide some benefits and opportunities when used the right way. Homeowners who are currently paying down both a mortgage and student loans might be able to consolidate both of these forms of debt into one, low rate payment.
"Debt is a tool that should work to the borrower's advantage."
The average college graduate in 2017 is expected to leave school with more than $30,000 in student debt , according to the Institute for College Access and Success. Of course, many end up owing much more, sometimes at high interest rates. Unlike a mortgage, student debt is unsecured - lenders cannot foreclose on a college degree like they can a home - which is part of the reason mortgage interest rates tend to be lower.
However, a new program by the federal home finance corporation Fannie Mae allows borrowers to take advantage of this situation. If they qualify, homeowners can pay off some or all of their student debt while refinancing their housing debt, potentially securing an even lower mortgage rate. This cash-out refinance program could allow homeowners to save a significant amount on student loan interest payments.
Fannie Mae also announced new policies that would make it easier to apply for a mortgage while paying off student debt, according to Jonathan Lawless, the organization's iVice President of Customer Solutions. According to Fannie Mae, these initiatives could help as many as 8.5 million U.S. homeowners save on their mortgage and student loan payments.
"We understand the significant role that a monthly student loan payment plays in a potential home buyer's consideration to take on a mortgage, and we want to be a part of the solution," Lawless said in a media release on the topic. "These new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers."
What borrowers need to know
These new programs and policies are certainly attractive to current or future homeowners who are also working to pay down student debt. However, as The New York Times explained, there are still some risks and possible drawbacks to the new programs that borrowers should be aware of.
Regarding the refinance program, which would allow homeowners to essentially convert student debt into mortgage debt, there are a few things to note. First of all, while unsecured student loans offer more flexibility than secured mortgage debt, they also confer some protection that a home loan does not offer. For example, federal student loans can be paid off in a way that's better for the borrower if they are having temporary trouble handling this debt. Sometimes, federal loans can also be deferred or forgiven. By converting this debt into housing debt, these protections go away, and homeowners could still lose their house if they are unable to make payments in the future.
It's also important to point out that not everyone is eligible for Fannie Mae's cash-out refinance program, nor will everyone necessarily benefit from it even if they are eligible. First of all, a borrower's current mortgage lender must be one that is willing to sell the loan to Fannie Mae - about 1,800 U.S. lenders qualify for the program. In addition, borrowers will only benefit from the refinance program if their student debt interest rate is higher than their mortgage rate. Most older student loans probably have higher rates than new mortgages do. However, the 2016 federal student loan rate was as low as 3.76 percent, while mortgage rates currently hover around 4.1 percent.