Should Student Loans Be Repaid by Refinancing Homes?

NEW YORK (MainStreet)—What happens when students - or their co-signer parents - are having difficulty repaying a student loan? Is getting a second mortgage, obtaining a home equity loan or a HELOC (Home Equity Line of Credit) an advisable option to repay the debt?

Yes and no, say the experts. This unfortunate ambivalence among those in the know does not help those who are unskilled in the arcane ways of finance.

Those who warn against using a house say it is foolish to trade an unsecured debt for a secured one. Those in favor say there may be some advantages to refinancing a house to repay student loan debt but it involves great risk – especially for parents.

"You may get a better rate or longer term for a refinance," said Wharton finance professor David Musto about the wisdom of repaying student loans with a loan against a house. "Let us say you take cash out of a property--you could get a better rate. But now you expose yourself to foreclosure. It is hard to judge. If you are a parent paying the loan there are one set of considerations. But if it is just, say for example, myself, and I am getting an MBA, but I increase my mortgage payments--this creates some stress."

Musto noted an important factor in determing what to do is future income. But this is complicated to determine. Although in some professions there is a specific correlation between getting a degree and higher income this is not always the case. For example, school teachers have a clear path between obtaining a degree and increasing income. But in other fields the relationship is not guaranteed. So one is betting one's house on the investment of a higher education when one takes out a loan against their residence.