What Is a Student Loan Cash-Out Refinance?
Definition of the Student Loan Cash-Out Refinance Process
A student loan cash-out refinance mortgage is a mortgage loan that allows you to tap into your home's equity to pay off your student loan debt. Through it, you combine your mortgage and student loans into a new mortgage and potentially reduce the interest rate you were paying on your educational debt.
While you may use the proceeds from any cash-out refinance mortgage to do this, mortgage financier Fannie Mae also offers a specific product called “Student Loan Solutions” designed specifically to serve as a student loan cash-out refinance loan.
What Is a Student Loan Cash-out Refinance?
A student loan cash-out refinance mortgage loan involves taking a new home loan for more than you currently owe and using the extra cash to pay off one or more of your student loans.
While many lenders offer cash-out refinance loans, Fannie Mae's program is designed to simplify this process when applying for a mortgage secured by this government-sponsored entity. However, Fannie Mae's program and other types of cash-out refinances require you to use your home as collateral and could have some downsides including potentially raising total interest costs on your student loans and losing your student loan interest deduction.
How Does a Student Loan Cash-out Refinance Work?
The steps involved in a student loan cash-out refinance are simple:
Decide if You Want to Use the Fannie Mae Program or a General Cash-out Refinance
Fannie Mae's program makes it easier for borrowers to qualify by allowing lenders to exclude debt paid by others when calculating debt-to-income ratios in determining eligibility. If a borrower is on an income-driven plan and their student loan payment is $0, lenders may also calculate eligibility based on a $0 payment.
Calculate Your Equity
Calculate if you have sufficient equity in your home to qualify for a cash-out refinance loan. Fannie Mae's program generally allows you to borrow up to 80% of the value of your primary home if it is a single-family home or up to 75% of its value if it is a two- to four-unit property. You can use a basic home-value estimation from sites like Zillow or Redfin to help you decide, but only a certified home appraiser will be able to give you a binding estimate on your home value.
Find a Lender Offering Fannie Mae’s Student Loan Cash-out Refinance
While Fannie Mae doesn’t offer a list of lenders that participate in the Student Loan Solutions program, you can call and ask your local lenders if they do. Or, you can search online companies; popular lender SoFi participates in the program.
Get Approved and Close on the Refinance
Fannie Mae's program requires you to pay the student loan servicer directly at closing and you must pay off at least one entire loan; you cannot make partial loan payments. With other lenders, you can simply take out as much cash as you qualify for given your equity and financial credentials and then use the loan proceeds to pay off as much of your student loan debt as you can afford.
You may receive cash back from your refinance up to the lesser of 2% of the new refinance loan amount or $2,000.
Types of Student Loan Cash-out Refinance Loans
Fannie Mae's Student Loan Solutions is the only well-known program specifically designed to facilitate the use of a cash-out refinance loan to pay student loan debt, but you aren't limited specifically to using this program to secure a cash-out refi loan to pay your educational debt.
If you have equity in your home, many lenders allow you to tap into it and take cash out that you can use for any purpose, including student loan repayment.
Pros and Cons of Student Loan Cash-out Refinancing
You could reduce your student loan interest rate
Your student loan interest may remain tax-deductible
You can simplify repayment
You pay off your loan(s) at closing
You're putting your home at risk
You lose student loan benefits and protections for the loans you pay o
Repaying student loans could become more expensive
You could lose your student loan interest deduction if you don't itemize
- You could reduce your student loan interest rate: The average student loan interest rate may be higher than the average mortgage rate. If you can refinance a student loan to a lower rate mortgage loan, you may be able to save money on repayment.
- Your student loan interest may remain tax-deductible: Student loan interest is deductible for most borrowers and so is mortgage interest on loans up to $750,000 if you itemize on your taxes. That means your interest may remain deductible on your educational debt if it's refinanced into your mortgage.
- You can simplify repayment: You will only have your mortgage to pay, instead of having to send payments to both a mortgage lender and student loan lenders.
- You pay your loan(s) off at closing: Everything is taken care of when the loan closes. You don’t have to worry about organizing and sending payments to lenders or servicers after the fact.
- You're putting your home at risk: Student loans are unsecured debt. A mortgage is secured debt. When you repay your student loans with a mortgage loan, your home is used as collateral. If you can't pay off the mortgage, you could be foreclosed on.
- You lose student loan benefits and protections for the loans you pay off: If you exchange your student loan debt for mortgage debt, you will lose the protections and repayment flexibility federal student loans provide.
- Repaying student loans could become more expensive: If you had just five or 10 years left on your student debt repayment and you refinance it into a 30-year mortgage, you will pay interest on your loan balance for many more years and your total costs could potentially rise.
- You could lose your interest deduction if you don't itemize: Interest on mortgage debt is deductible only if you itemize on your taxes, while the student loan interest deduction is an above-the-line deduction so anyone can claim it even if they do not itemize on their taxes.
Many taxpayers do not itemize on their taxes, so they cannot claim the mortgage interest deduction. If you don't itemize and you secure a student loan cash-out refinance mortgage, you will no longer be able to deduct the interest on your student debt.
Limitations of Student Loan Cash-out Refinancing
Student loan cash-out refinance loans are limited to borrowers with sufficient equity in their homes to repay some or all of their student debt. If you do not have enough equity, this will not be an option for you.
Alternatives to Student Loan Cash-out Refinancing
You have other options if you don't want to put your home at risk to pay off student loans. These include:
- Student loan refinancing: You may be able to lower the interest rate on your student debt by refinancing into a new loan with a private lender
- Personal loans: You may also be able to qualify for a personal loan, the proceeds of which you can use to pay off outstanding educational loans
- A student loan cash-out refinance mortgage could possibly lower your interest rate on your student debt
- You'll need sufficient equity in your home to qualify for a cash-out refinance loan
- There are risks and downsides of a student loan cash-out refi, including the possibility of losing your home if you can't make payments as well as the potential loss of your student loan interest deduction
Fannie Mae. "Student Loan Solutions: Frequently Asked Questions." Accessed Oct. 6, 2020.
Fannie Mae. "Eligibility Matrix." Accessed Oct. 6, 2020.
Fannie Mae. "Selling Guide." Accessed Oct. 6, 2020.
Internal Revenue Service. "Publication 936 (2019), Home Mortgage Interest Deduction." Accessed Oct. 6, 2020.