Student loan debt is at an all-time high. According to the Education Data Initiative, 42.8 million Americans are grappling with student loan debt. The average monthly payment is about $500.
If you have a large student loan bill, you’re probably wondering how to pay it off faster. A line of credit may be one option you’re considering.
While lines of credit can come with lower interest rates, you’ll want to evaluate all the risks before using one to pay off your student loans.
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- A line of credit is a flexible, open-ended loan issued by a financial institution.
- Secured lines of credit, which are backed by collateral, come with better loan terms.
- While a line of credit is an option, there are other refinancing options you should consider.
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Can You Pay Off Student Loans With a Line of Credit?
Yes, you can pay off student loans with a line of credit, and, depending on the terms, it can be advantageous to do so.
A line of credit is an open-ended loan that allows you to borrow money up to a set credit limit.
Unlike a mortgage or a car loan, a line of credit isn't for a specific purchase and it isn’t a fixed amount, making it more flexible.
A line of credit can either be secured or unsecured.
- A secured line of credit is backed by collateral – like your house – and often comes with better loan terms.
- An unsecured line of credit is only backed by your promise to repay what you borrowed and usually comes with a higher interest rate.
Lines of credit can be used as part of a debt consolidation strategy — the goal is to reduce the amount of interest your debt accrues, making it possible to pay it back faster.
RELATED: How To Start Paying Your Student Loans Back
Types of Lines of Credit
There are different types of lines of credit you can use if you want to restructure your student loan debt.
Home equity line of credit
A home equity line of credit (HELOC) is a loan against the equity you have in your home.
Unlike a home equity loan, which is a set sum of money borrowed against your home, you can tap into a HELOC whenever you need.
Depending on how your student loans are structured, you can use a HELOC to repay some of your student loans. For example, if you have private student loans with a high interest rate, you could use a HELOC to pay off your loans at a lower rate.
One thing to consider with HELOCs is they have variable interest rates. The market determines the rate, which means there are times when it might not make sense to use a HELOC.
Back in 2021, the average HELOC rate was just under 4%, whereas today, it's closer to 8%. Keep a close eye on the market before paying off student loans with a HELOC.
Asset-based line of credit
A securities-based line of credit allows you to borrow against your portfolio. This is similar to a 401(k) loan, which allows you to borrow against your retirement savings.
Borrowing against your portfolio is a way to tap into liquidity without selling any assets, triggering a capital gains tax. This is used to bridge funding during major purchases like buying a home.
Similarly, if you own a business, it’s possible to take out a line of credit against the assets in your business. This could be physical property, inventory, unpaid invoices, or equity you have in the business.
Asset-based lines of credit are high-risk. If you’re unable to repay the funds, the lender can seize whatever collateral you put up to establish the line of credit.
RELATED: Should You Pay Off Debt or Invest?
Credit cards or personal lines of credit
Some private student loan servicers may allow you to make payments with a credit card.
If you’re trying to earn a sign-up bonus or leverage a 0% APR introductory offer, using a credit card to pay your student loans could make sense. However, this may come with an additional processing fee.
A personal line of credit comes with interest rates that may be lower than a credit card’s. If you have a great credit score and can take advantage of a low-interest personal line of credit, you could use the funds to repay your student loans.
Alternative Strategies To Pay Off Student Loans
While you can use a line of credit to repay your student loans, there are other strategies to consider.
Refinancing
Refinancing your student loans allows you to consolidate several loans into a single one, sometimes at a lower interest rate.
This can shorten the time it takes to pay off your student loans, reducing the long-term cost.
READ MORE: How I Paid Off $220,000 in Student Debt
Talk to your employer
More and more employers are offering student loan repayment help as part of their compensation packages.
Similar to a 401(k) match, your employer may make a payment toward your student loans on your behalf.
FAQs
Is it smart to use home equity to pay off debt?
It can be smart to use home equity to pay off debt, but it depends on your situation and how much equity you have in your home.
Why can't I pay my student loans with a credit card?
Federal student loan servicers don’t allow you to make student loan payments with a credit card. Other servicers may not permit it because of the processing fees.
TL;DR: Should I Use a Line of Credit for My Student Loans?
While a line of credit is a potential strategy for managing student loan debt, it's not a one-size-fits-all solution. It depends on your financial situation, credit score, and the terms of the line of credit.
Before using borrowed money to pay off student loans, carefully evaluate the interest rates, potential fees, and long-term implications. You want to reduce your debt without adding further to it.
For more tips on managing your money and your debt, check out these episodes of the Erika Taught Me podcast:
- Money & Investing Pitfalls to Avoid
- How To Budget for Beginners
- 10 Steps Towards Financial Wholeness
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