Las week a national homebuilder made headlines for creating a program that would pay off the student loans of homebuyers, up to 3% of the home’s value, capped at $13,000.
In theory, this sounds like a great opportunity. For many young potential homebuyers, student debt is the main obstacle to homeownership. In reality, these programs offer a lot of risk, to go with limited benefit.
Buy a Home, We Pay Student Loans
We suspect that these programs will become more popular in the coming years. As student debt continues to balloon, builders and mortgage lenders will increasingly target borrowers with student loans. Not only is the program a tool to market directly to consumers, the program has also generated a great deal of media attention, which is also a perk for the builder/lender.
Regardless of how the program is advertised, consumers should understand that they are footing the bill for the student loan payoff. If you are buying a home that comes with a $10,000 payoff on your student debt, you could just be buying the home for $10,000 less.
The question for consumers is which is better: a bigger house bill and student loan help or paying less for your house?
Bundled Home Loan Perks
Student loan interest rates can routinely be around 10%. Many 30-year fixed rate mortgages are less than 4% right now. This represents a tremendous drop in interest rates.
Additionally, by stretching payments out over 30 years, the monthly bill drops when student debt is combined into mortgage debt.
The reason mortgage rates are often lower than student loan interest rates is because a mortgage is secured debt. If a borrower doesn’t pay their mortgage, they lose their house.
Student loans are not secured debt. If you don’t pay your student loan bill, the knowledge that you acquired during school cannot be taken, nor can your degree.
The higher your mortgage payment, the harder it is to pay the bill. Using mortgage debt to pay down student loans puts your house at risk.
Additionally, for borrowers with federal student loans, the repayment options are far more flexible. If you lose your job, you fall behind on your mortgage. If you lose your job with a federal loan, you can sign up for an income-driven repayment plan and stay current. Federal loan repayment flexibility and perks far exceed those offered by mortgage lenders.
A Better Alternative
This option cannot be examined in a vacuum. Bundling student debt into a mortgage is not the only way to lower student loan interest rates.
Student loan holders also have the option of refinancing their student loans with a new lender. These refinanced student loans have interest rates that start between 2 and 3%. While the lowest rates on student loan refinance typically apply to 5-year loans, a 20-year student loan refinance can have a fixed rate of about 5%.
The student loan refinance angle still will have higher monthly payments than the combined mortgage option, but the rates will be close and less debt will be tied to the house.
There is a tax deduction for student loan interest and for mortgage interest. The mortgage interest deduction is more broad than the student loan interest deduction, but for many borrowers, there is no difference from a tax perspective.
Most homebuyer student loan assistance programs are very limited in scope. If you have less than $10,000 in student loans they can make a big difference. If you have average or above average amounts of student loan debt, you student loan issues will remain regardless of the option selected.
Don’t buy into media or lender hype. Buying a house will not solve your student loan problems.