Fannie Mae introduced new programs on April 25, 2017 allowing student loan borrowers to refinance their student loans into their home mortgage. Fannie Mae explained that this would open home ownership to more candidates and reduce interest rates from what is often 6-8% to a more manageable 4% under present 30 year fixed rates. The headline reads: Innovations Help Borrowers Pay Down Student Debt and Overcome Debt Related Obstacles When Buying a Home – See more at this link.
While this will help many young borrowers I’m sure, I’m also cautious in that borrowers are giving up important federal rights in doing so. For instance, if older Americans elect to refinance their Parent Plus loans into their mortgage as they downsize to a more affordable smaller home, they are giving up the right to an income based plan (often 0-$100 a month) and trading that in for a sizable chunk of their home equity. Home equity that could have been used to help fund their retirement.
Even a younger person should be careful as they too are giving up important rights in the event they lose their job, have a drop in income or become disabled. The present income based/debt forgiveness plans allow for a re-calculation of a student loan payment for all of these events. A federal loan can also be discharged in its entirety under the Total and Permanent Disability Discharge program. A refinance of a student loan, while it may sound inviting due to a lower interest rate, will result in the loss of these federal benefits. It will also cause the student loans to now be collateralized by their home and the loss of a down payment or equity in that home should a calamity occur.
A borrower may also be putting their spouse on the new mortgage loan, whereas he or she was not liable on the former student loan.
All of these factors and more are important considerations in making a life altering decision such as this. Please consider consulting with a student loan attorney before taking the step to refinance any student loan, particularly in linking one to a home payment. For more information, please see our website at Arkovich Law