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I just paid off a loan I had with Sallie Mae using a home equity line of credit. The student loan was a variable rate that was based on the 90 day T-Bill rate plus 3.5%. The equity line is a variable rate that is prime minus 1/2 percent. Historically, the T-Bill rate and the prime rate have risen and fallen at the same rate, so I get a slightly lower rate and get to deduct all of the interest I pay.

(Writing the big check with borrowed money is like kissing your sister).

I would love to get a fixed rate, but I managed to save some money using the home equity line with no up front costs.

If you have home equity and variable student loans, you might want to try this.

I used Greater Atlantic Bank in Washington, D.C. Prime minus 1/2 is the best rate I could find.

Siggie
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I briefly thought about that but decided against it. I'm simply not comfortable with the risk. What if you became unemployed? Student loans can be deferred; HELOCs can't. Even if there was no deferral, I'd much rather default on a student loan than on my house. Yeah, my credit would suffer but they can't foreclose on my degree.

-Steph
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I briefly thought about that but decided against it. I'm simply not comfortable with the risk. What if you became unemployed? Student loans can be deferred; HELOCs can't. Even if there was no deferral, I'd much rather default on a student loan than on my house.

I agree. My accountant's been hinting that my wife and I should do that in a couple of years once we build some more home equity / pay down some of the student loan balance. His thinking is that as our income (presumably) grows we would get more of a benefit, tax-planning-wise, since we could write off all the interest on the HELOC whereas our joint income may phase us out of part or all of the student loan interest deduction.

I have resisted this advise for several reasons:

1) the loss of protections and attachment of the home discussed above;

2) my wife would now become a joint debtor on the student loan debt (since the house, and presumably any HELOC, would be in our joint names);

3) our home's value might be re-assessed in the process and we would have to pay higher property taxes (though I admit I'm not knowledgable about the HELOC process compared to a second mortgage and am not sure if this occurs), and;

4) the interest rate on any HELOC would probably be the same, if not higher than, the rate on my student loans.

The only benefit I could see to doing this would be using a HELOC for private-lender loans which are variable-rate. You could lock in a fixed, low rate on those with a HELOC and assure yourself of deductibility of interest. But you would have to forego the protections the loans come with.
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What if you became unemployed?

Likewise, what if you go back to school? Especially with subsidized loans, you even get to freeze the interest rate clock on them. That's one reason why I'm letting most of my student loans hang out there as long as I can. (The unsubs I think I'll clean up before I go back to school, if I wind up doing so in a year or two. But first... I gotta pay off some credit cards!)

-A
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I agree. My accountant's been hinting that my wife and I should do that in a couple of years once we build some more home equity / pay down some of the student loan balance. His thinking is that as our income (presumably) grows we would get more of a benefit, tax-planning-wise, since we could write off all the interest on the HELOC whereas our joint income may phase us out of part or all of the student loan interest deduction.

Good for you, blugld, for NOT LISTENING to that accountant!!

C.P.A's and other tax preparers are great people to get answers about making a tax number the smallest it can be mathematically. But sometimes I hear anecdotes like this one that make me shake me head.

For a lot of people, going the HELOC route is the one that makes sense. They are happy with the decision, it usually improves cash flow for them, and they are more likely (but will not always!) be eligible for the mortgage deduction. (The deduction is only there to people who itemize---and some mortgage holders don't have enough interest and other deductions to itemize!)

But like the folks here are saying, (and I agree), there are the various protections built into the student loan. I believe these have a value. You only know the actual CASH value of them if you need to exercise a provision. (For example, I know that my student loan deferment is worth about $2400 after-tax, and over $4,000 pre-tax, per year.)

I will never figure out why people get so nervous about the student loan, but are in fact rather blithe about all the other kinds out there (especially mortgage and consumer.) Aside from the student-loan-borrower badmouthers out there (in their many varieties), it seems to me that the student loan is the one to hang on to. And not worry or feel any kind of anxiety about unless the Collector is not knocking on the door.

I believe that political pressure will force Congress to make the terms of these easier and easier as the 2000's go on.

They are a stupid policy as currently structured, and more and more people---including universities like Princeton---are seeing that.

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You all make some good points.

In my case, I'm definitely not going back to school; and I only have to pay back interest on the home equity line for the next fifteen years, which gives me some flexibility in case I lose my job (although I plan to continue making at least the same payment as long as I am employed).



Siggie
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Siggie,

how are things working out for you? I got a HELOC for a 2nd mortgage and I was exasperated at how many increases (5) since I opened the HELOC in September. I just refinanced my 2nd into a 20 year fixed HEL.

Has your rate stayed stable?

-b-
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