Student debt is currently at an all-time high, with 42.7 million individuals owing a cumulative $1.7 trillion in federal student loans, according to Education Data Initiative. With the average borrower carrying nearly $38,400, many property owners are turning to their built-up home equity to help alleviate that burden.
There are two common options for using home equity to consolidate student loans: a standard cash-out refinance and Fannie Mae’s student loan cash-out refinance program. Here’s a breakdown of the pros and cons of each, plus a few other alternatives worth considering.
- A standard cash-out refinance lets you pay off some or all of your student loan debt while giving you maximum flexibility in how you use your equity.
- Fannie Mae’s student loan cash-out refinance program offers lower rates but has stricter guidelines and limits on how the funds can be used.
- Rolling student loans into your mortgage can lower your monthly payments but may cause you to forfeit federal protections on your student debt.
Consolidating Student Debt Into Your Mortgage
A student loan cash-out refinance allows you to roll some or all of your student debt into your home mortgage, consolidating multiple monthly obligations into one payment.
Student debt typically carries a 10-year repayment period. Folding it into a mortgage can stretch that term and reduce your required monthly payment. And if you’re locked into a high student loan rate, consolidating into your mortgage may also reduce your total interest cost.
Standard Cash-Out Refinance
A standard cash-out refinance lets you take out a new mortgage for more than you currently owe, use the new loan to pay off the existing one, and receive the difference as cash at closing. For example, if your current mortgage balance is $200,000 and you refinance for $300,000, you’d receive $100,000 — minus closing costs — as a lump sum.
Those funds can be used in any way you choose — including to pay off student loan debt. You can also use the proceeds to consolidate other debts or split the funds across multiple goals:
- Credit cards, auto loans, or medical bills
- Home improvements and repairs
- Major purchases
- Down payment on a second home or investment property
- Funding other investments or business ventures
Cash-Out Refinance Options
Most homeowners use a conventional cash-out refinance, though FHA and VA programs also offer this option. Here’s how they compare:
- Conventional cash-out refinance: Conventional guidelines require a minimum credit score of 620, though most lenders look for higher. Refi.com requires a minimum of 660. DTI can be as high as 45% depending on the lender. You’ll need to retain at least 20% equity in the home after the cash-out.
- FHA cash-out refinance: FHA guidelines allow cash-out refis with a credit score as low as 500, though most lenders — including Refi.com — require 620 or higher. DTI allowances can reach 45–50%, though lower is generally preferred. Like conventional, you’ll need to retain at least 20% equity.
- VA cash-out refinance: The VA doesn’t set a minimum credit score, but a 620 or higher gives you the best chance of approval. Most lenders target a DTI of 41% or below, though exceptions are possible. A VA cash-out refinance can typically go up to 90% LTV, with some lenders offering 100%.
Note: Compared to a standard rate-and-term refinance, cash-out refinances typically carry slightly higher interest rates, reflecting the added risk of borrowing more than the current balance.
Fannie Mae’s Student Loan Cash-Out Refinance
A popular alternative is Fannie Mae’s student loan cash-out refinance program. Because it’s specifically designed to pay off student loan debt — not treated as a standard cash-out refinance — borrowers typically qualify for a lower interest rate.
The trade-off is that your cash-out is essentially limited to paying student debt. You don’t have the same flexibility to direct funds toward other goals as you would with a standard cash-out refinance.
If your primary goal is to consolidate student loans into your mortgage, this program can be the more cost-effective path. Key eligibility rules to keep in mind:
- The loan must be approved through Fannie Mae’s Desktop Underwriting (DU) platform — manual underwriting is not permitted.
- At least one student loan belonging to a borrower on the mortgage must be paid off in full. Partial payments aren’t allowed, and funds can’t be used for another person’s (e.g., a family member’s) student loans.
- Second-position liens (such as HELOCs or home equity loans) cannot be wrapped in unless they were used to purchase the property. The exception is Property Assessed Clean Energy (PACE) loans or other energy-efficiency financing.
- Up to 2% of the new loan amount (maximum $2,000) may be received back as cash at closing.
- Closing costs can be included in the new loan.
Note: Refi.com does not currently offer the Fannie Mae student loan cash-out refinance program. This information is included for informational purposes.
Comparing the Two Options
| Standard Cash-Out Refinance | FNMA Student Loan Cash-Out Refinance | |
| Use of Funds | Any use | Student loan payoff only |
| Interest Rates | Higher | Lower |
| Flexibility | High | Limited |
| LTV Limits | 80% for most borrowers | 80% for most borrowers |
| Closing Costs | Can be included | Can be included |
| Overall Cost | Higher | Lower |
Should You Roll Your Student Loans Into Your Mortgage?
This decision depends on your individual financial situation. A few important considerations:
- You’re converting unsecured debt into secured debt. Defaulting on student loans can result in wage garnishment and credit damage. Defaulting on a mortgage can lead to foreclosure. The stakes are higher when your home is on the line.
- You may lose federal protections. Rolling federal student loans into a mortgage eliminates access to income-driven repayment (IDR) plans, deferment, and forbearance options.
- Your monthly payments may be lower. For homeowners who are cash-strapped each month, consolidating student debt into a mortgage can provide meaningful monthly relief — even if total interest paid over time is higher.
Alternative Options
Home Equity Loans
A home equity loan is a second mortgage that lets you access equity without replacing your current loan. You receive a lump sum at closing — which can be used to pay off student debt — and repay it at a fixed rate over time.
Home equity loans typically have lower closing costs than a cash-out refinance but carry higher interest rates. They’re most commonly used by homeowners who are locked into a favorable first mortgage rate or only need to borrow a relatively small amount. Use our blended rate mortgage calculator to see how a home equity loan could affect your combined monthly costs.
HELOCs
A HELOC is another second-mortgage option that keeps your current loan intact. Rather than a lump sum, you receive access to a revolving line of credit — useful if you plan to pay off student debt now but anticipate needing further access to your equity in the future.
HELOCs typically begin with a draw period (5–10 years) during which you pay interest only, followed by a repayment period (10–20 years) with full principal and interest payments. Most HELOCs carry variable rates, unlike the fixed-rate structure of a home equity loan. Learn more about how these two options compare in our HELOC vs. home equity loan guide.
Employer-Sponsored Student Loan Repayment
Some employers offer student loan repayment assistance as a benefits perk — either as a one-time sign-on bonus or recurring monthly contributions. Some also offer retirement savings incentives tied to student loan payments.
Keep in mind that most employer-sponsored repayment funds are treated as taxable income. The CARES Act allowed up to $5,250 in annual tax-free employer contributions — check whether this provision has been extended when evaluating this option.
Private Student Loan Refinances
Private lenders offer student loan refinances that let you consolidate multiple loans and adjust your rate and term — similar to refinancing a mortgage. This can be a good option if you have a below-market mortgage rate or insufficient equity to qualify for a cash-out refinance.
The key trade-off: refinancing federal student loans with a private lender eliminates access to federal protections like income-driven repayment. Rates vary significantly by lender and credit profile, and may be higher than a cash-out refinance since the debt isn’t backed by collateral.
Federal Student Loan Forgiveness Programs
Some borrowers may qualify for partial or complete forgiveness through federal programs. Common options include:
- Public Service Loan Forgiveness (PSLF): For government employees and qualifying non-profit workers. After 120 qualifying monthly payments, the remaining balance may be forgiven.
- Teacher Loan Forgiveness (TLF): Up to $17,500 forgiven for teachers who complete five consecutive years at a qualifying low-income school or educational service agency.
- Total and Permanent Disability (TPD) Discharge: Available for borrowers with qualifying physical or mental health conditions that severely limit their ability to work. Documentation may include a VA 100% disability rating, SSDI/SSI eligibility, or certification by a qualified medical professional.
Final Thoughts
For homeowners who have built up meaningful equity, rolling student debt into a mortgage can provide real monthly relief. But it’s not the right move for everyone — especially if you rely on federal protections or income-driven repayment options, or if the long-term interest costs outweigh the short-term savings.
If you’re considering a cash-out refinance to consolidate student loan debt, start your application with Refi.com today for a personalized loan estimate.
