One might think that The New York Times‘ “Your Money” article on a company that offers to swap student debt for mortgage debt is an advertisement, but it’s an alternative to New York bankruptcy worth considering. SoFi, a nonbank lender, with the help of the government mortgage entity Fannie Mae promises student debtors the opportunity to take advantage of historically low mortgage interest rates. Using home equity to refinance student loan debt has long been an option for debtors fortunate enough to also be homeowners, but often the interest rates for home equity loans are higher.
SoFi’s program targets homeowners who owe their own student debt, co-signed someone else’s student debt (probably their kids’), or took out Parent PLUS loans to pay for their children’s educations. The homeowners refinance their mortgages, tapping additional equity, and retire their student loans in the process. Their new mortgages are larger, but their overall interest rates are lower and the loan terms are probably longer at 30 years.
The “Your Money” article observes that the potential savings from lower interest rates are quite significant. Before Congress stopped fixing student loan interest rates several years ago, the rates for PLUS loans were quite high—7.9 percent. With mortgage rates down to 3.5 percent, monthly payments could drop by quite a bit. Perhaps up to 8.5 million households are eligible for the program. Among homeowners who have co-signed a student loan, the average balance is $35,000.
Refinancing student loans into mortgages comes with drawbacks. For one, borrowers with federal loans might forgo income-based repayment options, but this would not matter for homeowners with private loans, co-signed loans, or federal Parent PLUS loans, which are ineligible. Two, many struggling debtors may choose to fall behind on one debt and not another, prioritizing the mortgage over the student loans. With all debts under one payment structure, debtors facing hard times might be forced to default on their mortgages and lose their homes in foreclosure. Conversely, debtors with private loans, which have fewer protections and are difficult to discharge in bankruptcy, would probably have less to lose by refinancing.
SoFi limits its program to homeowners with loan-to-value ratios of 80 percent and have credit scores over 620, which is above subprime by most definitions. It’s also not available to homeowners in every state.
The “Your Money” article on refinancing mortgage debt to pay off student debt can be found here.
Refinancing can undoubtedly help some New York student loan debtors, but if it does not, then it’s a good idea to discuss your situation with an experienced New York bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
