Should you Borrow to Pay off your Student Loans? Probably not

by Justin Weinger on August 20, 2014

You’ve no doubt heard about the student loan debacle. Student loan debt here in America passed the $1 trillion mark not long ago and isn’t going to let up anytime soon. In fact, over 70% of college graduates this year borrowed money to get their bachelor’s degree, and their average debt, $33,000, makes the class of 2014 the most indebted in history.

If you’re considering borrowing money to pay off your student loans, do yourself a favor and take a look at the scenarios, and their consequences, below. Once you know what you’re looking at, you’ll be able to make a more educated decision. Enjoy.

If you’re considering taking out a home equity loan to refinance your student loans, you might think it’s a good idea because of the low interest rates available today. The fact is however that this could cause significant long-term risk, i.e. the risk of losing your home if you can’t pay that money back. Let’s face it, the reason lenders are more than willing to offer such incredibly low interest rates is because they know that, if you can’t pay them back, they get your house.

Many people borrow from their 401(k) in order to pay off their student loans but, even though this might seem like a good option, it has a high amount of risk as well. Yes, it’s easier than getting a loan somewhere else because, well, it’s your money. You’ll need to call your 401(k) provider and fill out a short application, and interest rates might not even be all that bad. The risk is that you never replace the money that was in your 401(k) and thus lose all the benefit that compound interest can give you. Plus, when you go to retire you’ll have much less in your nest egg.

Taking out a personal loan to pay off your student debt would be a great idea if you were able to get a loan at a much lower rate than your student loan rate. The problem is that most personal loans are dependent on your credit score,  your credit utilization ratio and how much debt you already have. In other words, they can be quite high and might not offer a real advantage over simply paying off your student loans as they are.

Finally there’s borrowing money from your family to pay off your student loans which, if your family is filthy rich, might not be a bad idea at all. On the other hand, if you’ve already had someone in your family (most likely your mom and dad) cosign for your student loan and you’re having trouble paying it off, you probably don’t want to borrow even more money in order to do so.

By the way, if you’re having trouble paying off a loan that was cosigned by a family member, you definitely should discuss it with them as, if you default on your loan, it could harm their credit rating greatly.

Now that you know some of the advantages, and all of the risks, you can make it much more educated decision on whether or not to borrow more money to pay off your student loans. Best of luck.

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