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Does it make sense to release equity in my home via home equity loan to pay off student debt?

More and more people are leaving education with student debts. The BBC reported in 2011 that the average predicted debt on leaving university for UK students was £26,100 for those starting in 2011, rising to £53,400 for 2012 entrants.

If you are a graduate, you may well have a significant amount of student debt. You may also be struggling to pay your student debts. School loans, university loans, tuition fees and credit cards could be weighing you down. So, is it a good idea to repay student debts via a home equity or debt consolidation loan? Our guide looks at the pros and cons of doing so.

The student loan repayment rules

The student loan system in the UK was established for the 1990/91 academic year. It was designed to assist students with the cost of attending university and replaces the previous ‘grants’ system. There were around 4 million student loans outstanding at the end of April 2012.

If you have a student loan, you repay 9 per cent of everything that you earn above £15,795 a year. Before April 2012 this was £15,000. So, if you earn £17,000 you will repay £109 a year. If you earn £30,000 you will pay £1,280 a year.

If you are employed, the money is taken automatically from the payroll much like your income tax. Repayments are given to HM Revenue and Customs, which then pays the Student Loans Company (SLC) every March.

Why you may want to use a debt consolidation loan to repay your student debts

If you have a significant amount of student debt you may want to consider using the equity in your home to repay this borrowing. A home equity loan allows you to raise a sum of money based on the available equity in your home. You can then use this money to consolidation your student loans and debts.

The exact amount you can borrow is based on your income and expenditure, the value of your home, the equity you have and your credit rating.

Home equity loans are different from unsecured student loans as the lender takes a legal ‘charge’ over your home. This means that you have to keep up repayments on your secured education loan owner loan otherwise your house is at risk.

If you are struggling with your repayments then a home equity loan may help you. You can choose the term of the loan and spreading your repayments over a longer period may reduce your monthly outgoings.

In addition, if much of your student debt is on a credit card, then you could find you are paying interest in excess of 20 per cent. A home equity/debt consolidation loan will generally charge a lower rate of interest and so you could save money by consolidating your student debt.

Finally, if you have experienced debt problems or you struggle to regulate your spending, you may feel more comfortable if you consolidate your student debt. If you will just end up spending or wasting the cash, then at least overpaying the student loan is playing it safe. It is far better than ignoring the fact you have no self control or frivolously building up more borrowing.

Why repaying your student debts with a home equity loan may not be the right thing to do

Unlike normal borrowing which requires payment regardless of your situation, you don’t have to repay your student loan unless you are earning over a set amount. This applies even if you have started paying and then your income drops.

This means that if times get tough - you lose your job or your income falls - the student loan company won't require you to keep making the repayment to your loan. If you have consolidated your student debts then another lender will require you to make your payment every month irrespective of your personal circumstances.

In addition, for anyone who took out a student loan after 1998, the interest you can earn in a top savings account is more than the interest you will pay on a student loan. So you are better off saving any excess cash you have got rather than repaying the debt.

Interest rates on student loans are generally very low, and so consolidating this debt into a home equity loan may result in you actually paying more in the long term.

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