Your parents tapping the equity in their second home to pay off your student loans can make financial sense in terms of reducing the interest expense on your college education.
Replacing student loans with mortgage financing takes away some important features of those loans, such as loan deferment and loan forbearance, for periods when you can't make the payments or need to make reduced payments. Also lost are any loan forgiveness provisions, if you become disabled or die, while the loans are outstanding.
Any tax deductions lost on the student loans might be replaced by a mortgage interest deduction, but that would depend on your parents' mortgage balances on both their main home and their second home. If the student loans are in your name, then you're the one losing the tax break when your parents take on the mortgage debt.
That begs the question: Who is responsible for the student loan debt? If it's all in your name and you're asking if it makes sense for your parents to pay off your loans by taking out a mortgage, that may reduce the total interest expense -- but it then becomes their responsibility to pay off the mortgage.
A lot of parents, and even grandparents, are writing me complaining that when they co-signed student loans they didn't expect to get stuck with paying them back. It's often a reasonable complaint.
You've invested in your human capital by going to college. It's expected that the return on that human capital -- your future earnings -- will be used to make the loan payments.
Other parents expect to finance their children's education. It's one of their life goals to send their children to college. If that's the case with your parents, and they want to reduce the interest expense by taking out a mortgage on their second home to pay off the student loans, it can make sound financial sense for them to do so.
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