student loan

Repay student loan with cash-out mortgage?

Don TaylorDear Dr. Don,
My son just graduated with his master's degree and has accrued $100,000 in student loan debt. He is prepared to pay it, but his college loan interest rates are higher than I could get by refinancing my home.

Would it be a good idea to refinance my home and get cash out, pay off his loans and let him make his payments to my loan at a lower interest rate? I would hope to get a 7.5-year adjustable-rate mortgage at close to 3 percent. I now owe $50,000 on an eight-year loan at 3.75 percent. I'm not worried about him defaulting.
-- Peggy Payments

Dear Peggy,
To the extent that you can reduce the effective interest rate on the loan, you'll make the debt more manageable for your son. He'll lose any tax breaks associated with the interest he would have paid on the student loan and any deferment, refinancing or forbearance options associated with these loans but, assuming you can fully utilize the mortgage interest deduction, you'll gain the mortgage interest deduction for the interest expense on the $100,000 and reduce the interest rate on the loan balance.

Getting the cash-out refinancing on your home assumes you have enough equity in your home and that you have the income and the credit history to get the loan approved.

You say you're not worried about your son defaulting on the loan. That can mean one of two things: Either you don't care if he doesn't pay you, or you're certain he will make the payments. I hope it's the latter. You taking out this debt to reduce his interest expense shouldn't mean that you're taking on his debt. He made an investment in his future by getting his graduate degree. Ideally, it will pay him a return in higher career earnings. It's those earnings that should be paying down the debt, not yours.

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