By T.J. Porter, WCI Contributor
It’s no secret that becoming a doctor is expensive. According to the Association of American Medical Colleges, 73% of all medical school graduates have at least some amount of student debt with the median balance clocking in at $200,000. Dealing with student loans can be a pain, especially if you have multiple debts and loan payments to deal with. You might consider rolling your large student loan balance into another large loan, such as a mortgage.
Consolidating your debt this way has some benefits, but it’s also important to consider the drawbacks before you roll your student loans into a mortgage. Here are some reasons why this strategy might work—and a few other reasons why you probably wouldn't want to do this.
Reasons to Consider Rolling Student Loans into Your Mortgage
Outside of your student loans, your mortgage is likely the largest loan you’ll ever receive. Lenders understand that homes are expensive, so they’re willing to lend hundreds of thousands of dollars to people who want to buy homes, which makes it possible for some people to roll their medical school debt into their mortgage balance.
A few benefits of rolling your student debt into your mortgage include:
Lower Interest Rate
Mortgages and other loans secured by real estate tend to have some of the lowest interest rates of any loan on the market. This is because the home you purchase with a mortgage secures the debt. If you stop making payments, the lender can foreclose and repossess your home. That makes mortgages much less risky for lenders.
Student loans typically have higher interest rates than mortgages. If you roll your student loan balance into a mortgage, you can reduce the amount of interest that accrues, saving you money overall.
Longer Repayment Term Equals Lower Payments
The typical student loan has a repayment period of 10-25 years, depending on whether you're going for a forgiveness plan like PSLF or if you're just paying off the debt all by yourself (some doctors, through various means, end up paying off their loans much faster). Mortgages usually come with terms ranging from 15-30 years.
Extending the repayment term of a loan can help reduce your monthly payment. It leaves more time for interest to accrue, which can increase the overall cost, but the lower interest rate that mortgages carry means you may still save money, even if you extend the term of your loan to lower its payment.
Fewer Monthly Payments
If you have multiple student loans, you have to make a payment toward each loan. It’s easy to find yourself dealing with three, four, or more payments to make each month.
Keeping track of all of those required payments can be a hassle and it might be easy to make a mistake and miss one, which can damage your credit score and cause you to rack up late fees. If you roll your student loans into a mortgage, you’ll be left with just one monthly payment to make, which can save you some effort and mental energy.
Why You Shouldn’t Combine Your Student Loans and Mortgage
There are many benefits to keeping your student loans as is instead of rolling them into a mortgage. Student loans offer many borrower protections that aren’t available for non-student debt.
Here are some reasons to avoid consolidating your student loans into a mortgage. The first one is a big drawback.
You'd Lose Some Big Tax Benefits
If you were to refinance your mortgage or take out a HELOC, only the interest of the first $100,000 is tax deductible—and that's only true if you are purchasing or upgrading your house. That means that rolling student loans into a mortgage insures that a portion of the mortgage interest would no longer be deductible for you.
Trading Unsecured Debt for Secured Debt
Your student loans are a type of unsecured debt, meaning that there isn’t any collateral that the bank can repossess or foreclose on if you stop making payments. You will face consequences if you don’t pay your student loans, but they won’t be as immediate as a house foreclosure and you may be able to work something out with your lender.
Mortgages, on the other hand, are secured debts. Your home serves as collateral, which means your home is at risk if you stop making payments.
If you roll your student loans into a mortgage, you’re trading unsecured debt, which is less risky for you, for secured debt, which puts your assets at greater risk.
Fewer Borrower Benefits
Student loans carry many perks for borrowers, and you lose these benefits if you roll them into a mortgage.
For example, student loans are eligible for a deferment if you ever go back to school, letting you pause payments. You still have to make mortgage payments if you return to school, so consolidating means you lose that option of flexibility.
Student loans also offer income-based repayment and the potential for loan forgiveness, which can reduce your monthly expenses and help you save money overall. If you wind up working for a nonprofit, you could get loans forgiven in as little as a decade with PSLF. Taking that path could save you hundreds of thousands of dollars on your student loans.
Mortgages don’t have a loan forgiveness option, so you’ll lose out on that potential savings.
You Can Lower Your Interest Rate by Refinancing
Another way to lower your student loans is to refinance with any of the WCI-vetted companies listed below. That way you could lower your payments without having to go through the process of tying them to your mortgage.
Variable 5.99% - 9.99% APR
Fixed 4.99% - 9.99% APR
^Up to 0.75% off rates
Variable 4.99%-13.92% APR
Fixed 4.40%-11.99% APR
^Best Rate Guarantee
Variable 4.54% - 11.72% APR
Fixed 3.95% - 9.19% APR
† Bonus includes cash rebates and value of free course. Borrowers who refinance more than $60,000 in student loans using the WCI links will be enrolled in The White Coat Investor’s flagship course, Fire Your Financial Advisor for free ($799 value). Borrowers will still receive the amazing cash rebates that WCI has negotiated with each lender. Offer valid for loan applications submitted from May 1, 2021 through June 30, 2023. Free course must be claimed within 90 days of loan disbursement. To claim free course enrollment, visit https://www.whitecoatinvestor.com/RefiBonus.
How to Roll Student Loans into a Mortgage
If you think rolling your student loans into a mortgage is still a good idea, it’s important to know that you can’t just go to a bank and ask for a much larger mortgage than you need to buy a home. You need to use a few specific methods to combine your medical school loans and mortgage.
- Cash-out refinance: Most lenders will allow you to refinance a mortgage and then take some of your home equity out as cash. For example, if you own a home worth $500,000 and have $300,000 left on your mortgage, you can refinance by getting a $400,000 loan. This leaves you with a larger amount of debt, but it also gives you $100,000 in cash that you can use for other purposes, such as paying off student loans.
- Fannie Mae student loan cash-out refinance: Fannie Mae offers a special program for homeowners who want to refinance their mortgages to pay off student loans. The program sends the proceeds of the refinance directly to your lenders and can help you secure a cheaper loan.
- Home equity loan or line of credit: If you don’t mind having a second payment on top of your mortgage payment, you can use a home equity loan or line of credit to pay off your student loan balance. This can be beneficial if you secured a low rate on your initial mortgage and don’t want to replace it with a higher one by refinancing.
If you don’t think that rolling your student loan balance into a mortgage is the right plan for you, there are other options.
- Federal loan consolidation: If you have federal student loans, the government offers a loan consolidation program that you can use to combine multiple balances into one.
- Personal loan: This one could depend on your student loan balance.
- Loan forgiveness: If you work for a nonprofit, you could qualify for loan forgiveness after as little as 10 years. There are other loan forgiveness options for doctors, so you should look into those if you’re searching for another way to get rid of your debt.
Student loans and the many programs and options are challenging to navigate. If you need help, check out StudentLoanAdvice.com, a WCI company.
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