Cash-out refinances can pay off student debt
As we come into college graduation season, Fannie Mae came up with some clever credit concoctions to help those with student loans and other bills to get to an affordable avenue of ownership more easily.
Jonathan Lawless, vice president of customer solutions at Fannie Mae, presented a well-structured home loan for parents (for example) who might want to chip away at their students’ portion of the $1.4 trillion of national student loan debt.
You can cash-out up to 80 percent of the value of the property, not to exceed a $636,150 loan in Orange and Los Angeles counties without any of Fannie’s famously expensive pricing markups normally charged on an 80 percent loan-to-value, cash-out refinances.
We are talking about an interest rate savings of 0.25 percent to 0.5 percent or more when it comes to cashing out for student loan debt.
Compare interest rates and its tax deductibility. A U.S. Department of Education website shows a student loan interest rate chart that ranges from 3.76 percent to 6.31 percent. Cash-out mortgage rates will range in the 3.75 percent to 4.75 percent range, depending on variables like credit scores and remaining equity.
The maximum interest deduction on student loan debt is $2,500 for a single tax filer with an annual adjusted gross income of $80,000 or for married filers with an income of $160,000 or less.
Higher incomes can not get tax deductions, according to Jeff Hipshman, a partner at Tustin-based HMWC CPA’s and Business Advisors.
Hipshman points out that any cash-out refinance used to pay for student loans is capped at $100,000. Any amount beyond that is not tax deductible.
Do you remember the buy and bail days of the Great Recession? That’s when someone buys a new home and then bails on the existing home to get out of an underwater mortgage.
Student loans cannot be discharged through bankruptcy. Hopefully, we won’t see many people gaming the system by strategically refinancing for maximum cash-out, paying off the student loans, then defaults on the mortgage and files for bankruptcy, thereby putting an end to the student debt forever.
For good measure, Fannie does not your bills against you in the qualifying process, so long as you can prove through canceled checks and the like that someone was paying your car payment, for example, for the last twelve months.
Separate from the cash-out refinance described above, Fannie will use the minimum student payment listed on your credit report for qualifying purposes.
If the kids have demonstrated a history of being responsible about jobs, paying bills and the like, help them out if you want. It typically ends successfully.
If the kids are not responsible, you may become an enabler for their future financial failures where you will continue to be bailing them out.
Jeff Lazerson - Mortgage Columnist since 2011