How to Use a HELOC to Pay Off Debt

So here is how my morning started. I transferred $40,000 from my home equity line of credit (HELOC) into my checking.

I then took that same $40,000 that is currently at a 4.5% variable rate out of my checking and made a student loan payment. I just leveraged the equity in my home to pay off $40,000 in student loans.

In other words, I used a HELOC to pay off our debt. And you are thinking…. What the??

Now after reading the introduction paragraph you are still most likely wondering why we would do such a thing, right?

Quick Disclaimer: What you are about to read pertaining to paying off student loans is just a strategy we use, that works really well for our situation. Will this work for you, I am not sure. Just so you know, I am not a financial advisor, I just write quite often about student loans. That being said, you will learn something if you keep reading.

HELOC for debt consolidation 101:

Why would anyone ever take out the equity in their home to pay off their student loans? Well first things first, let’s not get all wadded up. People take out home equity lines of credit all the time to go on vacation, pay for their kid's braces, redo their basement and throw it down on red in Vegas. Just look at the numbers from 2018 showing the rise of HELOC lending.

And while the current HELOC balance is not as high as it was in 2006, when people were throwing around money they didn’t have like crazy to keep up with their lifestyle inflation, HELOC’s are still on the rise.

So now that we got it out of the way that people use HELOC’s on way dumber stuff then student loans, here is why we use a HELOC to pay off student loans.

We leverage debt, just like we leverage assets.

I aim to expand on leveraging debt the same way you can leverage assets, but if you are new to Money Life Wax, here is a quick rundown of our student loan story in less than 180 words:

In 2016 my wife had over $271,000 in student loans and I had roughly $15,000ish. Combined we started with over $300,000. After working for over a year, my wife and I realized that relying on public service student loan forgiveness was about as risky as questioning Joffery from Game of Thrones.

So instead of leaving our student loans to fate, we decided to pay them off and here is why. Our minimum payments were not even covering the monthly interest. And over 10 years our minimums would still total up to 6 figures but would never actually make a dent on the principal balance.

We were essentially spraying our money. And in 2017 when over 5 in 10 got denied PSLF, we were glad we chose to pay off our student loans.

But we had to figure out a way to get ahead… which is when we used a HELOC to start making one-time massive student loan payments. To read step by step how we used a HELOC to pay off student loans you can start here.

Why do you use a HELOC to pay off debt:

The simple definition of leverage is to use something to maximize advantage. In economic or business terms it can mean capital to make more money. Or in this case, leverage equity to pay off student loans.

Now, you are wondering if this is risky? Sure I think leveraging any sort of asset or debt can be viewed as risky, but no riskier than not paying off our student loans and letting the interest capitalize each year.

My wife and I had an online consultation with Bill Westrom of Truth in Equity in September of 2016. He vetted us first, to make sure we would fit the mold of this strategy. Typically, most people use this approach to rapidly pay off their mortgage. However, Bill and I both foresee people using this approach more for student loans.

The first thing we had to understand was that you need to have a positive monthly cash flow to really get ahead – whether investing, paying off debt, or in our case paying down our HELOC.

Second, we needed to understand that while equity is an asset, it is a very dormant asset. Like a grizzly bear snuggled up in a cave during the winter, your home’s equity isn’t really doing much until you go to sell.

But if you have equity, why not leverage it? Why not rob Peter (Equity) to pay Paul (Student Loans)?

That is exactly what we do, and what we did today. In order to get ahead of the interest, we simply made a $40,000 principal loan payment, with our first back in November of 2016. We then repeated the process in June 2017, March 2018 and December 2018, or about every 8 months.

Here is what paying off $40,000 in student loan debt with HELOC looks like:

Step 1:

Transfer money from the HELOC to our checking. If you notice our checking balance is low – that is because we keep every dollar in the HELOC at all times to keep the balance as low as possible. Thus, making sure every dollar is always working for us

We have a $50,000 HELOC, but we never stretch it out past $45,000, always leaving a buffer. Currently, the interest rate is at 4.5% and the minimum monthly payment is $500.

See the photos below.

Step 2:

Next, I simply logged on to my wife’s My Great Lakes account and went about submitting an extra payment. I will admit, I should let her have the gratification of paying off the student loans but since we are married, they are OUR student loans.

Side note, since we have now done this 4x, I wonder if My Great Lakes is saying this: Where in the hell do these people get $40,000 every 8 months.

Step 3:

Allocate the funds. This is where things get tricky and I think it is absolutely ridiculous how this process works. I have to determine a “Percentage” to go towards individual loans. Why can’t student loan companies be transparent and allow people to allocate a dollar value?

As you can see below, I then allocate the funds to certain student loans, focusing on the ones that hurt us the most with interest.

Step 4:

Hit submit. And like just that, we have made a $40,000 student loan payment.

Frequently Asked HELOC/Student Loan Questions

While I don’t ever want to be a financial planner or advisor, I also don’t consider myself an expert on the subject matter of HELOCS and Student Loans. I said it earlier, I just know what has helped us.

If you have questions comment below or reach out to Truth in Equity and fill out the quick questionnaire to see if your profile would even work with the program.

But here are some common questions I get that might help in the meantime as I close:

1. Why don’t you just make extra monthly payments instead of paying off your HELOC?

This is the most commonly asked question. But here is the biggest reason – it is not about interest rates it’s about cash flow and principal balance. What results in more interest each month, 4% on a $200,000 house or 6% on a $40,000 HELOC?

The house does, even with a lower interest rate. So when we made the $40,000 payment today, by the end of March the HELOC will be down below $30,000. Meanwhile, had we just made extra payments here and there towards our student loans, the dent on the principal would not be as significant. Therefore, never getting ahead of the interest.

2. But isn’t taking a HELOC out taking more debt?

Yes and No.

Since you are paying off one form of principal debt with the HELOC, really you are just moving debt. Now, you did add an extra monthly payment as far as the HELOC is concerned, but that is why having a positive monthly cash flow is essential.

3. Will this work for me?

This is best answered with three questions: Do you have a positive monthly cash flow? Do you intend to pay off the HELOC and not use it for other dumb stuff? Do you live on a budget and manage your money well?

If you answer is yes, yes, and yes then you are good to go.

4. Has anyone else you know used this approach?

Yes, I know several. In fact, I was referred to Truth in Equity after a financial mentor of mine used this approach to pay off his mortgage quicker. His words, “Not sure if this would work with student loans but you should see, it won’t hurt.”

Also, a reader is using this approach right now to rapidly decrease his mortgage, then step 2 is to use the same approach to invest. Now, not to jump down a rabbit hole, but imagine investing $40,000 at a time into a stock index fund with a conservative 5-7% rate of return?

Related: Read smart ways to use a HELOC here.

In 2017 we paid off $57,000 in student loan debt, with this approach. Followed by $70,000 in 2018! As of 2019, we have already paid the HELOC down to $15,000 as of July, and we are no longer in six figures of debt!!!

Q: Would a HELOC help you with your debt? What would you want to know more about? Comment below!