All About Fannie Mae’s Student Loan Cash-Out Refinance Program

If you have equity in your home and pesky student loans you just can’t seem to pay down, you’ll want to know about Fannie Mae’s student loan cash-out refinance program.

With it, you can potentially refinance your mortgage plus wrap in student loans at lower rates than you can get with standard “cash-out” refinances.

What’s the Advantage of the Student Loan Cash-Out Refinance?

Consolidating student loans and other debt into your mortgage is nothing new. People have been doing that for decades.

What is new is the lower cost.

Typically, debt consolidation cash-out refinances come with sky-high rates.

But Fannie Mae created an exception when using a cash-out loan to consolidate student loans. Now, your rate will be the same as someone getting a no-cash-out refinance.

Standard Cash-Out vs Student Loan Cash-Out: How Much Lower Are Rates?

Fannie Mae requires risk-based fees called Loan Level Price Adjustments or LLPAs. These fees are high for standard cash-out loans.

Lenders typically translate these fees into higher rates so the borrower doesn’t have to pay them out-of-pocket.

For someone with a 700 credit score and 80% loan-to-value, the student loan cash-out costs $1,375 less per $100,000 borrowed compared to standard cash-out loans. That translates to about a 0.5% to 1% lower rate.

But if you have a lower credit score, the savings are even more dramatic.

An applicant with a 660 score would pay $2,250 per $100,000 less in fees or receive a 1% to 1.5% lower rate for a student loan cash-out versus a standard cash-out.

Who Is Eligible for a Student-Loan Cash-Out Refinance?

To be eligible, you must meet the following requirements:

• Pay off at least one student loan in full.

• At least one mortgage borrower must be obligated on the student loan being paid off.

• Have at least 20% equity left (80% LTV) after taking out enough cash to pay off the student loan.

Here’s an example of how a student loan cash-out refinance might work.

In this case, the borrower might be eligible because they have enough equity in the home. They could consolidate their existing mortgage and the student loan without exceeding 80% of the home’s value.

However, if this homeowner had a $100,000 student loan, they would not be eligible. Their total loan would be $307,000, or 93% of the home value.

If this borrower had two $50,000 student loans, though, they could pay off one of them.

Ineligible Uses for the Student Loan Cash-Out

There are certain things you can’t do without triggering the higher cash-out refinance fees.

You can’t wrap in other debt, for instance. Credit cards, auto loans, and personal credit lines may not be included in the new loan.

Secondary financing, such as a HELOC, may not be consolidated unless it was used to purchase the home or add energy-efficient improvements.

You also may not receive more than $2,000 in actual cash at closing.

Should You Use A Student Loan Cash-Out Refinance?

A student loan cash-out isn’t a good idea for everyone.

The best candidates are those:

• With 30% or more equity in their homes

• Not on income-driven repayment plans or deferments

• With high student loan rates

• Having medium-to-high balances on their student loans

• Who don’t mind losing their rock-bottom mortgage rate

Let’s look at each of these rules of thumb.

Adequate home equity: You have to have 20% equity left in the home after the refinance. If you have 30% equity currently, you have only 10% of your home’s value with which to pay off student loans. On a $300,000 house, that’s $30,000 to cover closing costs plus at least one student loan.

Not on income-driven repayment plans: Those making the full student loan payment will benefit the most. Someone on reduced payment plans or deferment may experience payment shock. Their $0 or reduced student loan payment may add hundreds of dollars per month to their mortgage. Additionally, those who may eventually have their student loans forgiven should not participate in this program.

High student loan rate: You'll experience the most value if your student loan rate is at least as high as current mortgage rates, which are in the 7s or higher at the time of this writing. Those with much lower student loan rates may not want to refinance into a higher rate.

Medium-to-high student loan balance: Remember that you’ll pay thousands in closing costs for any refinance. Paying off a $5,000 student loan is probably not worth $5,000 in closing costs.

Don't mind losing a rock-bottom mortgage rate: Those who purchased or refinanced between 2020 and 2022 may have a much lower mortgage rate than is available now. You will be placed into today’s higher rates if you use a student loan cash-out refinance. It might be worth waiting until mortgage rates drop.

Using the Student Loan Refinance Program To Increase Cash Flow

Everyday costs are rising like few times in history. Personal budgets are getting squeezed.

Those with $500- or even $1,000-per-month student loans may be able to reduce overall monthly expenses.

A student loan cash-out refinance could help some consolidate and spread out large student loan payments over a new 30-year mortgage, increasing monthly cash flow.

In the example above, the borrower reduces payments by $370 per month even though their mortgage rate goes up.

If you have a large student loan with a high rate, you could be a great candidate for the student loan cash-out refi. Just keep in mind that you pay more interest overall by extending your loan.

Apply for your student loan cash-out refinance

See if a student loan cash-out refinance can benefit you. It’s not right for everyone, but speaking with an experienced lender can help you decide if this program can help you improve monthly cash flow and lower overall costs.