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Should I pay off my student loans early with a home equity loan?

Generally, the earlier you can pay off your student loans, the better off you'll be. You'll save interest and improve your debt-to-income ratio, a factor lenders consider when deciding whether to offer you credit, and your good payment record will be positively reflected in your credit history and credit score.

If you're a homeowner, you may want to consider paying off your student loans with the proceeds of a home equity loan. There are advantages and disadvantages to this alternative, and you'll need to analyze the financial consequences before you decide.

One advantage is that home equity loans often have longer terms than student loans, which may make your monthly loan payments lower. This can improve your debt-to-income ratio. In addition, if you itemize deductions on your federal income tax return, you may be able to deduct all the interest you pay on your home equity loan.

On the other hand, interest rates for home equity loans are often higher than those for student loans. And whether you itemize or not, you're allowed to deduct from your taxable income a portion of the interest you pay annually on your student loan (up to $2,500 if your modified adjusted gross income is under $60,000 for single filers, or $120,000 for joint filers in 2011).

Finally, keep in mind that student loans are unsecured debts, whereas your residence secures a home equity loan. If you can't meet your student loan payments, you may go into default and undermine your good credit record, but if you default on a home equity loan, you could lose your home to foreclosure.

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