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By LIZ PULLIAM WESTON

Using Home Equity To Pay Off Student Loans Rarely A Wise Move

Dear Liz: Our question is about student loans. We have a total of $69,000 in education debt. We also have a home worth $400,000 and our mortgage balance is $266,000, plus a home equity loan with a balance of $14,500.

We make a good salary, have excellent credit, pay all our bills on time and, if gas weren't so darn high, we would have a decent amount of discretionary income. We make extra principal payments when we can. The problem is that interest rates on our school loans are climbing, and payments are getting higher and higher.

We're wondering whether we should take out another home equity loan to pay off the student loans. That would obviously leave us with less equity, which could limit the price we could pay on the house we plan to buy in three to five years. But it would also decrease our monthly loan payment significantly and we would be able to deduct the interest on the home equity loan. (We can't deduct student loan interest because we make too much money.)

Does a home equity loan make sense in this case?

Answer: Generally speaking, trading student loan debt for home debt isn't a great idea.

Student lenders typically are much more flexible than mortgage lenders, with a wider variety of repayment options. You also can get a deferment or forbearance if you lose your job or otherwise encounter a financial hardship. This respite from payments can last as long as three years on many student loans.

Compare that with what would happen if you couldn't make your mortgage payments. Within a year, and usually much less, your home lender would start foreclosure proceedings.

In addition, most student loan debt can be consolidated. This would allow you to lock in your current interest rate and perhaps lengthen the repayment term to lower your monthly payments. A longer loan means you would pay more interest over time, but it could help ease the monthly crunch you're feeling.

All that said, not being able to deduct the interest on your student loans is a significant disadvantage.

If you're confident you'll be able to make the payments, then you might consider paying off at least some of your student loan debt with home equity borrowing.

You should, however, limit your total borrowing – all your home equity loans plus your primary mortgage – to no more than 80 percent of the value of your house.

You want to keep at least a 20 percent equity cushion in your home whenever possible, as a last-resort emergency fund and also to protect yourself in case of declining home values. (You don't want to be faced with having to sell your home and owing more than it's worth.)

Given the loans you already have, you should be able to pay off $39,500 of your student loans with home equity debt. Then you could consolidate the remaining $29,500.

Dear Liz: My sister, a 29-year-old single mother of three children, has committed identity theft by taking out loans and credit cards using my mother's name. Her total debt is $30,000.

My parents are torn about what to do. I feel that she needs to be turned in so that they don't have to pay this debt themselves, using their retirement money to do so.

They are concerned for the kids, but I feel that she needs to learn a lesson and that the family can take care of the kids. My sister suffers from bipolar disorder. I'm not sure what she would do if my parents turn her in.

Answer: If your mother lives in California or one of the other states that allows credit freezes, she should put one in place immediately – as should you and the rest of your family.

A credit freeze prevents anyone from opening credit accounts in your name, and is a much stronger protection than the fraud alerts that credit bureaus typically recommend.

A family member who has stolen one person's identity could well steal the identities of others, because she probably knows the essential details – names, Social Security numbers, dates of birth and addresses – that would allow her to commit more of these crimes.

You seem to understand that to avoid responsibility for this debt, your mother almost certainly will need to file a police report, which means your sister could be prosecuted and sent to jail.

Occasionally lenders will let a victim off the hook without such a report if the thief admits the deed, commits to making payments and has the means to do so, said Linda Foley. She is co-founder of San Diego's Identity Theft Resource Center, which helps victims of this kind of fraud.

The family typically needs to hire a lawyer to conduct such negotiations and draw up the necessary paperwork, Foley said.

It doesn't sound like your sister's a great candidate for this kind of deal, however, unless she's gotten her act more together than your letter would indicate.

Your best move now, after recommending credit freezes for your family members, is to point your parents to the Identity Theft Resource Center, which has resources for victims of familial identity theft. Then back off. This is your parents' decision to make.

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Liz Pulliam Weston is author of the books "Your Credit Score" and "Deal with Your Debt," both published by Prentice Hall. She regrets that she cannot respond personally to inquiries but questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or visit her website, www.lizweston.com. Distributed by No More Red Inc.« click here for more Liz Pulliam Weston