Refinance to Pay Off Student Loans Without Cash-Out Pricing

If you’ve got federal student loans, you’ve probably heard that repayment is about to change — again. Starting July 1, 2026, the SAVE plan officially ends, two brand-new repayment plans launch, and millions of borrowers will be reshuffled into new monthly payment amounts. That reshuffle doesn’t just affect your loan servicer statement. It flows directly into how a mortgage lender calculates your debt-to-income ratio (DTI) — which affects how much home you qualify for.

There’s a less-talked-about Fannie Mae feature worth knowing about in this moment: if you use a refinance to pay off a student loan in full, Fannie Mae will waive the cash-out refinance fee (LLPA) that normally applies, and price the transaction more like a rate-and-term refinance instead. For homeowners sitting on meaningful equity, that can mean a noticeably better rate than a standard “pull cash out to pay off debt” refinance — and it sidesteps the new-repayment-plan guessing game entirely, because the loan is simply gone.

This post covers how that feature works today, what’s changing with repayment plans on July 1, and how to think through whether eliminating the loan now makes more sense than riding out the new system. For the back-and-forth on how student loans get counted in your DTI in the first place, see my guide on student loans and qualifying for a mortgage in Washington State — this post picks up from there.

What’s Changing with Student Loan Repayment on July 1, 2026

This round of changes comes from the Working Families Tax Cuts Act (also referred to as the One Big Beautiful Bill Act), and it’s a genuine overhaul — not a minor tweak. Here’s the short version:

• The SAVE plan ends. Roughly 7.5 million borrowers currently on SAVE (many in administrative forbearance with $0 payments showing) will get notices starting July 1 and have 90 days to choose a new plan. Anyone who doesn’t will be auto-enrolled in the Standard Plan or the new Tiered Standard Plan. (As of this writing, a last-minute lawsuit is seeking to delay this shutdown specifically — similar attempts haven’t succeeded so far, but it’s worth confirming the current status if you’re reading this after July 1.)
• Two new plans launch. The Repayment Assistance Plan (RAP) is the new income-driven option — payments run 1% to 10% of your adjusted gross income (your income before certain tax deductions), with a $10/month minimum and a $50/month reduction per dependent. Forgiveness, if any balance remains, happens after 30 years — longer than older income-driven plans. The Tiered Standard Plan replaces the old fixed plans with terms of 10, 15, 20, or 25 years based on total balance.
• A couple of older income-driven plans are being retired by mid-2028. If you’re already on one, you can stay for now, but you’ll eventually need to switch to something else. One other older plan sticks around longer, but only covers loans you took out before July 1, 2026.
• New loans disbursed on or after July 1, 2026 are limited to RAP or the Tiered Standard Plan only — and once you take out a new loan under the new rules, all your federal loans (even older ones) follow the new rules.

The bottom line for mortgage qualifying: if you’re currently on SAVE forbearance, or on one of the older income-driven plans, your monthly student loan payment is about to be reset to something different — possibly higher, possibly lower — and you don’t get to pick the timeline. That reset is exactly the kind of thing that can change your qualifying picture for a purchase or refinance without you doing anything at all.

How That Reset Hits Your Mortgage Qualifying

As I cover in more detail in my student loan DTI guide, Fannie Mae requires lenders to use the actual documented monthly payment from your credit report — and if that payment shows as $0 (which is common for SAVE borrowers in forbearance), the lender falls back to 1% of the outstanding balance.

That 1% fallback has been a known, stable number for SAVE borrowers with deferred or $0 payments. Once those borrowers are pushed into RAP or the Tiered Standard Plan, an actual payment will start showing up on the credit report — and a lender has to use that documented number instead of the 1% estimate. Depending on your income, dependents, and balance, RAP’s 1–10% of AGI formula could land above or below that old 1% fallback. There’s no way to know which way it goes for your specific situation without running the numbers.

If you’re planning to buy or refinance in the next year, this is worth getting ahead of rather than finding out about mid-transaction.

Fannie Mae’s Student Loan Cash-Out Refinance: Pay It Off, Skip the Cash-Out Pricing

This is where Fannie Mae’s student loan cash-out refinance feature comes in. Normally, when you refinance and pull cash out to pay off any kind of debt, Fannie Mae charges a fee based on your credit score and loan-to-value ratio — and that fee is usually the most expensive pricing hit a conventional loan can carry. Lenders typically build that cost into your rate rather than charging it as cash at closing, so you feel it as a higher interest rate for the life of the loan.

If the refinance is specifically structured to pay off a student loan and it meets Fannie Mae’s requirements, that fee is waived entirely — the loan gets priced the way a rate-and-term refinance would be priced instead. That’s a meaningfully different rate outcome than a standard debt-consolidation cash-out refi, particularly for borrowers with lower credit scores or higher loan-to-value ratios, where the standard cash-out fee tends to be steepest.

What You Actually Need to Qualify

Strip away the underwriting language, and here’s what this actually requires:

• The student loan has to be paid off completely — not paid down. If you have $40,000 left on the loan, the refinance needs to cover all $40,000, not a partial chunk of it.
• You have to be the one actually responsible for the loan. If you (or a co-borrower on the new mortgage) are personally obligated on the loan, it qualifies — even if someone else has been helping you make payments. A loan that belongs entirely to someone else, like one you co-signed for a child, doesn’t qualify.
• The payoff money goes straight to your loan servicer at closing — you don’t receive that portion as cash in hand.
• You still need to meet the same equity requirements as any cash-out refinance. What changes is the fee, not how much equity you need to leave in the home — generally around 20% or more, depending on your credit score.
• You can roll your existing mortgage into the same refinance, along with the student loan payoff — but generally not other debts like credit cards or a personal loan in this same transaction. (There are narrow exceptions, like a second mortgage that was used to help purchase the home.)
• You can get a small amount of cash back at closing — up to 1% of your new loan amount or $2,000, whichever is greater — but this isn’t a vehicle for pulling out a large lump sum.
• Closing costs and prepaid items can usually be rolled into the loan rather than paid out of pocket, and the same goes for property taxes if an escrow account is set up.

Source: Fannie Mae Selling Guide, B2-1.3-03, Student Loan Cash-Out Refinances.

As your loan officer, I can confirm this isn’t an area where extra requirements get layered on top of Fannie Mae’s own guidelines — including the credit score minimums, which follow Fannie Mae’s standard thresholds rather than a higher in-house floor.

Is This a Fannie Mae-Only Thing?

Right now, yes — this particular fee waiver is specific to Fannie Mae. Freddie Mac has a similar-sounding exception, but it’s built for different situations (like buying out a co-owner after a divorce), not student loan payoff — so a Freddie Mac loan used to pay off a student loan is priced under standard cash-out rules today. FHA, VA, and USDA loans are priced differently in general and don’t have an equivalent fee to waive in the first place. If you have a choice of loan program for your refinance, which one your loan is sold to can matter here.

Don’t Forget the Conforming Loan Limits

Since this fee waiver is a Fannie Mae feature, your new loan amount — existing mortgage balance, student loan payoff, and any closing costs you roll in — has to stay within Fannie Mae’s conforming loan limits for the county your home is in. Go above that ceiling and the loan is no longer conforming, which means this specific waiver isn’t on the table (a jumbo or non-conforming loan is priced differently).

2026 conforming loan limit (1-unit, most WA counties): $832,750

2026 conforming high-balance limit for King, Pierce & Snohomish Counties (1-unit): $1,063,750

Read: 2026 Conforming Loan Limits for Homes in Washington State for the full breakdown, including 2-4 unit properties.

If your student loan payoff would push your new loan amount close to or past these thresholds, that’s worth flagging before we run your numbers — it can change which loan program makes sense.

Is This the Right Move for You Right Now?

This tends to make the most sense if:

• You have enough equity in your home that paying off the loan in full still leaves you within the usual limits for a cash-out refinance — generally around 20% equity remaining, give or take, depending on your credit score.
• You (or a co-borrower) are personally obligated on the student loan, and you’d genuinely rather have it gone than manage it through a new repayment plan.
• You’re planning to buy or refinance soon and want a predictable DTI rather than one that depends on which repayment plan you land in after July 1.
• The math — new mortgage rate and payment, weighed against the student loan payment you’d otherwise be carrying — actually pencils out in your favor over the time horizon you care about.

It’s worth being honest about the other side, too: rolling a student loan into a 30-year mortgage means paying it off on a 30-year timeline instead of 10, 20, or 30 years on its own terms — and if you’d land on RAP with a low payment based on your income and dependents, riding out the new plan might genuinely cost you less over time than refinancing. This isn’t a decision to make on autopilot in either direction. I’d rather run your specific numbers both ways with you than tell you which way to go in a blog post.

What You’ll Need to Have Available

• Current student loan servicer statement(s) or a payoff quote
• Whatever notice you’ve received (or expect) about your repayment plan options after July 1
• Recent pay stubs
• Your current mortgage statement
• A ballpark sense of your home’s value — you can pull one up anytime with Homebot

FAQ

Does this feature let me pay off more than one student loan?

Yes — you can pay off more than one student loan as long as each one is paid in full and at least one borrower on the mortgage is obligated on the loans being paid off.

What if my student loan currently shows a $0 payment because of SAVE forbearance?

A $0 reported payment doesn’t affect your eligibility for this refinance feature — the requirement is about paying the loan off in full, not about what your current payment shows. It does mean your current DTI calculation is using the 1% balance fallback, which is worth factoring into your decision either way.

Can I use this to pay off a private student loan?

Fannie Mae’s guidelines don’t distinguish between federal and private student loans for this feature — the requirement is that the loan is paid in full and at least one borrower is personally obligated on it.

Can I include other debts, like credit cards or a car loan, along with my student loans?

No. Fannie Mae’s student loan cash-out refinance feature is built specifically for student loan debt — that’s the whole reason it gets the fee waiver instead of standard cash-out pricing. Credit cards, auto loans, and personal lines of credit can’t be rolled into the new loan under this program. If you have other debt you’d like to consolidate too, that portion would be treated as a standard cash-out refinance, which comes with different pricing — so it’s worth running both scenarios to see what actually makes sense for you.

Is there a minimum credit score for this program?

No. Fannie Mae no longer sets a minimum credit score for conventional loan approval — including for this student loan cash-out refinance feature. Instead, Fannie Mae’s automated underwriting system (DU) evaluates your full financial picture, weighing factors like debt-to-income ratio, reserves, and down payment alongside your credit profile. A lower score doesn’t rule you out the way it once did, especially if the rest of your application is strong.

Read: Turned Down for a Mortgage Because of Credit Scores? New Guidelines May Help You!

What if my student loan payoff would push me over the conforming loan limit?

Then this particular fee waiver isn’t available for the full loan amount, since it’s a Fannie Mae conforming loan feature. For 2026, the conforming loan limit is $832,750 for most Washington counties, and $1,063,750 for King, Pierce & Snohomish Counties (1-unit homes). If your new loan amount — mortgage balance, student loans, and closing costs — would land above that number, let’s talk through the alternatives, which might include a jumbo loan or reworking how much of the student loan debt gets paid off through the refinance.

Read: Student Loans and Qualifying for a Mortgage in Washington State

Have student loans and trying to figure out the smartest move before the July 1 changes hit? I’ve been helping Washington State homeowners navigate exactly this kind of decision for over 25 years — let’s look at your specific numbers.

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Rhonda Porter · Licensed Mortgage Advisor · NMLS #121324 · Washington State