Should I take out a personal loan to pay off student debt?

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Using a personal loan to pay off student debt could cost you more than refinancing, thanks to higher interest rates and shorter repayment terms. (iStock)

A personal loan is a form of installment credit with quick funding to your bank account, which you can use for a variety of reasons. But you can’t always use a personal loan for educational expenses, and they typically come with higher interest rates than student loans — so it might be a better idea to refinance your student loans instead. 

Here’s everything you need to know about using a personal loan to pay off student debt.

Using a personal loan to pay off student loans

Taking out a personal loan to pay off student loans can be appealing — with online lenders, you can submit an application online, get an approval decision instantly and receive funding quickly. (Keep in mind, when personal loans are used for education-related expenses, federal law requires a wait period of three business days between loan acceptance and funding.)

With Credible, you can easily compare personal loan rates from various lenders in minutes.

Also, many lenders won’t allow you to use personal loans to repay student debt. For example, LightStream, a Credible partner, explicitly states that loans can’t be used for education funding. Similarly, Prosper (another Credible partner) doesn’t provide loans for student expenses because of student loan regulations that conflict with its platform. If you opt for a personal loan, be sure to verify that the lender you choose will allow you to use the money to repay student loans.

You can use a personal loan for living expenses while you’re going to school, but it’s an expensive option. You’ll likely get a lower interest rate and higher loan amounts by refinancing your student loans, especially if you have a strong credit score.

The difference between personal loans and student loan refinancing

Here’s a closer look at the difference between personal loans and student loan refinancing.

Personal loans

The following information is based on data from 17 Credible partner lenders. Keep in mind that these details vary by lender and interest rates can change at any time.

  • Loan amounts — Up to $100,000
  • Loan terms — One to seven years
  • Potential fees — Origination, prepayment, late, dishonored payment 
  • Interest rates (fixed) — 2.49% to 35.99% 

Student loan refinancing

The following information is based on data from 13 Credible partner lenders. Keep in mind that these details vary by lender and interest rates can change at any time.

  • Loan amounts — Up to $750,000 or the full balance of your education loans
  • Loan terms — Five to 20 years
  • Potential fees — Varies by lender
  • Interest rates (fixed) — 2.15% to 4.54% 

Advantages of using a personal loan to repay student loans

While getting a personal loan to pay off student loans isn’t ideal, this strategy comes with several benefits.

  • Release a cosigner — Once you pay off your outstanding student loan balance with a personal loan, the student loan is closed, and any cosigners on the loan are no longer attached to the account.
  • Qualify even if you didn’t graduate — Lenders who offer student loan refinancing often require applicants to graduate college to qualify. With a personal loan, completing your degree isn’t a requirement. 
  • Receive loan funding quickly — Unlike student loan refinancing, where the underwriting process can take a few days to several weeks, personal loan lenders disburse funds quickly. Funding times vary by lender, but your loan may be approved and funded within three business days.
  • Discharge debt in bankruptcy — Discharging federal and private student loans in bankruptcy is next to impossible. That’s because debtors must prove that repaying the loan would cause "undue hardship." As it stands, there’s no single test to measure undue hardship, so the waters are murky. Personal loans don’t have to meet this standard, making them easier to discharge should you ever have to file for bankruptcy. Keep in mind, bankruptcy should be a last resort, as it can negatively impact your credit for years.

Credible lets you compare personal loan rates from multiple lenders to find the right one for you.

Disadvantages of using a personal loan to repay student loans

All financial products have downsides that you must weigh against their advantages. Here are some disadvantages of personal loans.

  • Paying off student debt is typically prohibited — Most personal loan lenders will decline your loan application if they know you intend to use the loan to pay off your student debt. If you’re unsure whether a lender allows borrowers to use funds to repay student debts, ask about their policy. It’s better to be upfront about what you want funding for, rather than risk breaching the lender’s terms of use.
  • Fewer repayment protections than federal student loans — If you pay off your federal student loans with a private student loan or personal loan, you’ll lose federal protections and benefits. For example, you’ll no longer qualify for federal forbearance, income-driven repayment plans, grace periods for repayment, Public Service Loan Forgiveness and more. Private loan lenders may also offer protections, but they’re generally not as flexible or generous as their federal counterparts.
  • Higher interest rates — Personal loans aren’t federally subsidized and can be discharged in bankruptcy, so lenders charge higher interest rates to safeguard against the risk you may default on the loan.
  • Less time to repay the loan — The standard personal loan repayment term is typically between 12 and 60 months. That’s a much shorter time frame than a federal student loan — repayment terms are generally 10 years, or between 10 and 30 years for student consolidation loans. A longer repayment term facilitates lower payments by stretching the payments out over a more extended period.

Should I use a personal loan to pay off student loans?

Taking out a personal loan to pay off student debt might sound like a good idea in theory, but high interest rates and restrictions on what you can use the funds for may make it difficult. 

It’s not impossible, though. If you have student loans but you didn’t receive your degree, or if you need to release a cosigner on your student loans, then taking out a personal loan might make sense.

Why refinancing your student loans might be a better plan

Refinancing your student loans means that you take out a new loan to pay off your existing student debt. Through refinancing or student loan consolidation, you could get a lower interest rate or a lower monthly payment with an extended repayment term.

Refinancing student loans may be a better option for you if you want to take advantage of:

  • Lower interest rates — You’ll generally find much lower interest rates when you refinance or consolidate your student loans instead of getting a personal loan to pay off your student debt. The lower your interest rate, the more you’ll save over the life of the loan.
  • Longer repayment terms —  The repayment terms for student loan refinancing are typically between five and 20 years. By contrast, the longest repayment term you’ll see with personal loans is usually 60 months. If student loans payments are taking up a large portion of your budget, refinancing your student loans and spreading your payments over a longer term could make your loan more manageable.
  • Tax benefits — When you refinance qualified student loans, you’re still able to claim the student loan interest deduction. At tax time, you can subtract up to $2,500 in student loan interest payments from your income, which reduces the adjusted gross income you’re taxed on. Just be sure to find out if you’re eligible ahead of time.

How to pay off your student loans quicker

Paying off your student loan requires time, dedication and a healthy dose of patience. Thankfully, there are ways to cut down the time it takes to pay off your student loans and save money.

Start early with a part-time job in college

By working part-time in college, you may be able to make student loan payments while you’re still in school or during your grace period. Even though you’re not required to make payments during school, it’s always a good idea to pay the interest your loan accrues each month if you can. That will make your principal balance lower when you enter your repayment period.

Create a repayment plan

If you have a federal loan, you’ll be automatically enrolled in the Standard Repayment Plan, which comes with a 10-year term. But the government offers a host of repayment plans, which typically come with longer repayment terms. While longer repayment terms lower your monthly payment, they also take longer to repay, and you’ll likely pay more in interest over the course of the loan. If you can swing the higher payments, stick with a repayment plan with a shorter repayment period. Most importantly, make your payments on time every month.

Establish a college repayment fund

One of the best tools to stay on budget and make payments on time is automation. Consider setting up automatic transfers to a savings account dedicated to student loan payments. Transferring this money to an account separate from your regular checking account will reduce the likelihood you’ll use it for other nonessential purchases. 

Make additional monthly payments

If you have room in your budget, making extra payments can reduce your principal loan balance faster and lower the interest that accrues on your account. 

Remember, when you submit an extra payment, your loan servicer may apply it toward the next month’s payment. Unfortunately, that won’t accelerate your time frame to pay off your student loan. Ask your loan servicer beforehand to apply your extra payment to your principal balance and not toward the next month’s payment.

Stick to a budget

Adhering to a budget and tracking your spending habits can help you repay your loan on time and even make extra payments. Look for opportunities to reduce spending, such as canceling apps and streaming services you no longer use or cutting your monthly dining and entertainment purchases. The more room you can create in your budget, the more money you can use to pay off your student loans faster.

Apply for student loan forgiveness (if you have federal loans)

Federal student loan forgiveness programs can reduce your student debt. Eligibility requirements vary depending on the program, but these programs offer relief for people in certain occupations. 

For example, teachers may be eligible for the Teacher Loan Forgiveness Program, while government and nonprofit employees may qualify for Public Service Loan Forgiveness. Income-driven repayment programs are available to borrowers whose loans make up a large portion of their annual income, and any remaining balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment term.

If you’ve opted for a personal loan, compare rates from lenders in minutes with Credible.