When you’re in student loan repayment mode, it’s likely you’re hungry for solutions – anything to make paying off debt easier. One lesser-known option is using a personal loan to pay off the remaining debt.
Personal loans are typically unsecured loans. This means they aren’t backed by any collateral, such as a home or car.
The beauty of personal loans is that unlike with a mortgage, car loan, or even student loan, you can use the money how you like. It can fund a home renovation or even help consolidate credit card debt, as most personal loans offer better interest rates than credit cards.
But should you use a personal loan to pay off student loans? Here’s what you need to know if you’re considering getting a personal loan to pay off student loan debt.
Using a personal loan to pay off a student loan: Pros and cons
There are some options you should weigh before deciding to use a personal loan to pay off student loans. Overall, using a personal loan to refinance student debt can cause some issues.
Pros of paying off student loans with a personal loan
If you want to pursue a personal loan to pay off your student loans, consider these advantages:
- You can consolidate your student loans and have one monthly payment.
- You will have a fixed interest rate and a fixed repayment term, which could be beneficial.
- By paying off your student loans, you can release your cosigner (if you have one) from your loans.
However, using a personal loan to pay off student loan debt isn’t the only way to get these benefits.
Cons of paying off student loans with a personal loan
Personal loan interest is not tax-deductible
You will not be eligible to deduct student loan interest if you pay off your loans with a personal loan. Your new debt will be a personal loan, which is classified differently than student debt and has no tax benefits.
Currently, student loan borrowers can deduct up to $2,500 in student loan interest with a modified adjusted gross income of less than $80,000.
You forfeit federal student loan protections
The process of using a personal loan to pay off student loan debt is not reversible. You can’t go back to having federal student loans – you forfeit your borrower protections such as income-driven plans and loan forgiveness.
Jamie Block, a certified financial planner at Wealth Design Retirement Services, said, “The federal student loan program offers various repayment schedules that provide flexibility personal loans cannot offer. Federal loans offer payment plans based on income, allows deferment if the borrower returns to college, and debt forgiveness under certain circumstances. Unfortunately, personal loans are not as generous.”
As Block pointed out, if you are having trouble making payments on federal student loans, you have several options to lower or pause payments. No such options exist for personal loan borrowers experiencing financial hardship.
Personal loan rates are usually higher than student loan rates
Student loan rates are typically lower than those offered on personal loans. For instance, student loan refinancing rates start around 1.87%. By comparison, the lowest personal loan rates start around 2.49%. Those are just the lowest rates, however. More typical rates for student loan refinancing are usually around 4-6%, while average personal loan rates for borrowers with good credit are around 15% – or higher.
Even if a personal loan rate is lower than your current student loan rate, you might save even more by refinancing with new private student loans, instead. You’re likely to get a much better deal refinancing a student loan with a new student loan, than trying to replace it with a personal loan.
It might be tricky to get a personal loan for student debt
One thing to keep in mind: not all lenders will allow you to pay off student loans with your personal loan. Before you apply, be sure to check and make sure the lender issuing the personal loan allows you to use the funds to pay student loan debt.
Note that you will also need to qualify for a personal loan. Personal loans usually require good credit or better, as well as good income and steady employment. You’ll have to meet all underwriting requirements to get a personal loan and qualify for the lowest personal loan rates.
Alternatives to using a personal loan to pay off student loans
If you’re not sure about using a personal loan to pay off student loan debt, there are other options.
Federal student loan repayment plans and options
If you have federal student loans, you have a variety of repayment options available. You can go with the Standard Repayment Plan and pay off your student loans in 10 years.
You can apply for an income-driven repayment plan if your income doesn’t support your student loan payments. These plans match your monthly payments to your income and are specifically designed to ensure they are affordable. Switching to an income-driven repayment plan can lower payments and help free up cash for other necessities.
Public Service Loan Forgiveness is also an option if you work in the public sector. If you use a personal loan to pay off federal student debt, you would give up those federal protections and flexibility. Personal loans have fixed repayment terms and don’t have the same repayment options.
Consider refinancing before using a personal loan for student debt
If you’re dreaming of paying off debt quickly and saving money on interest, consider refinancing your student loans into a new student loan before turning to a personal loan.
Student loan refinancing companies help borrowers consolidate their student loans and save money on interest through a lower interest rate. Depending on your credit, you could shave off a few percentage points in interest, resulting in big savings.
In addition, some refinancing companies such as SoFi and CommonBond have unemployment protection, which allows you to put your payments on pause while looking for a job.
Using a personal loan to pay off student debt won’t afford you these types of benefits specific to student loan borrowers. Plus, you might not get a better interest rate through a personal loan.
If you’re thinking about using a personal loan to pay off student debt, consider all of your other options first and understand what benefits you are giving up. If you do pursue a personal loan, find a reputable lender and read the fine print to make sure you’re not agreeing to terms that will interfere with your financial success later on down the road.
Elyssa Kirkham contributed to this article.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 6.66%1||Undergrad & Graduate|
|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.09%3||Undergrad & Graduate|
|1.99% – 5.64%4||Undergrad & Graduate|
|1.98% – 8.55%5||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 10/15/2020 student loan refinancing rates range from 1.98% APR to 8.55% Variable APR with AutoPay and 2.99% APR to 8.77% Fixed APR with AutoPay.