5 Reasons Grad Students Should Avoid Personal Loans for School

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If you’re continuing your education beyond undergraduate studies, you’re going to need more money to cover the cost. If you don’t have anything saved up for graduate school, you might look into personal loans.

If you’ve exhausted all your other financial options, getting a personal loan can be helpful to fill any funding gaps you have. But it isn’t the best option for you. Here are a few reasons to avoid personal loans for grad students.

5 reasons to avoid personal loans for grad students

Personal loans are widely available. You can get a personal loan from a bank or private lender and use the money for more than just tuition and books. While that might sound like a quick and easy option, there are a few reasons why personal loans shouldn’t be your first choice.

1. High interest rates

Personal loans have some of the highest interest rates among student loan options.

Federal student loans for grad students have interest rates of 6.00% and 7.00% for loans disbursed before July 1, 2018, while personal loan interest rates vary greatly depending on your creditworthiness, ranging in average from 10.00% to 28.00%.

Federal student loans have fixed rates, while personal loans can have fixed or variable interest rates.

Fixed interest means the rate doesn’t change for the duration of a loan term, while variable interest can fluctuate depending on market conditions. The higher the interest rate, the more money you owe in the long term. It’s best to find a loan with the lowest possible interest rates.

While interest paid on federal loans is tax-deductible, it’s not the same for private student loans or personal loans. This means you can’t claim your interest as a deduction on your taxes. Doing so reduces the money you owe the government or helps you get more money back in your tax refund.

2. Short loan terms

Repayment terms are how long it takes you to pay back your loan.

For personal loans, repayment terms are typically shorter. They vary depending on the lender but can be as short as two years or as long as seven years. This is short considering federal student loan terms are typically 10 years.

That’s important because the longer the repayment term, the lower your monthly payments can be. Keep in mind, though, that lower monthly payments might mean you’re paying more in interest over the life of the loan.

3. Less flexible repayment options

You typically don’t have to start paying back federal student loans until six months after graduation or until you’ve dropped below half-time enrollment.

This can help you concentrate on school and other work without having to manage your loan payments. But personal loans require you to start paying back immediately, regardless of your enrollment status.

If you’re having trouble making payments, federal loans offer a slew of repayment assistance, including income-driven repayment plans, deferment and forbearance, and loan forgiveness programs. That’s not the case with personal loans, which don’t offer these.

4. Credit check required

Credit checks are done on federal graduate loans to make sure you don’t have any delinquencies, debt in collections, foreclosures, repossessions, or tax liens, among other things, according to Investopedia.

If you have a low credit score from being credit invisible, you’re still likely to receive a Direct PLUS Loan. You’ll also get the same repayment flexibility options as with undergraduate loans.

For personal loans, though, credit checks are required. A minimum credit score that shows you’re in good standing is also required for most personal loan lenders.

5. Must have a cosigner

While Direct PLUS Loans don’t require a cosigner, you might have to get one if your credit check shows some issues.

If you’re having trouble getting approved, you can also get an endorser who doesn’t have an adverse credit history. Keep in mind that they become liable for paying your loans if you can’t.

For personal loans, cosigners are a must if you don’t meet the minimum credit score requirements determined by your lender. It might be difficult for you to find someone with a solid credit history who agrees to be your cosigner.

Personal loans should be a last resort

If you’ve exhausted all other resources for free money, such as grants and scholarships, you can turn to loans to fund your graduate education.

Fill out the Free Application for Federal Student Aid, also known as FAFSA, and try federal student loans first since they tend to have lower interest rates and friendlier repayment terms. Next, shop around for private student loans, but research all your options before deciding.

Personal loans for grad students should be one of your last resorts to fund college. With higher interest rates, shorter repayment terms, and fewer options when there are repayment difficulties, personal loans aren’t the best choice for grad students.

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Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

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  1. Fixed rates from 5.99% APR to 18.07% APR (with AutoPay). Variable rates from 5.74% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of October 10, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.74% APR assumes current 1-month LIBOR rate of 2.05% plus 3.08% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
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  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
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  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
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* Personal loans made through Upgrade feature APRs of 5.99%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

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