Why College Students Shouldn’t Take Out Personal Loans

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Finding money for college can be difficult. Many of us resort to student loans, which explains why Americans owe nearly $1.5 trillion in student loan debt.

But not all loans are created equal. If you’re considering personal loans to fund your college education, you might want to think twice. Here’s why personal loans for undergrad students aren’t the best idea.

3 ways personal loans for undergrad students can hurt you

The cost of college is high. In-state students attending four-year public institutions pay nearly $10,000 a year on average. It’s more for private colleges and universities.

It’s no wonder undergraduates are turning to personal loans to pay for school. But personal loans can do more harm than good.

1. Quick repayment terms

While federal student loans have a standard 10-year repayment plan that doesn’t kick in until six months after you graduate, personal loans have some of the shortest loan terms — six months to seven years, depending on your lender. Then you must start paying back the loan right after you take it out.

For a college student who might not have a lot of time for work between classes and studying, that isn’t ideal. You might not be able to afford payments so soon after borrowing, which could result in missed payments and derogatory marks on your credit report.

2. No repayment help

A quick turnaround isn’t the only drawback to personal loans. If you can’t afford payments, federal student loans have options to help you out, such as deferment and forbearance, income-driven repayment plans, and consolidation.

Personal loans for undergrad students don’t provide the same benefits. But some lenders offer help. For example, Payoff has job loss support and works with you if you can’t afford to make payments.

3. High interest rates

Personal loans can be used for a variety of reasons. But because they’re usually unsecured loans, lenders need to make sure you’re responsible enough to pay them back. That’s why interest rates are higher, typically ranging from about 10.00% to 32.00%.

The interest rates vary depending on your credit score. The higher the credit score, the lower the interest rate. The higher the interest rate, the more money you’ll pay over the life of the loan. You’ll want to do your best to get the lowest possible interest rate.

But federal student loans offer some of the lowest interest rates. Direct Loans for undergrads have an interest rate of 5.05% for loans disbursed on or after July 1, 2018.

Federal rates don’t change depending on your creditworthiness either. Regardless of your credit score and history, the interest rate for federal student loans stays the same.

3 places to look for college money instead

If you’re thinking about getting a personal loan to pay for college, exhaust all your other options first. Here are a few places to look before getting a personal loan.

1. Grants and scholarships

To get as much free money as possible, complete the Free Application for Federal Student Aid (FAFSA). When you get your award letter, you’ll see how much federal aid you’ll get in the form of grants, scholarships, and loans.

Sometimes you’ll need to apply for state-specific grants separately from the FAFSA. Look for ones close to home by browsing for grants by state. This is helpful whether you’re staying in state for college or going out of state and want to see what other places offer.

2. Family and relatives

It really does take a village to raise a child. So you might need to call on your village to help you in a financial pinch.

Talk to your friends and family about gaps in financing your education to see if they can help you out. If it’s a family loan and not a gift, talk about ways to pay the money back either after college or during breaks from school.

Parents and other relatives might be more inclined to help instead of letting you take on a personal loan. Talk to them about your education and career plan. Explain how important their help will be. Sometimes all you need to do is ask.

3. Federal student loans

If you need to borrow money, taking out federal loans should be your first stop. Direct Subsidized Loans are available to students with financial need. They don’t accrue interest while you’re in school.

Direct Unsubsidized Loans are also available to anyone who wants them, but interest starts adding up when you take out the loan, not after you graduate.

Avoid personal loans if you can

Personal loans for undergrad students can be a great help to fill in any funding gaps for school. But they should be your last resort when you’re looking for money.

Exhaust all your free options first, including grants, scholarships, and relatives. Then apply for federal aid.

If you’re still short on cash, consider private student loans. They offer longer terms than personal loans, and since lenders know you’re in school, they’re willing to work with you on repayment terms that are best for you.

If you’re still having trouble paying for school, personal loans can help you in a pinch. But be sure to find ones that offer you the lowest interest rates and best repayment terms. School is important, but you shouldn’t have to worry about paying for a loan while getting your education.

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1 Important Disclosures for College Ave.

CollegeAve Disclosures

College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

(1)All rates shown include the auto-pay discount.  The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.

Information advertised valid as of 11/4/2019. Variable interest rates may increase after consummation.


2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

3 Important Disclosures for Discover.

Discover Disclosures

  1. Students who get at least a 3.0 GPA (or equivalent) qualify for a one-time cash reward on each new Discover undergraduate and graduate student loan. Reward redemption period is limited. Please visit DiscoverStudentLoans.com/Reward for any applicable reward terms and conditions.
  2. View Auto Reward Debit Reward Terms and Conditions at DiscoverStudentLoans.com/AutoDebitReward.
  3. Aggregate loan limits apply.
  4. Lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments. The interest rate ranges represent the lowest interest rate offered on the Discover Undergraduate Loan and highest interest rates offered on Discover student loans, including Undergraduate, Graduate, Health Professions, Law and MBA Loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable Margin percentage. The margin is based on your credit evaluation at the time of application and does not change. For variable interest rate loans, the 3-Month LIBOR is 2.250%% as of October 1, 2019. Discover Student Loans will adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Please visit discover.com/student-loans/interest-rates for more information about interest rates.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.

4 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).

  1.  Rates are as of July 1, 2019 and include auto-pay discount. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment. Variable rates may increase after consummation.

5 Important Disclosures for Citizens.

Citizens Disclosures

Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of December 1, 2019, the one-month LIBOR rate is 1.70%. Variable interest rates range from 2.80% – 11.06% (2.80% – 10.91% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.

Please Note: International Students are not eligible for the multi-year approval feature.

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2.75% – 10.22%*,2Undergraduate and Graduate

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2.95%
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3.52% – 9.50%4Undergraduate and Graduate

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2.80% – 11.06%5Undergraduate and Graduate

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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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