Student Loans vs. Personal Loans: Which One’s Best for You?

student loans vs personal loans

Are you looking for new credit or interested in refinancing existing debts? Then you’re probably weighing the pros and cons of student loans vs. personal loans.

When you’re getting into debt, understanding your options ensures you are equipped to pick the best one for your situation. And while these two kinds of debt share some similarities, they also have some key differences.

Choosing a private student loan vs. personal loan ultimately affects how you can use the funds, the interest rate you’ll get, and more.

Here’s what you need to know about how private student loans and personal loans are similar — and how they’re not.

Common aspects of student loans vs personal loans

A private student loan and a personal loan have some key features in common.

Unlike federal student loans which are funded by the government, both personal loans and private student loans are provided by private lenders.

Personal and private student loans are offered by various institutions. For example, online loan providers like SoFi, banks, and credit unions.

Federal student loans do not carry a credit requirement. But both a private student loan and a personal loan usually require a credit check as part of the loan application and approval process.

Additionally, both personal loans and private student loans are unsecured debt. This means that any funds loaned through either product are not guaranteed by collateral.

Private student loans and personal loans are also installment loans. With both loan types, money is funded out upfront in a lump sum and then repaid over a set term with monthly payments. Or, installments.

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Personal loan vs student loan: 5 key differences

Personal loans and private student loans are two forms of credit that are comparable in structure, but they aren’t interchangeable. There are some important and key differences borrowers should be aware of.

1. What each loan can be used to pay for

The most significant difference is the kinds of expenses each loan can be used to cover.

A personal loan can actually be used to pay for almost anything. Unlike a mortgage, car loan, or even a student loan, the terms of the loan are not tied to its intended use.

This makes personal loans a popular financing option for a range of purchases. From emergency expenses to major life events like moving or a wedding, to consolidating debts.

Personal loans from lenders can be used for pretty much anything.

When a borrower takes out a private student loan, however, they are required by law to only use those funds to pay for their education or education-related expenses.

This actually applies to a wide range of costs. For example, childcare for dependents, a new laptop for schoolwork, even your rent or phone bill.

You can also use a new private student loan to consolidate or refinance existing student debts.

2. How funds are disbursed

Another key difference is how lenders disburse funds borrowed through private student loans vs. personal loans.

With a personal loan, the funds are deposited into the borrower’s account after the loan has been approved. And, the loan agreement finalized. The borrower is then free to use that money for anything they want.

Private student loans, however, are usually not disbursed to the borrowers.

Instead, for enrolled students, the funds are disbursed first to their school’s financial aid office. The financial aid office then utilizes the money directly to any outstanding tuition costs or other fees.

Once that happens, the student can then claim any remaining funds to use for out-of-pocket educational expenses.

Private student loans from lenders like Earnest can also be used by borrowers who have left school to refinance student debts.

Through this process, you can apply with a lender that offers student loan refinancing to get a new loan up to the total amount required to fully pay off existing student debts.

Upon approval, the refinancing lender will send payments directly to the servicers of the existing debt to pay off the loans in full, on behalf of the borrower.

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3. Whether the debt is dischargeable

Borrowers should also be aware that personal loans and private student loans are handled differently in a bankruptcy.

Personal loans are considered consumer debts and are dischargeable through bankruptcy.

So if a borrower cannot afford their debts and needs to file for bankruptcy, personal loans can be forgiven or wiped out through this process.

Private student loans, on the other hand, are much harder to discharge than other consumer debts.

Typically, courts will deny requests to discharge either federal or private student loans in bankruptcy. The filer must appeal the denial and prove undue hardship to discharge student loans in bankruptcy.

4. What kind of interest rates you can get

Private student loans will usually carry much lower interest rates than personal loans.

See for yourself by comparing different private student loans and personal loans in our marketplace.

Because of this, if you plan to use a personal loan to pay for educational expenses or refinance student debt, a private student loan from a lender like College Ave is probably the better choice.

What’s more, a private student loan is more likely to be a cost-effective product over personal loans, thanks to lower interest rates.

Additionally, private student loans and personal loans might have different types of interest rates. A variable rate, for instance, is more commonly offered on private student loans. Whereas personal loans usually have fixed rates.

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5. Whether you can write off interest payments

Lastly, private student loans provide the opportunity to write off interest payments on student debt to reduce taxable income by as much a $2,500. This tax benefit can help offset a borrower’s tax burden.

But the loan has to meet certain eligibility requirements for the student loan interest deduction to apply.

And while most private student loans will meet those requirements, personal loans usually won’t.

Essentially, when you understand the differences between private student loans and personal loans, you can see which one might be better for your situation.

If you need to finance educational expenses or refinance student debts, a private student loan is more likely to give you the best deal.

But if you’re looking for more control to decide how and where to use loan funds, a personal loan might be the better option.

Interested in refinancing student loans?

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