Should You Use a Personal Loan to Pay Off Student Loans?

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Updated on Monday, October 8, 2018

Repaying student loans can be a long and stressful process, and an opportunity to take a shortcut can seem appealing. One option that interests some borrowers is to take out a personal loan and use the money to pay off your student debt.

By swapping your student loans with a personal loan, you might be able to change your monthly payment amount, consolidate your bills and save money by lowering your interest rate. Those are all potentially helpful benefits, but a personal loan isn’t likely the best way to go about it.

Learn more, including the pros and cons of using a personal loan to pay off student loans, along with other options that could help you manage and pay off your student loans.

Can you use a personal loan to repay student loans?

If you get approved for a personal loan, whether or not you can use the money to pay off your student loans depends on the agreement you have with your lender. Some lenders explicitly say you can’t use their personal loans to pay for educational expenses or refinance student loans.

However, if your loan contract doesn’t have these provisions, you may be able to use the funds to pay off some or all of your student loans. You’ll then need to repay your personal loan based on your new loan terms.

4 benefits of using a personal loan to pay off your student debt

Many of the potential benefits borrowers could reap by using a personal loan to pay off student loan can be achieved by using any type of lower-rate loan to pay off your student loans. If you do decide to use the personal loan option, compare your rates and terms from multiple lenders to ensure you get your best deal.

1. You might have fewer loan payments

If you use a personal loan to pay off more than one student loan, you’ll have fewer loans to manage each month. Consolidating your debt can make it easier to track your bills and stay on top of your finances. However, if you use automated payments to pay your student loans (which may come with an interest rate discount) then managing payments may not have been especially difficult before.

2. You could lower your interest rate

You may be able to qualify for a personal loan that has a lower interest rate than your student loan, which can help you save money. However, there are also companies that offer student loan refinancing, and their rates often start lower than personal loan rates.

3. You can release a cosigner

Borrowers with private student loans may have a cosigner who helped them qualify for the loan or get a lower interest rate. The cosigner will no longer be tied to the debt once you repay the student loan with your personal loan. Assuming you qualified for the personal loan without a cosigner, the new debt will be entirely yours to repay.

4. It may be easier to discharge the debt in bankruptcy

It can be especially difficult to get student loans discharged in bankruptcy. A personal loan might not be treated as an educational loan during the bankruptcy, which could make it easier to get the debt discharged.

However, if you paid off your student loans using a personal loan with the intention of then declaring bankruptcy, that could be considered fraud and the debt may not be dischargeable.

6 cons of using a personal loan to pay off your student debt

The cons stack up higher than the pros in this case. Some people may benefit from using a personal loan to pay off student loans, but for most borrowers, it probably isn’t the best idea.

1. Many of the pros could be achieved with student loan refinancing

You should consider all your funding options if you want to pay off your student loans by getting a new loan. And if you can qualify for a low-interest personal loan, you may also be able to get approved for student loan refinancing.

You’ll receive many of the same benefits, such as consolidating debts, lowering interest rates and releasing a cosigner if you use a private student loan refinancing lender. Additionally, your new private student loan could still be eligible for some student loan repayment assistance programs and tax benefits, and you may be able to get an even lower interest rate than you could get on a personal loan.

2. Personal loans aren’t eligible for student loan repayment assistance programs

Federal and private student loans may be eligible for a variety of student loan repayment programs. These include employer-based programs that are offered to employees as a benefit and government-funded programs that may be available if you work in a public service or high-need area, including nurses, doctors, volunteers, military members, and attorneys.

These programs often stipulate that they only help repay student loans, so if you transfer your student debt into a personal loan you’ll likely become ineligible.

3. Personal loans aren’t eligible for forgiveness, cancellation and discharge programs

In addition to missing out on assistance programs, if you currently have federal student loans, they may be eligible for federal forgiveness and discharge programs. These include the Public Service Loan Forgiveness program, Perkins loan cancellation or closed school discharge. Private student loans, refinanced student debt, and personal loans aren’t eligible for these programs.

4. Personal loans won’t qualify for the student loan interest tax deduction

The interest you repay on your student loans could qualify you for a tax deduction that can lower your taxable income by up to $2,500. Personal loan interest payments don’t qualify for this deduction.

Eligibility and the deduction amount can depend on your income, tax filing status and whether someone else claims you as a dependent on his or her tax return. You can use one of the IRS’ interactive tax assistant tools to see if you currently qualify for the deduction.

5. Your monthly payments could increase

Personal loan lenders offer a variety of repayment terms, but many likely won’t offer a repayment term of more than five or seven years. This is much shorter than many student loans’ 10- to 20-year terms (or sometimes longer), and as a result, your monthly payment may be much higher.

6. You may have to pay origination fees

Some personal loan lenders charge an origination fee, often a percentage of the amount you borrow. The fee may be taken out before the loan is disbursed. For example, with a 5% fee on a $10,000 personal loan, you’ll receive $9,500 and then have to repay the full $10,000.

The origination fee should be included in the personal loan’s APR, which you can compare with your current student loans’ rates and the potential APR from other lenders.

3 better ways to repay student loans

1. Check out your repayment plan options

If you’re considering refinancing your student loans to lower your monthly payments, look at all your current repayment plan options first. With federal student loans, you may be eligible for a variety of income-driven plans that can lower your monthly payment based on your discretionary income.

If you’re looking to pay off your federal student loans as quickly as possible, you may want to choose the option with the shortest repayment period — the 10-year standard repayment plan. Although your monthly payments may be higher than they’d be on an income-driven plan, you’ll pay off the loan sooner and pay less interest overall.

Private student loans may not have alternative repayment plans to choose from, although some lenders temporarily lower your payment amount, interest rate or let you stop making payments during a financial hardship (such as losing your job). These options can make it easier to manage your loans in the short term but will cost you more money in the long run.

With federal and private student loans, you can always prepay your loan without having to worry about a prepayment penalty.

2. Look for repayment assistance programs

There are a variety of student loan repayment assistance programs (LRAPs) that may give you extra money for your student loans or make direct payments to your loan services.

Student Loan Hero has a list of companies that may offer an LRAP as an employee benefit. MagnifyMoney also has in-depth guides to loan repayment options for nurses and attorneys.

Note: MagnifyMoney and Student Loan Hero are both owned by LendingTree.

3. Consider refinancing your student loans

Once you’ve graduated, built a good credit history and have a steady income, you may qualify for student loan refinancing. Similar to using a personal loan to pay off student loans, student loan refinancing involves using a new student loan to pay off your current student loans.

Refinancing student loans isn’t without its own list of pros and cons. For instance, your new loan will be a private student loan and it won’t be eligible for federal forgiveness, cancellation or discharge programs. You may not want to refinance federal student loans if you think you’ll ever need these benefits or options.

On the other hand, student loan refinancers may offer you lower interest rates, often don’t charge origination fees and have comparable loan terms to current student loans. You can also compare lenders and loan offers before refinancing, as your new private student loan rate, term and benefits can vary depending on which lender you use.

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