Can You Use a Personal Loan to Pay Off a Student Loan?

Is it possible to pay off a student loan with a personal loan?

Some lenders allow borrowers to use a personal loan to pay down their student loans, while others explicitly prohibit it. That’s because the structure of educational borrowing and payoff has to be in line with specific guidelines outlined by the Higher Education Act. If you’re considering this financial move, read the fine print on your loan paperwork or ask your lender directly.

Student loan borrowers looking to pay their loans with a personal loan may have better odds with credit unions or small financial institutions, said Leslie Tayne, a financial attorney and the founder of Tayne Law Group in Melville, New York.

Should you use a personal loan to pay off student loans?

If your lender will allow you to use the funds from a personal loan to pay down student loan debt, you’ve still got to consider whether it’s the best financial move. There are several drawbacks to doing so.

• You’ll pay a higher interest rate (typically): If you’re making a choice between student loans or personal loans, a personal loan will likely have a higher interest rate than the interest rate associated with a student loan, Tayne said.
• You can’t write off interest payments: Normally, you can deduct up to $2,500 each year in student loan interest, but this deduction doesn’t apply to personal loans.
• You’ll lose the federal protection student loans offer: Student loan repayment programs, like income-driven repayment plans, forbearance and deferment, are hugely beneficial since you can get flexible payment options if you fall on hard times.

Despite this, there are cases where using a personal loan can help alleviate student loan debt. If you’re carrying a high debt loan in the form of private student loans with high interest rates and you have excellent credit, a personal loan might actually offer a lower interest rate — though this is rare, according to Tayne.

Similarly, if your student loan debt is subject to interest rate fluctuations (such as those with variable interest rates), signing up for a personal loan could provide you with more stable monthly payments.

And if you’re looking to pay off the loan as quickly as possible, a consolidated personal loan without early repayment penalties can be helpful. “Using a personal loan for student debt can fast-track your overall payment timeline,” said Tayne, “which can be good if the borrower can afford higher monthly payments.”

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Alternatives to using a personal loan for student debt

There are several alternatives to personal loans that have more favorable terms for the borrower. Refinancing, income-driven repayment plans and federal programs can pay off debt without racking up a personal loan with a high interest rate.

Refinancing

You can refinance your student loans, consolidating several loans into one in order to streamline your monthly payment. This is a popular option for borrowers whose financial situation has changed for the better, since they can get a lower interest rate.

You can refinance your student loans by contacting a lender, learning more about their terms and submitting an application, Tayne told us. “If approved, the lender will pay off the existing student loans, and your new payments will begin,” she said.

Income-driven repayment plans

“Income-driven repayment plans are a great benefit for student loan borrowers, said Tayne. “If borrowers make consistent, on-time payments over 20 to 25 years, they may even qualify for their loans to be erased,” she said.

These plans allow the borrower to adjust their monthly payment amount based on their current income and family size.

Federal programs

If you happen to fall on tough times while you’re still paying off your student loans, you can take advantage of federal programs like deferment and forbearance. Both of these student loan forgiveness programs allow you to make no payment at all for a specified period.

Interest continues to accrue on all types of student loans in forbearance, while some are shielded from interest accrual under a deferment plan.

Understanding lender restrictions and terms

If you’re wondering why some lenders have tight restrictions on using a personal loan to pay off a student loan, it’s because student loans are under federal regulation. Other restrictions on using personal loan funds include using them for business expenses, down payments and some investments.

Don’t hesitate to ask lenders directly about loan restrictions or the paperwork prior to signing up. No one wants to take on additional debt and risk a hit to their credit score when they can’t use the money for its intended purpose.

And if you attempt to skirt this requirement, consequences can be severe, Tayne said. “As a consequence of using a personal loan for a prohibited cost, you might be required to pay back the total sum of the loan immediately,” she said.

“If you don’t have the funds to pay back the loan, legal action may be initiated by the lender, and wage garnishment or asset seizure may result. It’s also likely that the misuse will be reported to credit bureaus, which will negatively impact your credit score,” said Tayne.

Comparing interest rates: personal loans vs. student loans

Personal loans often carry higher interest rates than student loans. While both are unsecured debt, student loans are considered slightly less risky since they can’t be discharged in a bankruptcy the way personal loans can.

At the time of this writing, the average student loan interest rate is 6.39%, while the average personal loan interest rate is 12.58%.

“Personal loan interest rates are influenced by your credit profile, which includes your credit score, debt-to-income ratio, employment status and income, repayment history and current credit accounts open,” Tayne said.

Federal student loan interest rates are set yearly by Congress and remain fixed over the life of the loan, while private student loan interest rates are based on creditworthiness, similar to a personal loan.