Paying off student loans is a huge victory, but it is certainly a difficult one. Many people repay their student loans for ten to thirty years. During this extended period, it is not surprising that borrowers look for creative ways to get rid of the debt faster. Hence, paying off student loans with personal loans for students can seem like an attractive option.
However, before taking this action, borrowers should consider the consequences very carefully. Specifically, loan terms matter a great deal, making borrowers responsible for the full debt amount immediately. Besides, there is no guarantee that paying off student loans with personal loans is a beneficial strategy even if it is allowed.
This guide discusses personal loans for students and their applicability to eliminate student loans. Moreover, we discuss alternative venues for anyone seeking a little more help in student loan repayment in case of financial difficulties.
What is a Personal Loan?
The student loan repayment process can take ten to thirty years. On average, people spend 21 years to finally pay off their student loans. As this period is extremely long, borrowers might be looking for creative ways to get rid of the student debt. Sure, they become tempted to check if personal loans for students can be the solution to all their debt issues.
Generally, personal loans can be used for different purposes. For example, if you are getting married, you might need a personal loan to finance your wedding. Alternatively, in case of medical emergencies or home renovation projects, personal loans can be helpful. However, people also use personal loans to consolidate their high-interest debt or get rid of existing challenging loans.
Interest Comparison of Personal Loans
Personal loans for students usually have a lower interest rate compared to credit card debt. Credit card debt can be the worst, with a prohibitively high-interest rate, on average 16.30%. Meanwhile, personal loans have slightly lower interest rates, around 9.58%. However, keep in mind that there is no guarantee that you will get a 9.58% interest rate. The rate of personal loans for students depends on many factors, such as your credit score. If you have a high credit score, you can qualify for a lower interest rate. Similarly, the interest will be higher for borrowers with bad credit history.
Comparing personal loans with federal student loans, it is evident that federal loans usually have better interest rates. Federal student loans are known for their affordability. Hence, it is not surprising that the interest for such debt is mostly the lowest. Additionally, interest depends on the loan type.
If you get undergraduate student loans, you will face a 3.73% interest rate. Meanwhile, this rate increases to 5.28% for graduate and professional students if they get Direct Unsubsidized loans. In the case of PLUS Loans, the rate is 6.28%. Yet, they all are likely to be lower than the rate of personal loans.
Can I Pay Off Student Loans with Personal Loans?
Usually, the answer depends on your loan agreement or loan terms. Every lender has specific terms when it comes to how you can use personal loans. For instance, some lenders allow borrowers to use personal loans for financing a small business, while others will require you to get business loans for this purpose.
Hence, it should not be surprising that many lenders will not allow borrowers to use personal loans to pay off student loans. They usually have another type of service- private student loans- for helping students with their educational debts. If you are unsure whether your lender allows using personal loans for students to pay off student debt, you can check your loan terms.
Alternatively, you can contact the lender and ask your questions. Do not ignore the terms, as you can be held responsible if you go against the terms. In this case, you might even be required to return the full personal loan amount immediately.
What if You Pay Off Student Loans with Personal Loans?
Whether your lender allows you to pay off student loans with a personal loan is a challenging matter. However, even if it is allowed, you still need to think thoroughly before taking this action. Financing your student loans with personal loans will have different consequences.
1. You Will Lose Eligibility for Federal Student Loan Benefits
Federal student loans have various benefits. For example, if you have financial difficulty, you can qualify for a student loan forbearance or deferment period. Besides, you can choose between different repayment plans. Among these plans, Income-driven repayment plans provide the most affordable rates for borrowers. Additionally, forgiveness programs exist to help borrowers get rid of debt fully or partially without paying a penny from the pocket.
Let’s imagine you took personal loans for students and used the proceeds to pay off your federal student loans. In this case, your new debt- personal loans- would not qualify for any of the opportunities mentioned above, whether it is an Income-driven repayment plan or student loan forgiveness program. If you face financial difficulties to repay the debt, your new lender will provide fewer options.
To understand what great opportunities and care for your debt you lose, let’s consider current COVID-19 protections. Once the pandemic hit the economy, the government stopped federal student loan debt collection, which is expected to resume in February 2022.
Meanwhile, private or personal debt is still collected. So if you pay off your student loans with a personal loan, you will no longer have a caring lender who protects you in case of emergencies or brings immense simplicity to pay your debt faster or easier.
2. Bankruptcy Consideration
Before we discuss the applicability of bankruptcy on your loans, please keep in mind that we do not recommend bankruptcy in most cases. A bankruptcy discharge can get you out of debt. However, it brings a lot of negative consequences. It usually damages your credit score, and your credibility is hurt for 7-10 years. It will be hard to get additional loans, rent an apartment, or even find an insurance program during this period. Hence, think twice before considering bankruptcy.
Generally, it is extremely hard to get bankruptcy discharge on your student loans. Simply, students have better educational backgrounds, which might help them to find a job in the future and repay debt. Hence, it is difficult to prove that there is no way for a student loan borrower to repay the debt, and bankruptcy is necessary. Meanwhile, it is easier to get bankruptcy discharge on personal loans for students or private student loans compared to federal student loans. This benefit can be one of few advantages of personal loans over federal loans for students.
Student Loan Refinancing as Alternative
While getting personal loans for students can give you access to quick cash, it also comes with its disadvantages. An alternative to this strategy can be student loan refinancing.
What is Refinancing?
Student loan refinancing helps borrowers to get a new loan to cover existing loans. It might sound counterintuitive, but refinancing can bring various benefits. For example, if you are fed up with your pressuring lenders or high-interest student debt, you can refinance a student loan. If you apply this strategy at the right timing, you can get lower interest, change your lender or loan servicer, or simply get a fixed-rate loan instead of a variable rate (or vice versa).
Refinancing is simple to understand. Imagine you have $10,000 student debt with a 7% interest rate. Then you find a refinancing loan that requires a 5% interest rate for a $10,000 balance. In this case, if you get a second loan and use the money to pay off the first loan, you will save from interest payments. Besides, your credit score can improve as you pay off one of your obligations.
You can refinance a student loan as many times as you wish. However, getting rejections can damage your credit performance. Before applying for refinancing, you can check eligibility and qualifying rates through pre-qualification tests on lenders’ websites. These tests do not impact your credibility and help you have some idea on refinancing loan terms. Yet, keep in mind that the final terms after application can differ from what you identify in pre-qualification tests.
Eligibility Conditions of Refinancing
Eligibility requirements of refinancing can be different from those for federal student loans. The most important two factors are a high credit score and a stable income source. You might need a 600 or more credit score to qualify for refinancing loans. In this way, the lenders guarantee repayment.
If you lack any of these elements, you might be required to bring a cosigner. The cosigner is a third party like a family member or friend who agrees to repay the debt if you fail. Some refinancing companies allow releasing a cosigner if you make several payments and prove your credibility.
Difference between Personal Loans and Refinancing Loans
Research done between Credible’s partner lenders reveals interesting insights to compare personal loans with refinancing loans. First, the loan amount is higher for refinancing loans, which is on average up to $750,000. This amount is up to $100,000 for personal loans. Second, when it comes to the repayment period, personal loans for students require one to seven years.
Meanwhile, refinancing loans require five to twenty years. Finally, when it comes to interest rates, the lower limit is similar, being around 2.5%. The upper limit for refinancing loans is 4.54%, while this rate is around 36% for personal loans.
Yet, these indicators are averages. The loan terms you will get depend on many factors, such as your preferred lender, credit score, debt balance, etc.
Advantages of Personal Loans over Refinancing
Using personal loans for students to pay off student debt can be risky. However, if it is allowed, you will get a few benefits compared to refinancing your debt. First, a personal loan is a quick solution. If you refinance debt, it takes several days or weeks to get the request processed. Meanwhile, personal loans are disbursed in a few days. Sometimes you might even get money in as fast as a day.
Next, some refinancing companies require borrowers to graduate before they qualify for refinancing. However, usually, such a requirement does not exist for personal loans. Lastly, as mentioned before, you can qualify for bankruptcy easier than if you had student loans.
Disadvantages of Personal Loans
One of the main disadvantages of personal loans for students is that they cannot be used for paying off student loans. As discussed above, such a strategy depends on your loan agreement or terms. However, in most cases, the lenders do not allow using personal loan funds for student loans. If you ignore this condition, you can face harsh consequences.
Another drawback of personal loans is that they usually have shorter repayment periods, such as seven years. Meanwhile, student loans or refinancing loans have longer repayment periods, such as twenty years. When repayment is shorter, the borrowers are required to pay more monthly compared to longer repayment terms.
Besides, personal loans for students can have higher interest rates compared to refinancing loans. Usually, lenders see personal loans as riskier because they can be discharged through bankruptcy faster. Hence, they require higher interest rates to mitigate the risk.
Lastly, even if you refinance student loans, you will still qualify for a student loan interest deduction. This benefit can help you get up to a $2,500 tax deduction from your income. However, with personal loans for students, this benefit is not possible. So, check eligibility before refinancing your loans.
How to Pay Off Student Loans Quickly?
Paying off student loans is a challenging task, and it requires a lot of patience, nerves, dedication, and time. Yet, there are several tricks to pay off student loans quickly and effectively.
1. Get a Part-time Job in College
If you have federal student loans, you will not be required to start repayment until you graduate. So instead of waiting for four years or more to start repayment, you can begin working for repayment. Even if you find a low-income part-time job while in school, you can accumulate some amount until you graduate. Besides, if you pay interest on your student loans, your principal balance will be lower when it is time to repay.
2. Find the Most Suitable Repayment Plan
Federal student loan borrowers have access to multiple repayment options. These plans differ on their length, monthly repayment amount, eligibility requirements, etc. If you face financial difficulties, it can be a good idea to consider Income-based student loan repayment plans. Meanwhile, if you want to repay debt fast, you can choose plans with shorter payback periods. Most importantly, make sure you repay your debt on time and in full amount.
3. Make Higher Monthly Payments
If you have extra room in your budget, making higher monthly payments can be a good idea. These payments can decrease your principal balance and generate less interest on your debt. However, before making higher payments, contact your lender. Sometimes, lenders apply extra amounts to the following month’s payments. In this case, there is no effect on the principal balance or interest rate. You need to ensure that they apply the payment to the principal balance.
4. Stick to a Budget
Creating a spending plan and sticking to your decisions can help you pay off student loans faster. In this way, you can make room in your budget for extra payments. For example, start by canceling services that you no longer use. Alternatively, you can reduce the entertainment purchases. It will be hard, but repaying student loans are worth it.
5. Contact a Debt Specialist
Getting help from a debt specialist can also be highly effective if you struggle with personal loans for students. Like those in Student Loans Resolved, specialists will analyze your finances and determine the best strategy to get rid of the student debt. Whether it is repayment through personal loans or a forgiveness program, our debt experts can find the most effective and quick way to pay off student loans.