Can I pay off my student loans with a personal loan?

Yahoo

a day ago

More than 40 million Americans have student loan debt. And, depending on when you took out your loans — and, in the case of private loans, your credit score at the time — you could have a double-digit interest rate.
If you're struggling with your debt, the idea of using a personal loan to pay off your student loans can be appealing. Personal loans are readily available, and you can apply and get your loan funds in as little as one day.
But using a personal loan to pay your student loans is more complicated than it may seem. Few lenders allow it; even if you find a lender that permits it, there are significant downsides to this approach, and there are likely better alternatives.
When you take out any debt, including a personal loan, you have to sign a loan agreement. This document outlines the terms of the loan, including the rates and fees associated with it and any restrictions.
Most lenders have a list of prohibited uses for loan funds. For example, many personal loan lenders prohibit using the money for gambling, investing, or business expenses. They typically also forbid the use of personal loans for education expenses or to refinance existing student loans.
There are some lenders — usually smaller companies or credit unions — that do offer personal loans that can be used for educational expenses or to pay down student loan debt, but they tend to be harder to find.
It's easy to see why personal loans are attractive. They're unsecured, so you don't have to worry about collateral, you can receive the loan funds as soon as the same day you apply, and, if you have good credit, you could qualify for a relatively low interest rate.
However, the perks of personal loans fall short when compared to student loans. Even if you find a lender that allows you to take out a personal loan to pay off your student loans, think twice before submitting your loan application.
Using a personal loan to pay off student loan debt is rarely a good idea for the following reasons:
With student loans, origination or disbursement fees tend to be low. Private student loans rarely have these fees, and the disbursement fee on federal loans is either 1.057% or 4.228% (varies based on loan type).
Origination fees are more common (and more expensive) with personal loans. Of the 12 personal loan lenders we looked at, eight of them charged origination fees, and the fee could be as high as 10% of the loan amount.
Student loans tend to have lower interest rates than other forms of debt. While federal student loans start at 6.39% in the current school year, private student loans are available at rates as low as about 3%.
By contrast, personal loan rates start around 6% and can be as high as 35% — significantly more than the maximum annual percentage rate (APR) on student loans.
Depending on the type of student loan you have and the repayment plan you choose, you could have anywhere from five to 25 years to repay your student loans. Longer repayment options can give you a more affordable monthly payment, making it easier to stay on track with your payments.
Personal loans tend to have much shorter repayment periods. While we did find a few lenders that offer loan terms of 10 or 12 years, the majority of lenders had a loan term maximum of just five years, so you'd have a much higher monthly payment amount.
Read more: How to choose the right personal loan term length
Personal loans are unsecured, but that doesn't mean there aren't consequences if you fall behind on your payments. Lenders can charge late fees, report missed payments to the credit bureaus, send your account to collections, or take you to court and sue you for what you owe. If you can't afford your payments, there are few hardship options.
Student loans have more borrower protections. With federal student loans, you may be eligible for alternative payment plans or deferment to temporarily pause your payments. And, with private loans, many lenders have their own financial hardship programs to help borrowers dealing with things like unemployment or major medical expenses.
Federal student loans don't have minimum credit or income requirements, but personal loans are much stricter. You usually need a reliable source of income and good to excellent credit to qualify for a personal loan. Otherwise, your application will be denied, or you may only be approved for a high, double-digit interest rate.
Read more: How to get approved for a personal loan
As you repay your student loans, you can deduct the interest that you pay on both federal and private student loans on your taxes. You can deduct the lesser of $2,500 or the actual interest you paid, helping to reduce your tax bill.
If you use a personal loan to pay off your student loans, your payments aren't eligible for that tax deduction, so you'll lose that perk.
You may have considered using a personal loan to pay off your student loans if you're behind on your payments and need to pay off the loan fast to get out of default. Or, perhaps you wanted to pay them down to reduce your monthly debt payments.
Whatever the case may be, there may be other options that are a better fit for your needs:
Private student loan borrowers with high-interest rates
If you have high-interest private student loans and want a lower payment or reduced interest, student loan refinancing may be for you. You take out a loan to pay off your existing debt, and, based on your credit, you may qualify for a different loan term or interest rate. You could qualify for a lower rate and save money or choose a longer loan term to reduce your payment amounts.
Federal student loan borrowers who can't afford their payments
The standard repayment plan for federal loans is 10 years with fixed monthly payments. If your payments are too high under that plan, an IDR plan could be a useful option. These plans base your payments on a longer loan term and calculate your payment amount using a percentage of your discretionary income.
Read more: Can you change your student loan repayment plan?
Federal student loan borrowers who defaulted on their loans and those who can't afford their payments
If you have several federal student loans and are struggling to remember all of their payment due dates and payment amounts — or, if you have older federal student loans that aren't eligible for programs like income-driven repayment (IDR) — consolidating your loans with a Direct Consolidation Loan is one potential solution.
With a Direct Consolidation Loan, your federal loans are combined into one, and the interest rate on the new loan is based on the weighted average of your current debts. You can choose a new loan repayment term — Direct Consolidation Loans have terms as long as 30 years — and a new repayment plan to get a more affordable payment amount.
Because Direct Consolidation Loans are federal loans, your loans stay within the federal loan program, and you're still eligible for borrower protections like IDR plans and forbearance.
You can submit a loan consolidation application online.
Federal student loan borrowers who defaulted on their loans
For borrowers who default on their federal loans, loan rehabilitation is one way to get their debt back in good standing. With loan rehabilitation, you work with your loan servicer to come to an agreement. You commit to making nine voluntary, reasonable, and affordable monthly payments (often less than your current payment amount), and make nine payments on time during a 10-month period.
You can apply for an IDR plan online.
This article was edited by Alicia Hahn.