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With student debts at all-time highs, many graduates are left wondering whether it’s feasible to take out a personal loan to pay off student loans. The notion is that taking out small personal loans can save borrowers money when they use them to pay back high-interest student loan debt.
So, could taking out personal loans to cover student debt be the best way to pay off your student loans?
Paying off student loans with a personal loan
A personal loan can be a way to pay off student loans fast or cover financial expenses under new conditions. The loan has a set term and fixed payment throughout the life of the loan. Personal loans typically do not have any prepayment penalties and they affect your credit the same way a student loan would. Overall, a personal loan is not drastically different from a student loan — you are just using a new loan to pay of an existing student loan. So, if paying off student loans fast is a priority, taking out a personal loan is something to consider. Let’s take a look at the pros and cons.
In some cases, taking out a personal loan can be the best way to pay off student loans fast.
- You may have access to a lower fixed-rate loan by using a personal loan.
- Personal loans usually have shorter payoff periods if your goal is to pay off your loans as fast as possible.
- One of the biggest benefits is consolidating multiple student loans into one payment.
- Another great benefit to getting a personal loan to pay off student loans is that you can release any cosigners you have on your student loans. If you qualify for the personal loan on your own, the person who cosigned for your student loans will not be obligated on your new loan.
- Unlike most student loans, a personal loan is dischargeable in bankruptcy.
One drawback to using a personal loan to pay off student loans would be that you could lose the benefits of forbearance and deferment options on federal loans, or the reduced payments available with private loans. Check to see if your existing loans have these benefits and if you have a need to utilize them.
Another disadvantage is that most lenders have a limit on loan amounts for personal loans. Since a personal loan does not have any collateral, lenders typically limit the amount that can be borrowed. Furthermore, if you still have new credit a lender may not feel like you have sufficient credit history to warrant a high loan amount.
So if you are a borrower with a large amount of student loan debt you may not be able to pay off all of your student loans utilizing a personal loan. Also, there aren’t any tax benefits on a personal loan. Each year borrowers can claim a tax deduction for up to $2,500 paid in interest on their student loans, but this is not extended to personal loans.
Is using a personal loan to pay off student loan debt right for you?
A personal loan is one of many options worth considering when trying to reduce your student loan interest rates. There are several lenders on the market that offer personal loans to pay off student loans. Alternatively, refinancing lenders will pay off your existing loans for you as well as typically have lower rates than personal loans. Depending on your financial situation there are pros and cons to both refinancing and using a personal loan to pay off your student loans. Figure out what your repayment goals may be and explore your options.