Should I Use a Personal Loan to Pay off My Student Loan Debt?

If you’re determined to pay off your student loan debt as quickly as possible, you might be looking for creative solutions — like using a personal loan to pay off student loans.

Personal loans can give you quick access to cash, which could be helpful if you’re struggling with your student loans. You also might qualify for a low interest rate on a personal loan if you have good credit.

However, while using a personal loan to pay off student loan debt can seem like a good plan, it could be an unrealistic strategy. The reasons can include higher interest rates, and a loss of benefits like student loan forgiveness and income-driven-repayment plans (if you want to pay off federal student loans). But also, few if any personal loan lenders are likely to approve your personal loan application if you intend to use the loan to pay off student debt.

Compare personal loan rates

Paying off student loans with a personal loan

Using a personal loan to pay off your student loans can be appealing. With many personal loan lenders, you can submit an application online, get an instant decision, and have money deposited into your bank account quickly.

But using a personal loan to repay your student loans usually isn’t a good idea, and often isn't a loan purpose lenders approve. If you want to tackle your debt, student loan refinancing could be a better option.

With refinancing, you’ll likely get a lower interest rate than you would with a personal loan. Plus, refinancing also offers longer repayment terms compared to personal loans.

Pros and cons of personal loans for student debt

Taking out a personal loan to pay off student loans could be risky, but there are also some benefits to this approach. Make sure to consider the pros and cons.

Pros

• Personal loans are usually processed quickly: With student loan refinancing, it can take several days or even weeks for your existing loans to be paid off. Personal loan funds are typically disbursed much more quickly. After your loan is approved, you might get your money in as little as one business day, depending on the lender.
• You might qualify even if you didn’t finish college: Although some lenders will refinance student loans if you didn’t finish college, many require you to have graduated to qualify for refinancing. Personal loan lenders don’t have this requirement.
• You could release a cosigner from your student loan: If you use a personal loan to pay off a student loan, your student loan account will be closed. If you had a cosigner on your student loan, they’ll be released from the account.
• Personal loans can be discharged in bankruptcy: Student loans are notoriously difficult to discharge in bankruptcy. Personal loans, on the other hand, aren’t subject to the same restrictions as student loans. This makes them easier to discharge if you have to declare bankruptcy later on.

Learn More: Refinancing Your Federal Student Loans

Cons

While using a personal loan to pay off student loans could be tempting, here are some serious drawbacks to keep in mind:

• Most personal loan lenders prohibit using loans to repay student debt: When you apply for a personal loan, you have to sign a loan agreement that states you’ll abide by the lender’s terms. Most personal loan lenders have strict policies that prohibit paying for school with a personal loan or refinancing existing student loans with a personal loan.
• Personal loans have shorter repayment terms: Personal loans tend to have short repayment terms — often seven years or less. If you refinance your student loans instead, you might have as long as 20 years to repay your loans, depending on the lender and the term you choose. Federal student loan repayment options also typically come with much longer repayment terms.
• Personal loans typically have higher interest rates: Because personal loans can be discharged in bankruptcy, lenders see them as riskier forms of debt. To offset that risk, they charge higher interest rates than you’d get with student loan refinancing. This means you could likely get a lower interest rate by refinancing.
• Personal loans aren’t eligible for the student loan interest tax deduction: If you use a personal loan to pay off student loans instead of refinancing your debt, you’ll lose out on the student loan interest tax deduction. Depending on your income, you might be able to deduct up to $2,500 in student loan interest from your taxes, but personal loans aren't eligible for this deduction.

Additionally, if you pay off your federal student loans with a personal loan, you'll no longer have access to multiple repayment options.

Additional loan repayment options

If you take out a personal loan, you'll make fixed monthly payments until the loan is paid — typically for one to seven years, depending on the lender. Private student loans function similarly, though you'll usually have five to 20 years to repay them.

But if you have federal student loans, there are other loan repayment options in addition to the standard 10-year repayment plan, which might be a better fit for your situation than using a personal loan. Here are a few choices to consider:

• Income-driven repayment: If you sign up for an IDR plan, your payments will typically be 10% to 20% of your discretionary income — in some cases, this could bring your payments down to $0 per month. Plus, you could have any remaining balance forgiven after 20 to 25 years, depending on the plan you choose.
• Graduated repayment: With this kind of plan, your payments will start low and gradually increase over time. This could be helpful if you expect your income to rise in the future.
• Extended repayment: This type of plan allows you to extend your repayment term up to 25 years, which can reduce your monthly payments. There's also an option for an extended graduated repayment plan — this will extend your term and give you payments that start low and increase every two years. Just keep in mind that you'll pay more interest over time with a longer term.
• Applying for deferment: This will temporarily pause your student loan payments. Keep in mind that while federal student loans come with built-in deferment options in certain situations, private student loan deferment is offered at the discretion of the lender. Additionally, interest might continue accruing on your loans during a deferment period, depending on the type of loans you have.
• Student loan forgiveness: Federal student loan borrowers have access to a variety of student loan forgiveness programs, which can discharge some or all of your federal loan balance. These programs are typically available to borrowers who work in specific careers — such as doctors, lawyers, and teachers.
• Consolidating your federal loans: Federal student loan borrowers can consolidate their loans into a Direct Consolidation Loan. While this won't change your interest rate, it will let you extend your repayment term up to 30 years, which could greatly reduce your monthly payments. Just keep in mind that you'll pay more in interest over time with a longer term.

Refinancing your student loans is usually a better way to manage your student loan debt. Through refinancing or student loan consolidation, you could get a lower interest rate or a lower monthly payment with an extended repayment term.

Is using a personal loan to pay off student loan debt right for you?

In some cases, using a personal loan to pay off education debt can be a good idea — especially if you can take advantage of a low interest rate. However, it's important to carefully weigh the pros and cons as well as fully understand how personal loans work so you can make the best decision for your financial situation.