Personal vs. Student Loans: What’s the Difference?

One of the most intimidating parts of getting ready for college is figuring out how you’ll pay for it. Personal loans and student loans are both financing options that can help pay for some of your education expenses, but they have very different benefits and rules.

Student loans are a great way to cover most education expenses and have special perks like lower interest rates and flexible repayment, while personal loans should be used more sparingly when covering school costs.

If you’re getting ready to pay for college, keep reading to learn the key differences between personal vs. student loans, including how each financing option works and when you should use each one.

Current private student loan rates

What is a personal loan?

A personal loan is a type of installment loan you can get from a bank, credit union, or online lender. Personal loans usually have fixed rates and are unsecured, meaning they don't have any collateral. Instead, lenders rely on borrowers' creditworthiness to determine if the loan will likely be repaid.

There are virtually no limits on personal loan uses, making them popular for things like debt consolidation, medical costs, and major expenses such as vacations or weddings.

Personal loan limits, terms, and rates vary from lender to lender. You can generally find loans as high as $100,000 from certain lenders, with repayment terms of up to about seven years. Personal loan rates depend heavily on your credit score, but rates available through lenders on the Credible platform currently range from 6.49% to 35.99%.

What is a student loan?

A student loan is a type of installment loan that's specifically designed for educational expenses. Like personal loans, most student loans are fixed-rate term loans. The amount you can borrow is based on your cost of attendance. Most student loans don't require you to make payments while you're in school. You'll start repayment after you leave, often after a grace period.

There are two different types of student loans: federal and private. Federal student loans are funded by the federal government, while private loans are offered by banks, credit unions, and other private lenders.

While federal and private student loans have a similar purpose, they differ in terms of eligibility requirements, interest rates, and repayment options.

Generally speaking, there are more federal loan benefits and protections. For example, your credit score isn't a factor in qualifying for most federal loans. You don't have to make payments while in school. You can choose from a variety of repayment plans, including income-based options, and you're eligible for borrower protections like deferment and loan forgiveness.

While private loans don't have as many perks, they're a good option for borrowers who can't get enough through federal loans to cover all of their expenses.

How do personal and student loans compare?

Personal loans and student loans have a few things in common. For example, both usually have fixed interest rates and monthly payments. However, they vary significantly in terms of their primary purpose, how you qualify, and how you repay them.

When does a personal loan make sense for education expenses?

A personal loan isn’t usually the best option to pay for education expenses, especially compared to federal student loans. The higher interest rates, shorter repayment terms, and stricter eligibility requirements make personal loans a worse choice. However, there may be some situations where they’re the best option.

First, a personal loan could be a suitable option if you’re not eligible for student loans. Federal student loans require that you enroll at least half-time in an eligible degree program. If you’re attending school less than half-time or are completing a certificate program that’s not considered an eligible program, a personal loan could take the place of a student loan.

A personal loan might also make sense to supplement your student loans if you have expenses above and beyond what your student loans can pay for.

“Student loans can be used for off-campus housing, but only up to the cost estimated by the college,” says Jack Wang, a wealth adviser with Innovative Advisory Group who specializes in helping families with college financial aid. “However, if actual housing costs exceed the estimate, a personal loan could be used to cover that difference.”

According to Wang, a personal loan could also serve as a sort of bridge loan if you need temporary cash while you’re waiting for a student loan or another source of funds to come in.

“If a family is expecting a bonus or other windfall to pay for college, but [it] will not arrive until after the tuition bill is paid, a personal loan can be used to pay tuition and cover that time,” says Wang.

When is a student loan the better option?

Student loans are almost always a better option than personal loans to pay for your education expenses.

“A student loan is usually the better move for a student, especially if the student does qualify for federal loans,” says Jocelyn Pearson, the founder of The Scholarship System, which helps families figure out how to pay for school. “It tends to have lower interest, more flexible repayment, and sometimes even forgiveness options.”

As noted above, the federal government sets a fixed interest rate for student loans. It’s almost always lower than the rate you could get on a personal loan, even if you have excellent credit. The lower rate, combined with the longer repayment terms on student loans, makes for more affordable payments.

Student loans are also deferred while you’re in school, while a personal loan would require immediate repayment. For many students, making payments on a loan while also going to school would present a financial burden.

Once you graduate or leave school for another reason, student loans have more flexible repayment options. You’ll have access to income-driven repayment plans that limit your payments to a certain percentage of your income. If you face financial hardship, you have the option to put your loans into forbearance. Finally, in certain situations, you could even be eligible for loan discharge or forgiveness, which isn’t an option for personal loans.

“Basically, if you can get a student loan first, do that before turning to personal loans,” says Pearson.