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Personal loans are incredibly versatile, and most lenders allow you to use them for just about any legal purpose. That said, it's usually not worth it to use a personal loan to pay for college expenses because it would be a more costly option with unfavorable terms compared to student loans.
Here's what you need to know about the differences between personal and student loans and why the latter option is better when it comes to funding your education.
Can I Use a Personal Loan to Pay for My College Tuition?
Ultimately, the option to pay tuition with a personal loan will depend on your lender. However, the federal government has more requirements that financial institutions need to meet when offering private education loans.
As a result, many lenders explicitly prohibit using funds to pay for educational expenses to avoid the additional compliance burden.
Learn more >> How to Pay for College When Financial Aid Isn't Enough
Should I Use a Personal Loan to Pay for College Expenses?
Once you receive your personal loan funds, your lender likely won't be looking over your shoulder to make sure you're using the money in line with its rules. However, there are many reasons why it's still not a good idea to use a personal loan for college expenses:
- Higher interest rates: Personal loan interest rates tend to be higher than student loan interest rates, even if you have stellar credit.
- Immediate repayment: While both federal and private student loans often allow you to defer payments until you graduate, you'll need to start repaying a personal loan immediately.
- Higher monthly payments: Personal loans typically have shorter repayment term options compared to student loans, which means that you'll have a higher monthly payment.
- Fewer protections and relief options: Unlike federal student loans, personal loans don't offer deferment and forbearance options, forgiveness programs or income-driven repayment plans.
- No tax benefits: The federal government allows you to deduct up to $2,500 in student loan interest payments from your income when filing your tax return.
Personal Loan vs. Student Loan
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Allowable Uses
Personal loans: You can use personal loans for most types of personal and household expenses and consolidating debt. However, many lenders disallow using personal loans for tuition and other educational costs.
Student loans: You can use student loans for any expenses related to attending college. That includes tuition, fees, room and board, transportation, books, supplies and equipment.
Interest
Personal loans: Interest rates are usually fixed and based on your creditworthiness. Rates often range from roughly 7% to 36%.
Student loans: Interest rates may be fixed or variable. Rates often range from 3.5% to 18%.
Repayment Terms
Personal loans: Repayment terms may range from one to seven years, depending on the lender. You'll typically need to start making payments immediately.
Student loans: Repayment is typically deferred for students until graduation. Terms often range from five to 15 years.
Taxes
Personal loans: You can't deduct interest payments on your tax return.
Student loans: You may be able to deduct up to $2,500 in student loan interest payments from your income on your tax return.
Learn more >> How Do Student Loans Work?
Can I Use a Personal Loan to Pay Off a Student Loan?
Because student loans are used to fund educational expenses, consolidating student loan debt may fall under the same restrictions that lenders place for direct payment of college costs. As a result, using a personal loan to pay off a student loan may not be an allowable use.
Even if you can do it, it's generally not a good idea for the same reasons described above. If you're looking for some relief on your student loans, it may be better to consider refinancing them with a private student lender.
Alternatively, if you have federal student loans, you may consider getting on an income-driven repayment plan to reduce your monthly payment.
Build Credit While You're in School
Your college years can be an excellent time to start establishing your credit. Building a good credit history can help you qualify for more affordable credit after you graduate.
With Experian Go™, you can take your first step in establishing a credit profile and learn about how you can develop good credit habits. You'll also get free access to your FICO® Score☉ and Experian credit report, making it easy to track your progress.