Should You Get a Personal Loan for School?
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- You might be able to use a personal loan to pay for college.
- Personal loan interest rates are typically higher than student loans.
- Student loans are hard to discharge in bankruptcy, but personal loans aren't.
- Find out whether you qualify for federal student aid before getting a personal loan.
The cost of higher education is rising, making paying for college a challenge for many families. Students might need a combination of savings, scholarships, grants, and loans to complete both undergraduate and graduate school.
This is why some people may consider supplementing their financial aid packages with personal loans from private lenders. But should you use a personal loan to pay for school?
What Is a Personal Loan?
Lenders give borrowers personal loans to help finance purchases that must be paid back in installments. People use them to consolidate credit card debt, finance a vacation, or renovate their homes, for example.
Personal loans are unsecured, meaning they don't have collateral. Personal loan interest rates tend to be higher than federal or private student loans.
Some personal loans make it clear that you shouldn't use them to pay for your education. Others allow you to spend the money as you see fit.
Can You Use a Personal Loan for School?
Yes, you can use a personal loan to pay for school if there's no stipulation preventing that from your lender. Be sure to read the fine print. You may also have the option of using a personal loan to pay off student loans.
Should You Use a Personal Loan for School Costs?
While paying for school with a personal loan is possible, doing so may not be ideal due to high interest rates and other financing options.
Do You Qualify for Federal Financial Aid?
First, fill out the Free Application for Federal Student Aid (FAFSA). This form will help you determine if you qualify for scholarships and grants you don't have to pay back, such as the Pell Grant.
Scholarships and grants for college are your best options for financing college, but student loans are also worth considering.
Do You Qualify for a Federal Student Loan?
Scholarships and grants might not cover all you need to pay for school. To that end, your next-best option is taking out college loans such as federal student loans. Issued by the federal government, these student loans have a lower interest rate. In addition, opt for subsidized awards first, then unsubsidized loans.
Do You Qualify for a Private Student Loan?
If you've exhausted your federal aid options, you may be able to pay for school with private student loans. This type of financing often has higher interest rates than federal student loans — but they're not as steep as personal loans. They may also have repayment options that personal loans don't, but that depends on your lender. In addition, they are generally harder to get and often require a cosigner.
Do You Have Any College Savings?
Saving money for college is a smart way to pay for school if you have the time to. You can look into college savings accounts for yourself. Or, parents or guardians can save for their child's college education. This may prevent needing a personal loan for school when the time comes.
When Is Taking Out a Personal Loan for School a Good Idea?
There are some advantages when using a personal loan to pay for school. Student loans are very hard (and sometimes impossible) to discharge in bankruptcy, and personal loans are not. You can also use personal loans when the FAFSA can't help you, such as if you're an international student pursuing an MBA. Generally, however, a private student loan is a better option than a personal loan.
Frequently Asked Questions About Using Personal Loans for School
Is it worth taking out a loan to pay for college?
Taking out a loan to pay for college can be worth it if you consider a few factors. It's a good idea to opt for federal loans first, then private student loans. After considering these two options, then you might think about taking out a personal loan. You may also want to make sure that your career trajectory can support what debt you need to pay off down the road.
Can I take out a personal loan to pay for college?
In some cases, you can take out a personal loan to pay for school, depending on your lender's terms. Some banks and credit unions may stipulate that you can't use the loan to pay tuition or fees or to pay off existing student loan debt.
Ensure you have considered options such as scholarships, loans with lower interest rates, and grants first to get the best deal.
Are personal loans worse than student loans?
In general, student loans are better than personal loans when it comes to paying for college. This is due to flexible repayment options and lower interest rates student loan lenders offer.
However, this is entirely dependent on what you need the loan for. For example, student loans are designed for educational expenses as opposed to buying a home or paying off high-interest credit card debt. It's important to consider the context.
Is it better for a student or a parent or guardian to get a loan?
As long as the student is in good financial standing, it's probably better for them to get the loan as opposed to their parents or guardians. This is because parents and guardians won't be left on the hook if the student doesn't pay back their debt later on.
Students may also get better rates and perks by taking the loan out in their name. Just be sure to discuss your priorities as a family first.
Can you use a personal loan to pay off a student loan?
While you might be able to use a personal loan to pay off a student loan, it's usually not advisable. Interest rates on personal loans are higher and don't offer as flexible payment schedules as most student loans. Loan forgiveness may also be a factor to consider.
However, personal loans can be wiped clean in bankruptcy, and student loans can't, which is an important advantage to consider.