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Can You Pay Off Student Loans With a Personal Loan?

Can You Pay Off Student Loans With a Personal Loan?

Living with Student Loans
ELFI | October 18, 2021
Can You Pay Off Student Loans With a Personal Loan?

Can I use a personal loan to pay off student loans? This may be a question you’ve asked yourself if you have a lot of student debt to repay.  Unfortunately, there’s not a straightforward answer because it depends on your situation. And, in many cases, even if you can use a personal loan to pay off student loan debt, you may not want to because doing so could be costlier and cause you to give up borrower benefits. Here’s what you need to know about using a personal loan to pay off student loan debt — as well as alternative options, like student loan refinancing.

Can I use a personal loan to pay off student loans? 

Personal loans are available from many different banks, credit unions, and online lenders. While the money can generally be used for almost any purpose, the keyword is almost.  In most situations, you are not allowed to use the proceeds of a personal loan to repay existing student loan debt or to pay for education expenses (although you can use personal loans to pay for living expenses while in school).  The reason you may not be allowed to use a personal loan to pay off student loan debt or to pay for school is simple. There are more regulations imposed on student lenders and different laws for student loans as outlined in the Higher Education Act. There are a few exceptions, though. A limited number of lenders do allow you to use personal loan proceeds to refinance loans. That’s why the answer to the question, “Can I use a personal loan to pay off student loans?” is, it depends.  If you’re interested in using the proceeds from a personal loan to tackle your educational debt, you’ll need to research the options available to you to find a lender that allows this financial move.

Should I use a personal loan to pay off student loan debt? 

Beyond asking the question, “Can I use a personal loan to pay off student loans?” you also need to consider whether doing so would be a good idea. In most cases, the answer is no. Here are a few reasons why.

You’d give up borrower benefits

Federal student loans from the Department of Education come with several beneficial features that aren’t available on personal loans. For example, you can put loans into deferment or forbearance to pause payments, can change your payment plan as needed, and can choose income-driven payment options that cap payments as a percentage of income.  Loan forgiveness of some of your student loan debt may also be possible, either after making a certain number of payments on an income-driven plan or after qualifying for Public Service Loan Forgiveness.  Personal loans don’t offer any of these benefits. And, while private student loans don’t come with the same advantages federal loans do, most do allow you to defer payments while in school and have forbearance options. You won’t get these advantages with personal loans.

Your interest rate may be higher

It’s possible that a personal loan might have a lower interest rate than student loans, but it’s not likely — especially if you have low-interest federal student loans at a fixed rate. It wouldn’t make sense to take a loan at a higher rate to pay off your student debt, as this would just make loan repayment more expensive. 

You could lose the student loan interest deduction

If your income isn’t too high, you can generally claim a student loan tax deduction. You can deduct up to $2,500 per year in interest paid on qualifying student loans. If you use a personal loan to pay off student loan debt, you will lose this deduction since you can’t deduct interest on personal loans. 

Alternatives to using a personal loan to pay off student loan debt

While repaying student loans with a personal loan probably doesn’t make sense and may not be allowed, the good news is, you have other options.  If you’re interested in changing the terms of your existing student loans, getting a private loan to pay off student loans from a student loan refinancing lender could be a great option.  Like personal loans, banks, online lenders, and credit unions offer private student loan refinancing. But these loans are specifically designed for refinancing student debt, while personal loans are not.  You may be able to qualify for a competitive rate if you get a private loan to pay off student loans from a refinance lender. And, while you’d give up borrower benefits compared with federal loans, your refinanced student loan would have the same protections and perks in place as other private student debt.  With a refinance loan, you can change your interest rate, repayment timeline, and many other terms of your student loans — just as you could with a personal loan. You’ll want to get a quote from a private lender to make sure that the interest rate is affordable for you. But if you can drop your borrowing costs and get better terms, then there’s little reason not to refinance your existing private student loans.