Can I Use a Personal Loan for College?
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Summary:
While you can use some personal loans to pay for college expenses, it’s generally not a good idea. Most personal loan lenders prohibit the use of their personal loans for tuition expenses to avoid having to follow stricter lending regulations. Federal and private student loans generally offer more favorable loan terms and repayment plans than personal loans. However, in some cases, personal loans can be an option to pay for living expenses while at college.
College is expensive; we all know that. Attending any four-year college in the United States costs a yearly average of $35,331 per student according to the National Center for Education Statistics.
While it’s tempting to seek out a personal loan due to the expense of college, both private and federal student loans are usually better options to cover the cost of your education. In this article, we’ll discuss the differences between student and personal loans, why using a personal loan to pay for college might not be your best option, and what to do instead.
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Should I use personal loans for my education?
Due to federal regulations, many personal loan lenders don’t allow students to borrow funds for college expenses. Beyond that, it is often much harder for a college student to qualify for a personal loan. Because of this, federal and private student loans are the better option for financing higher education.
To sum up, yes, personal loans can be used for educational expenses. But should personal loans be used for college? No.
What can I use a personal loan for?
Personal loans can be used for nonacademic purposes such as consolidating high interest debt, home improvement projects, weddings, or just about anything else. Some people use personal loans cover emergency expenses such as medical expenses, auto repairs, or other emergency circumstances.
With that being said, most lenders demand established credit history and stable income. If your credit history is poor or your income unstable, borrowing a personal loan requires some other type of income, such as a cosigner or co-borrower.
However, due to federal regulations and a lack of credit, most lenders don’t provide personal loans to college students.
Simply put, borrowing a personal loan is better for people beyond college with established careers, good credit history, and the ability to pay high-interest rates when warranted.
For those with poor credit histories, different types of personal loans exist. However, these types of personal loans entail high-interest rates—ones that could result in double digits.
Personal loans are a much more viable option for graduate students who have a higher income, a stronger credit record, and the potential for immediate repayment. Still, graduate students are more likely to find a better deal with federal and private student loan options, too.
Pro Tip
Before taking the plunge into borrowing a personal loan, determine if your expenses can also be covered under a student loan or scholarship.
Personal loans are offered by banks, credit unions, and online lenders. Often without collateral, personal loans have high-interest rates and depend on financial health and credit history, which many students don’t have.
When taking out a personal loan, you receive a lump sum, which you must begin to repay after 30 days. Repayment installments can extend from one to seven years.
Should I use student loans?
Student loans finance higher education and the educational expenses college requires. Students repay this loan later while interest accrues over time, and some repayment options are flexible. Student loans typically offer lower interest rates, and they give the student a much longer period to repay.
There are two types of student loans designed for people paying for college: federal and private student loans. Federal loans are issued by the government, whereas private loans can be issued through a variety of lenders, such as banks, schools, credit unions, or state agencies.
Why is a student loan better than a personal loan?
Student loans cover most expenses college students must pay. These can include books, tuition, transportation, and even living expenses.
Personal loans, on the other hand, can be used at your discretion. While they can sometimes be used to pay for your tuition and other educational expenses, personal loans are generally not advised for college students. This is because many college students don’t have the required credit history, income, or assets to qualify for personal loans. To apply for a personal loan through most lenders, a parent would need to cosign.
When borrowing money, both student loans and personal require you to repay them after you leave school. However, those repayment terms vary depending on the type of financial aid a student receives.
What type of loan is best for college students?
As mentioned, student loans are better borrowing options for college students. There are two kinds: federal student loans and private student loans.
- Federal. Federal student loans are the most popular financing option for college students. In addition to the lower interest rates, federal loans offer the potential eligibility for federal relief programs, forbearance, and income-driven repayment plans. While there are different types of federal loans, keep in mind that each kind has different eligibility requirements.
- Private. Private student loans usually have higher interest rates than federal student loans, which will add up during college. Certain protections and benefits federal student loans provide are not implemented under private student loans, such as loan forgiveness programs and income-driven repayment plans.
Pro Tip
Student loan debts are tax-deductible of up to $2,500 per year. Personal loan payments are not tax-deductible.
What is the maximum number of student loans you can get?
The federal government provides students subsidized and unsubsidized loans based on financial need. While subsidized loans are available only to undergraduates, Direct unsubsidized loans are available to both undergraduate and graduate students that are not based on financial need requirements. Schools determine the amount a student can borrow through tuition and other financial aid.
Unlike most federal student loans, college students can borrow up to 100% of the school’s certified cost of attendance through private lenders. These private student loans can cover any and all educational expenses like textbooks, housing, and transportation.
Pro Tip
Explore the rates and terms between private loan lenders, as they often vary from one lender to the next — pay attention to competitive interest rates, low or no fees, good customer service, and flexibility.
Still considering a personal loan?
Although it typically isn’t the best option, there still are several lenders offering personal loans to students.
Take your time and compare lenders to find the best deal for you. The last thing you’d want to do is get yourself in too deep with an unsecured personal loan.
How can I pay for college with no money?
There are other options to pay for college beyond borrowing personal loans, worrying about credit history or score requirements, and immediate repayment terms.
Financial aid
Regardless of your credit history, credit score, or income, you can get federal loans. As long as you’re enrolled at an eligible college or university, you can fill out the FAFSA.
Schools offer various payment plans, usually through a third party, at no interest, and with a small enrollment fee. Payments can go for a semester or beyond several months.
Some other emergency aid options schools provide include:
- Short-term emergency loans
- Completion scholarships and other scholarship opportunities
- Grants
- Vouchers
Pro Tip
Speak to your school’s financial aid office. They may be able to provide you with various options, especially in case of an emergency.
For parents
Parents often help pay for their children’s college education. There are several options for parents to help cover part of the cost of college. Taking out a personal loan as a parent can make sense if the interest rate is right and the terms are agreeable.
For instance, if a student is in their last year or semester and short a reasonable amount of money, with all other expenses paid for, a personal loan could make sense. However, as a parent with a first- or second-year college student, borrowing a personal loan could lead to an exhaustive debt load each year.
Federally backed loans
Parents may consider the Parent PLUS Loan. These types of loans are unsubsidized loans and made to parents of dependent undergraduate students.
The Parent PLUS Loan has a higher interest rate than most federal student loans. With flexible credit qualifications and longer repayment periods than typical loans, federally backed loans are a viable option for some.
Home equity loan or home equity line of credit
A home equity loan and home equity line of credit (HELOC) can pay for college tuition. Both depend on the amount of equity a parent may have in their home. However, HELOC is more comparable to a credit card with a variable rate, while a home equity loan is a traditional loan with a lump sum.
However, using home equity loans or HELOC is risky. Even though increases in home values and low interest rates make these options appetizing, home values do decrease. If your home value falls too low, you may fall into debt levels higher than the value of your home.
IRA or 401(k) withdrawals
Using your IRA or 401(k) to pay for college is possible. But these individual retirement account options have drawbacks. You are most likely to pay income tax on the money taken out, with an added 10% penalty with 401(k) withdrawals.
Although it’s possible to fund a college education solely through these options, there aren’t loans to finance retirement.
Family loans
Parents or relatives can provide a loan to a student, too, but this should be met with caution.
Pro Tip
Maintain strong communication and keep a written agreement that clearly outlines when the loan will be paid.
But what if I can’t afford my monthly payments?
When taking out a student loan, you’re committed to repaying the money. There are temporary, short-term fixes if you run into problems, but these can end up costing you more in the long term.
If you’re currently struggling to make your monthly payments on your student loan debt, you can look into forbearance, deferment, student loan forgiveness, default, and refinancing your student loans.
Key takeaways
- While you can use a personal loan to pay for college, personal loan lenders must follow strict federal regulations that often prevent them from lending to students.
- Always consider student loans, particularly federal student loans, before applying for personal loans to cover college expenses.
- Personal loans require a credit check and income information, while federal loans do not require this.
- If you do not receive enough federal aid to pay for college, there are plenty of private student loan options available that may offer more favorable terms than personal loans.
- If still contemplating a personal loan, borrow only for the essentials and prepare for immediate repayment.
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