Many lenders do not allow you to use a personal loan to pay off private or federal student loans. But even if they do, potentially higher interest rates than student loans might not make it your best option. Before applying for a personal loan to pay off student loan debt, consider other repayment strategies first.
Student loans are a tremendous burden for many Americans. In fact, between 2007 and 2022, student loan debt grew by 211% in American households, well above most other debts. A lot of people find themselves still paying off student debt well into adulthood. The idea of paying them back more quickly by using a personal loan may seem like a great idea, but it’s important to first review your other options.
Keep in mind that federal student loans have a lot of choices and protections that you won’t get with personal loans. For instance, forbearances, deferments, and income-driven repayment plans are all repayment options that many borrowers regularly take advantage of. Refinancing student loans can also help your payments or interest rates decrease.
Today we’ll take a closer look at the different ways to handle student loan debt before deciding if a personal loan is the right decision for you.
Private student loans vs. federal student loans
When deciding how best to manage your student loans — and ideally pay them off as efficiently as possible — it’s important to distinguish between federal loans versus private loans.
Federal student loans
Loans issued by the federal government come with more flexibility and protections than you can get with other types of loans.
A prime example of this is when federal student loan holders weren’t required to make monthly payments during the coronavirus pandemic. From the spring of 2020 through August of 2022, federal loan payments were suspended and no interest was accrued during this time. That option was not available to private student loan holders.
In addition to this pause, federal student borrowers have access to the following options:
- Forbearance. Like the above example, a forbearance is when your student loan payments are paused for a period of time. However, normally you will accrue interest during that time. (The pandemic was a significant exception to that rule.) Usually, forbearances are granted during times of short-term financial hardship.
- Deferment. If you get a loan deferment, loan payments can also be delayed for a period of time, but in this scenario, your qualified student loans (meaning they’re subsidized by the government) will typically not accrue interest during that time. Most other federal unsubsidized loans, however, will continue to add interest during a deferment period. Oftentimes, borrowers who go back to college to earn a higher degree can be granted a deferment period while they remain in school.
- Income-driven repayment plans. The U.S. Department of Education (EDU), which is responsible for issuing federal student loans, has several different repayment plans. They are designed to make it easier for a borrow to manage their monthly payments and are based on income level and size of family. Some of them are also a requirement for borrowers who are seeking public service loan forgiveness.
- Consolidation. Federal student loan borrowers with multiple loans have the option to consolidate their existing loans into a single loan, leaving them with only one monthly payment. At this point, borrowers can also negotiate longer repayment terms and a new (hopefully lower) interest rate.
Private student loans
If you have student loans issued by a private lender, your choices are more limited than with federal loans. That being said, you still have a solid option to restructure or refinance your student loans to your benefit.
However, if you’re having trouble making your monthly payment, you may be able to speak with your lender about temporarily pausing your payments if you encounter financial hardship. Take a look at some of the options below to get started.
Student loan refinancing
Refinancing for private student loan borrowers is essentially the same thing as loan consolidation for federal loans. The difference is that you can consolidate both your federal and private existing student loans into one larger loan with new repayment terms and interest rates.
For those who wish to consolidate, there are usually less strict eligibility requirements needed than when you’re applying for a personal loan. Ideally, it will also come with a lower interest rate as well if you can meet credit approval. Student loan refinancing could also result in lower monthly payments if you extend the loan term, for instance.
If you have multiple student loans you want to consolidate, or a loan you want to refinance, take a look at some of the refinancing options below.
The case for using personal loans to pay off student loans
In some cases, if you have excellent credit and sufficient income, you might be able to get approved for a personal loan at a lower interest rate than your current student loans. The interest rate you qualify for also depends on the state of the economy.
If everything lines up and you get approved for a lower interest rate, a personal loan might be a smart move for you. This is especially true if you have the means to pay the loan off relatively quickly, allowing you to save money on interest payments.
Personal loans can also be beneficial to those who have both private and federal student loans and want to consolidate all of them. Federal consolidation rules do not allow you to consolidate any private loans you might have with your federal loans.
The case against using a personal loan to pay for student debt
For one thing, they can be very hard to get. Most personal loans aren’t even eligible for use to pay education expenses, although they can be found in certain banks, credit unions, or online lenders. Plus, if the stars fail to line up just perfectly, you will likely pay a higher interest rate for a personal loan than you would for pretty much any type of student loan.
Personal loans also do not come with any of the benefits and protections that federal student loans do, as laid out above. If, for example, you lose your job, become ill, or suffer some other financial emergency, a private loan servicer may not accommodate your situation with a handy forbearance or deferment during the repayment period.
Another thing to think about is your chance at public service loan forgiveness (PSLF). If you rolled over your federal student aid loans into a personal loan, you give up any chance of PSLF. Depending on your career, this may be a nonissue for you. But if you’re a teacher, public servant, or in another qualified occupation, you wouldn’t want to miss that opportunity to have your student loans forgiven.
Finally, if you move to a personal loan to pay off your student debt, you will lose the student loan interest deduction. The federal government allows student loan borrowers to deduct up to $2,500 of student loan interest from their federal income tax. There are no tax benefits whatsoever on personal loans.
Here is a list of the benefits and drawbacks to consider.
- Potential for lower interest rates
- Lower interest rates means lower monthly payments
- Consolidate both federal and private student loan debt
- May be difficult to get
- Could come with higher interest rates
- Don’t have the benefits of federal student aid
- No chance at public service loan forgiveness
- Give up student loan interest tax deductions
Is it worth it to aggressively pay off student loans?
Yes. It’s worth paying off any debts you have as soon as possible. The longer you take to pay, the more money you’ll owe in interest, which just adds to the total cost of the loan. Plus, the relief and satisfaction of eradicating your student debt is a reward in itself and allows you to use your money for more productive means, such as investing for your retirement.
How can I pay off large student loans faster?
There are a number of ways to pay off your private or federal student aid debts more quickly. One option is to always pay more than your minimum monthly payment, even if it’s only an extra $10 or $20 — as your income increases, you can increase your extra payments.
Other ways to pay off your student loan more quickly is to get a side job or make bi-weekly payments. Here are a few other things you can do to pare down that student loan debt.
Is it good to pay off student loans in full?
Paying off student loans in full is an excellent strategy if you have the means to do so. This is particularly the case with federal student loans where there is no prepayment penalty. That means you’re not charged a penalty of sorts for paying your loan off early.
With a private student loan, make sure you find out if there’s a prepayment fee before paying in full. In some cases, it might be cheaper to continue making payments if the penalty for early repayment is exceedingly high.
- You may be able to use a personal loan to pay off your student debt, but it might not always be the best option.
- If you have excellent credit and a good income, you may be able to get a better interest rate on a personal loan than you have with your existing student loans. However, that also depends on interest rates at the time you apply.
- If you have federal student loans and you consolidate them into a personal loan, you’ll lose the protections and benefits that come with federal student aid. This includes forbearances, deferments, and income-dependent repayment plans.
- The repayment term and interest rates might be more favorable if you consolidate your federal loans or refinance your federal and private student loans.
- Income-driven repayment plans can help to lower your monthly payment and keep you eligible for student loan forgiveness.
View Article Sources
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