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Student Loans vs. Personal Loans: Which One’s Best for You?
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As a college student, parent, or student loan borrower, it’s important to understand your options to borrow for school or refinance student loans. Specifically, you might compare private student loans versus personal loans and wonder which is better for you.
While these two kinds of debt share some similarities, they have some major differences. Choosing the right type of loan ensures you get the funds you need now and affordable payments later.
Here’s what you need to know about how private student loans and personal loans are similar — and how they’re not.
Comparing student loans vs. personal loans
A private student loan and a personal loan have some key features in common:
- Funded by private lenders: Unlike federal student loans which are funded by the government, both personal loans and private student loans are both provided by private lenders: online loan providers such as SoFi, banks such as Citizens Bank, or credit unions.
- Good credit and borrowing requirements: Both a private student loan and a personal loan usually require a credit check as part of the loan application and approval process. A federal student loan, on the other hand, doesn’t have any credit score or income requirements.
- Unsecured debt: Personal loans and private student loans are unsecured debt. This means that any funds loaned through either product are not guaranteed by any asset or collateral.
- Installment loans with fixed payments: With both loan types, money is funded out upfront in a lump sum and then repaid over a set term with monthly payments — called installments.
Personal loans and private student loans are two forms of credit that are comparable in structure, but they aren’t interchangeable. There are some important and key differences borrowers should be aware of.
1. What you can use the loan for
The most significant difference is the kinds of expenses each loan can be used to cover.
A personal loan can actually be used to pay for almost anything. Unlike a mortgage, car loan, or even a student loan, the terms of the loan are not tied to its intended use (though some lenders might have a few restrictions about their use).
This makes personal loans a popular financing option for a range of purchases. From emergency expenses to major life events like moving or a wedding, to consolidating debts.
When a borrower takes out a private student loan, however, they are legally required to limit the use of these funds to college costs such as tuition. You can also use student loans for education-related expenses, such as child care for dependents, a new laptop for schoolwork, or even your rent or phone bill.
You can also use a new private student loan to refinance existing student loan debt.
2. What kind of interest rates you can get
Typically, private student loans will carry much lower interest rates and cost less to borrow than personal loans.
The lower rates on a private student loan mean that they’ll generally be a cheaper way to borrow. If you’re borrowing to pay for educational expenses or refinance student debt, a private student loan from a lender like College Ave is probably the more affordable choice.
3. How loan funds are disbursed
Another key difference is how lenders disburse funds borrowed through private student loans vs. personal loans.
With a personal loan, the funds are deposited into the borrower’s account after the loan has been approved. And, the loan agreement finalized. The borrower is then free to use that money for anything they want.
Private student loans, however, follow a different process:
- Student loans are disbursed first to your financial aid office.
- The financial aid office uses your student loan money to cover any outstanding tuition costs or other fees.
- You can then claim any remaining funds and use them to pay out-of-pocket educational expenses.
Private student loans can also be used by borrowers who have left school to refinance student debts.
Through this process, you can apply with a lender that offers student loan refinancing to get a new loan up to the total amount required to fully pay off existing student debts.
Upon approval, the refinancing lender will send payments directly to the student loan servicer of the existing debt to pay them off in full, on behalf of the borrower.
4. Whether the debt is dischargeable
Personal loans and private student loans are handled differently in a bankruptcy.
Personal loans are considered consumer debts and are dischargeable through bankruptcy. If a borrower cannot afford their debts and needs to file for bankruptcy, personal loans can be forgiven or wiped out through this process.
Private student loans, on the other hand, are much harder to discharge than other consumer debts.
Typically, courts will deny requests to discharge either federal or private student loans in bankruptcy. The filer must appeal the denial and prove undue hardship to discharge student loans in bankruptcy.
5. When the loan comes due
You’ll also want to consider when you’ll have to start making payments on this loan.
Many private student loans have flexible payment options. Most provide the option to defer student loan payments while you’re still enrolled in college. Student lender Ascent, for example, lets students enrolled at least half-time to postpone repayment for up to 60 months.
Personal loans, on the other hand, won’t have the same options to defer payments while you’re still in school. Most lenders will require you to start repaying your personal loan within a few weeks of disbursement.
6. Whether you can write off interest payments
Lastly, private student loans provide the opportunity to write off interest payments on student debt — a benefit that can reduce taxable income by as much a $2,500.
But the loan has to meet certain eligibility requirements for the student loan interest deduction to apply.
And while most private student loans will meet those requirements, personal loans usually won’t.
Choosing between a personal loan and private student loan
When you understand the differences between private student loans and personal loans, it will help you make an informed decision about which one is better for your situation.
If you need to finance educational or college-related expenses or refinance student debts, consider a private student loan. The lower interest rates and a wider array of options on private student loans can make them a flexible way to fund college costs.
But if you’re looking for more control to decide how and where to use loan funds, a personal loan might be the better option. This type of loan can fill in the financial gaps and help you pay for non-college costs.
For example, you might need funds to pay for a coding bootcamp or similar training program. Or as a college student, you might wind up stuck with a bill for a major medical or dental procedure while you’re in college.
Once you decide on the right type of loan for you, however, your homework isn’t over. Make sure you shop around for loans and compare offers to find lenders that can offer you an affordable loan that meets your needs.