Student Loan vs. Personal Loan: Which One’s Best for You?
If you have to borrow money to pay for college, federal loans are usually best. But if that’s not an option, you may end up deciding between a private student loan and personal loan.
Usually, the private student loan will have a better interest rate, but in some cases, the personal loan might be the better option. So if you’ve hit your federal borrowing limit, here are some factors to consider as you weigh a personal loan versus a student loan.
Student loan vs. personal loan: Similarities
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.
- 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 (as opposed to a federal student loan, which doesn’t).
- Unsecured debt: Personal loans and private student loans are unsecured debt. This means that, unlike an auto loan or mortgage, 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 up front in a lump sum and then repaid over a set term with monthly installments, unlike a credit card or line of credit.
Student loan vs. personal loan: Differences
Personal loans and private student loans are two forms of credit that are comparable in structure, but they aren’t interchangeable. There are some 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 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 required to limit the use of these funds to college costs, such as tuition. These do usually include education-related expenses, such as child care for dependents, a new laptop for schoolwork or even your rent or phone bill.
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 is probably the more affordable choice.
3. How loan funds are disbursed
Another key difference is how lenders disburse funds borrowed through personal loans as opposed to private student 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, generally 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 or else return them to the lender.
Private student loans can also be used by borrowers who have left school to refinance student debt. Through this process, you can apply with a lender to pay off your existing school debt with a new loan — hopefully with a lower interest rate.
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 currently 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. What happens when the loan comes due
You’ll also want to consider when you’ll have to start making payments on this loan.
Some private student loans have flexible payment options. Many provide the option to defer student loan payments while you’re still enrolled in college.
Personal loans, on the other hand, probably 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
Private student loans provide the opportunity to write off interest payments on student debt.
Note, however, that the loan has to meet certain eligibility requirements for the student loan interest deduction to apply. While most private student loans will meet those requirements, personal loans usually won’t.
Choosing between a personal loan and a private student loan
Understanding the differences between private student loans and personal loans will help you make an informed decision about which is best 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 on top of paying for school.
Once you decide on the right type of loan for you, make sure you shop around and compare offers to find lenders that can offer you an affordable loan that meets your needs. Search broadly online or start your hunt with our list of favorite private or personal lenders.