Many lenders won’t let you use a personal loan to pay off student loans. But even if they did, personal loans can come with higher interest rates that cost you more money overall.
If you’re looking to pay off student loans faster, refinancing student loans can get you out of debt sooner while saving you money in interest.
Why don't lenders provide personal loans to pay off student loans?
Lenders determine how personal loan funds can be used, and it's usually outlined in the loan agreement.
Money loaned for educational expenses — including paying off existing student loans — comes with additional requirements that lenders must adhere to. If the personal loan does not meet the criteria, including what's outlined in the Higher Education Act, you can't use it to pay off student debt.
If you’re not sure whether you can use a personal loan to pay off student loans, check the lender’s terms and conditions. That will tell you what the loan can and can't be used for. Specific student loan refinancing products will be labeled as such, and the funds will be sent directly to your loan servicer.
Should you use a personal loan to pay off student loans or refinance?
The short answer is no. Personal loans are best for consolidating higher-interest debts, like credit card debt, to lock in a lower rate.
But consolidating high-interest debt is different from consolidating student loans, which typically have lower interest rates to begin with.
Instead, it's better to refinance your loans with a with private student lender. Here's why:
- Lower interest rates. Rates on personal loans can range from about 6.5% to 36%, while student loan refinance rates currently sit around 4.5% to 10%, as noted NerdWallet. So, if you can qualify for private student loan refinancing, you’re likely to get a better interest rate — and pay less, as a result — than with a personal loan.
- Longer repayment terms. Most personal loans offer repayment terms between two and seven years. Private student loans typically have a minimum five-year term with terms up to 20 years. A shorter term may sound appealing because you’ll pay off loans earlier, but it can also come with a bigger monthly bill that's further inflated by a personal loan’s higher interest rate.
- Better tax benefits. You can deduct student loan interest, up to $2,500, from your taxable income each year you make eligible student loan payments. Interest on personal loans doesn’t qualify for a similar tax break.
You’ll typically need a credit score in at least the high 600s, steady income and enough cash to cover your monthly expenses to qualify for refinancing your student loans.
Personal loans do have one advantage over private student loans: They can be erased like most other unsecured debt during bankruptcy proceedings. Student loans can also be dismissed through bankruptcy, but doing so is often difficult and expensive.
Other ways to pay off student loans
Even if you can’t qualify for student loan refinancing, a personal loan likely isn’t the answer for paying off student loans.
Personal loans for borrowers with bad credit are available, but you can expect rates above 25%. That would make them far more expensive than your existing student loans.
Instead, you can try refinancing with a co-signer or wait until you’re in a stronger financial position. While you do that, try to implement additional strategies to chip away at your debt, like making biweekly payments and reducing your interest rate by enrolling in automatic payments.
