Is a Personal Loan a Viable Option to Pay for College?
Should you consider a personal loan to pay for college? Tuition and other costs can seem like a daunting task for many American families. The 2018-2019 college season saw the first nationwide decline in enrollment in years, but most people still see the value in getting a college degree. Not everyone qualifies for scholarships or grants, and even for the ones who do qualify, those scholarships and grants rarely cover 100% of all college costs. So how do you cover these expenses? Is a personal loan the way to go?
What Is A Personal Loan?
A personal loan is when you borrow money from a bank or financial institution and pay it back in fixed monthly installments. They’re usually paid back over the course of 2-5 years with rates that can range anywhere from 5%-35%. A personal loan that isn’t backed by any collateral is usually referred to as an unsecured loan, or signature loan. These usually have higher interest rates. A secured loan is backed by collateral, such as your car, and has lower interest rates. If you fail to pay back a secured loan you could forfeit your collateral to the bank.
Getting approved for a personal loan depends on more than just your credit score. Lenders will often take a look at your debt-to-income ratio and they will also take into account how well you pay down revolving debt like credit cards. And, as with pretty much any other type of loan, the better your credit history, the lower your interest rate will be.
You Can’t Pay Tuition With A Personal Loan
Let’s say that again: You can’t pay tuition with a personal loan. Loans to pay for college tuition have many federally-regulated rules and red tape. Because of this, lenders are not able to offer personal loans that will be used for tuition payments. A personal loan can be used to pay for any other college expenses such as books, living expenses, travel costs, room and board, a laptop — basically anything else that isn’t your tuition. And technically, yes, once a bank gives you a personal loan, the money is yours and you can do whatever you want with it. But again, using a personal loan to pay for college tuition is highly discouraged. There are better options out there.
And special bonus, many of these better options can also cover (or partially cover) living expenses for a typical college student.
- FAFSA: Free Application for Federal Student Aid is a federally subsidized program to offer scholarships, grants, and work-study opportunities. This should be considered before any other option available.
- Subsidized & Unsubsidized Loans: These are federal student loans to help cover expenses that one could expect when attending a four-year university. These are loans with low interest rates offered by the U.S. Department of Education.
Should You Pay For College Expenses With A Personal Loan?
As with pretty much any loan, a personal loan must be repaid with interest. You should exhaust all other options first before turning to a personal loan to pay for college expenses. Student loans are structured in a way to be much more lenient with the repayment terms. Here are some of the major differences between personal loans and student loans:
- Higher Interest Rates: Personal loans have much higher interest rates than student loans.
- Immediate Repayment: Payment on student loans can often be deferred, or put off for a while, but payment on personal loans is expected usually within 30-60 days of signing the paperwork.
- Shorter Payoff Period: Personal loans are often on repayment terms of 2-5 years. The shorter the payoff period, the higher your monthly payments will be. Student loans often have repayment terms that extend out 10+ years.
Can You Pay Off Student Loans With A Personal Loan?
Technically, yes, you can. Should you? Probably not. Personal loans often have higher interest rates than student loans. Even if you ignore the interest rates, there’s a lot of benefits student loans offer that you wouldn’t ever find on a personal loan.
- Tax Benefits: Student loans come with various tax benefits to help ease the burden.
- Loan Forgiveness: Many types of student loans offer loan forgiveness programs where, upon meeting certain conditions, the loan debt can be potentially wiped out.
- Grace Period: Oftentimes student loans do not need to be paid back until you’re finished with school. The grace period can typically be extended if you decide to stay in school longer.
- Deferment: Similar to the grace period, student loans likely come with deferment options should you lose your job, have some kind of emergency, or some other life-changing decision pops up, you can get with the lender and pause your loan payment responsibilities.
A Personal Loan Isn’t Terrible
We need to emphasize that a personal loan is great, but for the right circumstances. If you’re new to college it is imperative that you exhaust all federally available options first. A personal loan can be great for those who have no other options to turn to. It’s also infinitely better than trying to pay for college and related expenses using something like a credit card, or a payday loan.
If you have to take the round for institutions offering the best interest rates. You’re about to hire this bank or financial institution to work for you, so do your research and ask questions. Treat this like your interviewing a potential employee.
- Credit Unions: What would happen if a bank operated as a not-for-profit institution and was there solely to help consumers? Well, you would end up with a credit union. Because of the way they operate, their interest rates and fees are typically much lower than normal banks.
- Bundle Products: Many banks, both local and nationwide, will offer discounts on interest rates if you hold a checking account or other products with them. If you’re considering a bank, ask about discount rates for existing customers or for bundling products.
- Check Your Credit: You should check your credit before shopping around. Also, when a bank runs your credit to consider approval, you’re entitled to get a copy of that credit report. Go over everything and check for errors. An error on your credit report can result in a loan with higher interest rates.
- Fees, Fees, Fees: The interest rates on personal loans are so much higher compared to other types of loans, this means banks and institutions make more profit from this kind of lending. Since they’re making a good chunk of money from your interest payments, they likely won’t have absurd fees. That being said, it’s always a good idea to read the fine print and ask plenty of questions to your loan originator, or the person taking your application.
Personal loans are great when you need money quickly. The application and approval process can usually be done on the same day, with the loan money often available in 24-48 hours or less. But remember, when it comes to paying college tuition, there are usually much better options available than personal loans.