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Is it Smart to Use a Personal Loan to Pay Off Student Debt?

August 24, 2018 · 6 minute read

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Is it Smart to Use a Personal Loan to Pay Off Student Debt?

When it comes to student loans, graduates find all kinds of creative ways to stay on top of them. Some people decide to launch crowdfunding campaigns because they believe complete strangers will be willing to help them pay off their loans. Others choose to take on a full-time job and six side hustles and pledge to repay their loans within the year.

But just because these strategies might work for others doesn’t mean that they will work for you! If you find yourself with only one $20 donation from your Aunt Nell and burned out from your side hustles, you might be willing to try anything.

Maybe you heard of people taking out a personal loan to pay off their student loans, but have wondered whether that’s a good idea? Have they uncovered a secret way to fast-track their student loan repayment that you don’t know about? Or are you better off leaving your loans as is or taking out a private student loan to refinance them? We break down the benefits and drawbacks of taking out a loan to pay off student loans.

Starting to Repay Your Student Loan Debt

Before we get into what you can do to repay your loans, it might be helpful to talk about what your repayment might look like. When you graduate from college, the good news is that you don’t have to start repaying your loans right away.

Student loans have a grace period built in. With most loans, this period is six months, but with some it can last as long as 9 months. While your loans are in the grace period, you are still being charged interest on them, so some people decide to make payments on that interest alone so that the balance does not grow.

If you’re unable to pay your loans after the grace period is over, you have options. With federal student loans, you may be able to defer your loans for a number of reasons including if you’re returning to school, are unemployed, are experiencing extreme economic hardship, are on or have recently been on active duty service in the military, and several other reasons.

If you don’t qualify to defer your loans, you might be able to forebear your loans. To qualify for forbearance, you need to be experiencing financial difficulties, medical expenses, changes to employment, or other reasons that your student loan servicer approves. With both deferment and forbearance, you don’t have to make payments on your loans, however, if you have certain types of loans you might not be charged interest on them if your loan is in deferment.

But what happens if you just can’t afford your payments but don’t fit any of those criteria? A lot of people end up being in that crowded boat and struggle to make their student loan payments every month. It might be because you’re underemployed and presently making latte art at your local coffee shop, or just that you have an entry level job in your field but aren’t making enough money yet.

As your salary increases, you will likely be better placed to pay your loans but, in those first few years after you leave school, you’ll likely be turning to clipping coupons as though they will save you. Luckily, there are other ways you can lower your payments.

Basing Payments Off Your Monthly Income

Are you struggling to cover your rent and buy ‘actual food’ and not just rice and beans? If you’re yearning for room in your grocery budget for a bunch of grapes or the occasional spaghetti with meat sauce, then you might be interested in how you can lower your monthly payments on your federal student loans. It’s easy! You can do so by enrolling in one of the many income-driven repayment programs that are offered.

There are various repayment plans to choose from that allow you to limit your monthly payments to just 10% to 20% of your monthly discretionary income. That will often reduce your monthly payments to a more manageable level and allow you to at least buy eggs every once in a while.

After 20 to 25 years of on-time student loan payments, your loans qualify to be forgiven under these repayment plans. If you’re interested in signing up for one of these plans, you should contact your student loan servicer to find out more.

Can You Use a Personal Loan to Pay Off Student Loans?

While it is possible to use a personal loan to pay off your student loans, many lenders will decline your application if they know you will be using the loan for this purpose. There are specific rules around using personal loans for paying for school so it is important to talk to your lender to determine if it is possible for your individual situation.

First, let’s look at why someone would ever use a personal loan to pay off student loans. The first benefit is that you can potentially reduce the amount of interest that you’re paying if you qualify for a lower rate on your personal loan.

You might also be able to qualify for different loan terms lengths—potentially reducing your monthly payments by spreading them out over a longer period of time. Another benefit is that, unlike student loans, personal loans can be discharged in bankruptcy. That means that if you’re ever unable to repay your personal loans, you can declare bankruptcy and get rid of them. In contrast, student loans can rarely be discharged in bankruptcy.

But that’s where the benefits stop in using a personal loan to pay off your student loans. By doing so, you lose some protections that you get from student loans such as your grace period and the ability to defer or forbear your loans. If you have federal student loans, you also lose the opportunity to use income-driven repayment plans to repay your loans and to take part in any student loan forgiveness programs.

Also, it might be difficult to qualify for a personal loan to pay off your student loans since they won’t be able to confirm that you’ll pay off your student loans. The lender will calculate your student loans and the loan you’re applying for as part of your debt-to-income ratio when deciding whether to lend to you.

That could lead you to being approved to borrow less, not at all, or at a higher interest rate. In contrast, when you use a refinancing loan to pay off debt, the debt that you’re refinancing does not get counted in your debt-to-income ratio since they only include the loan you’re applying for in the equation.

Why Refinancing Your Student Loans Might Be a Better Plan

When it comes to either reducing your monthly payment on your loans or paying less in interest, your best bet might not be to get creative and take out a personal loan to repay your student debt – but just refinance your student loans with private student loans.

Refinancing your student loans means that you take out student loans in order to pay off your existing student debt. When you do this, you can often save money because you’re more likely to qualify for a lower interest rate on your student loans than if you took out a personal loan. That’s because the debt can’t be discharged in bankruptcy so that secures the debt and allows lenders to give you a lower rate.

You can also get a longer-term length and space out your payments so that you owe less each month. This will likely mean that you’ll pay more in interest over the life of your loans, however, it could allow you to ensure you can afford your loans and some occasional canned salmon while you’re not making as much early in your career. Check out this student loan refinancing calculator can help show how much you may be able to save each month.

While refinancing your student loans can help many students save money, you should think twice before you refinance your federal student loans. That’s because you lose out on the ability to have your student loans forgiven or to qualify for income-driven repayment plans.

You’ll also lose out on the ability to defer or forbear your student loans in certain circumstances – depending on the student loan refinance provider. That’s one of the benefits of refinancing your student loans rather than taking out a personal loan. While private student loan lenders don’t offer the same benefits as federal student loans, many offer deferment or forbearance in certain circumstances–unlike with personal loans.

It’s important to note that it might be difficult to qualify for student loan refinance right out of school since you might not be making enough or have a long enough credit history. For that reason, you might need to get a co-signer in order to qualify to refinance your loans or wait until you build your credit up enough in order to qualify. Usually, the higher your credit score is, the less you’ll pay in interest.

Ultimately, refinancing your student debt is often the better option over using a personal loan to refinance that debt. That’s because you can get lower rates and better terms.

Want to refinance your student loans? Find out what rate you qualify for by answering just a few short questions.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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