Academic dismissal is when a student is asked to leave a school due to continued poor academic performance. It typically follows a period of probation, which occurs when a student is given a warning and a set amount of time in which they can try to improve their grades and avoid dismissal.
While academic dismissal may seem like the end of the world, it doesn’t mean that the student can never go to college again. It simply means they have to stop attending their current school, at least for a certain period of time. In addition, there are a number of ways to get back on track after a dismissal and either overturn the decision and return to school, or start on a new path that’s a better fit.
• Poor academic performance, such as a GPA below 2.0, can lead to academic dismissal.
• Dismissal impacts financial aid eligibility, which typically requires students to maintain satisfactory academic progress.
• Appealing dismissal involves reflecting on reasons, presenting a sincere case, and showing maturity.
• After dismissal, consider community college, trade schools, or employment as alternative paths.
• Some colleges allow a student to re-apply after academic dismissal, providing they wait a period of time and offer a thoughtful approach to restarting their academic career.
Reasons for Academic Dismissal
Everyone’s academic journey is different, and for some, the transition to college-level work can be more challenging than for others. A student may struggle with grades because they chose a major that’s not compatible with their specific skill set. Or perhaps they faced too many distractions, from personal events or hardships to an overwhelming list of extracurriculars.
When teachers and administrators notice a pattern of poor academic performance, including a GPA below 2.0 or a failure to attain enough credits (as a result of dropping or failing to complete enough courses in a semester), they may put a student on academic probation.
If a student fails to bring up their GPA by the end of their probation period, they may face academic dismissal. Academic probation is not meant to serve as a kind of punishment, but more as a wake-up call to students who are falling seriously behind.
Depending on the school, academic probation may make students ineligible for certain university activities. This makes sense, as probation is meant to be a time to focus seriously on grades in an effort to avoid eventual academic dismissal.
Academic probation or dismissal can also affect a student’s financial aid. The U.S. Department of Education requires students to maintain satisfactory academic progress toward their degrees to receive financial aid — which may include federal, state, and institutional grants and scholarships; work-study; and federal student and parent loans.
There are still options for students who lose their financial aid due to poor academic standing, including some private student loans. Keep in mind, though, that your GPA can also impact your ability to get a private student loan. Each private loan is different, so there’s no one magic number for a student’s GPA. It can be worth shopping around and comparing options from different lenders.
If a student ultimately faces the prospect of academic dismissal, there are multiple routes they can take to try and handle the situation. First, it can be wise to take a moment to reflect on what may have caused the decision to dismiss and reassess one’s priorities. Perhaps a student was up against too much pressure, was pursuing a subject area that didn’t suit them, or had a personal crisis.
If a student decides to appeal the decision, they should be prepared to present a strong and sincere case. Luckily, most schools will allow students to appeal academic dismissal. Most school authorities are receptive to select reasoning or excuses for a poor academic performance. These usually include extenuating circumstances like financial issues, psychological or mental issues, or a family crisis, including an unexpected death in the family.
Approach the case with understanding and humility instead of anger, and try to fight the battle without parents. Students may want to prove that they can handle the stress and academic rigor of college on their own, which involves a certain degree of maturity and independence.
Bouncing Back After Being Dismissed
There’s a lot you can learn from an academic incident like probation or dismissal, and ultimately, it can help you become a better and more dedicated student.
Applying to college after academic dismissal can be a good idea, but only if a student has taken the time to reflect and is ready to make a fresh start. This is especially true if a student is re-applying to the same school.
Some schools will require that students wait at least a year before re-applying, and some will have students show that they’ve received a certain number of credits from community college while on hiatus from the institution. Research each school’s particular policy on reapplying before taking any specific measures.
It can be helpful to talk to professors and academic counselors to determine if going back to college is the right decision and if so, if a student should re-apply to the same school.
It can also be helpful to research schools that have lenient policies around past dismissals when looking to re-apply to school.
College is not for everyone. Other options may include getting a job, pursuing a trade at trade school, or completing an apprenticeship. There’s not one route to a career, so bouncing back may look a little different for everyone.
The Takeaway
It’s important to handle academic probation and dismissal thoughtfully and methodically, assessing all available options and identifying the issues that may have caused a student to fall behind in the first place. If college is still on the table, set a goal to improve grades, whether through tutoring, time management strategies, or a peer study group. Also look into what’s required in terms of getting or regaining financial aid.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
FAQ
What is academic dismissal?
Academic dismissal occurs when a student is required to leave a college due to continued poor academic performance.
Will I be warned before academic dismissal?
Yes, typically a student is put on academic probation prior to academic dismissal. This is a warning period during which grades must be improved to continue as a student at the school.
Does academic dismissal mean I can’t go back to my school?
When academic dismissal occurs, some colleges may allow you to reapply after a specific period of time and by showing why you are now qualified to return to your studies. It’s worthwhile to check with a school about their policy if you are at risk of academic dismissal.
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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
If you’re looking for a tool you can use to borrow money when you need it, you may be wondering which is the best choice: a personal line of credit, a personal loan, or a home equity line of credit (HELOC).
In this guide we’ll compare these three types of loans. The two credit lines both function similarly to a credit card but typically have a lower interest rate and a higher credit limit, while a personal loan can provide you with a lump sum of cash that you pay back over a set term. We’ll also cover some of the pros and cons of using a HELOC vs. a personal line of credit vs. a personal loan.
• A personal line of credit and a HELOC are both flexible borrowing options that allow you to access cash when you want it up to a set amount.
• When it comes to a HELOC vs. a personal line of credit or personal loan, the HELOC will generally have a lower interest rate due to being secured.
• Personal loans typically have fixed interest rates, while HELOCs and personal lines of credit usually have adjustable rates.
• If you have enough home equity, a HELOC could potentially offer you access to more money than a personal loan or line of credit.
• Defaulting on a HELOC puts you at risk for losing your home.
What Is a Personal Loan?
A personal loan is a highly flexible way to borrow a lump sum of money for virtually any reason – from paying medical bills to financing a wedding. You may be able to borrow anywhere from $1,000 to potentially as much as $100,000, typically at a fixed rate, and pay it back in regular monthly installments over a preset period of two to seven or even 10 years. These loans are usually unsecured debt, which means you don’t have to use collateral to qualify. The rate and other terms are determined by the borrower’s credit score, income, debt level, and other factors.
You’ll owe interest from day one on the full amount that you borrow. But if you’re using the loan to make a large purchase, consolidate debt, or pay off one big bill, it may make sense to borrow a specific amount and budget around the predictable monthly payments.
Personal loan rates and fees can vary significantly by lender and borrower. You can use a loan comparison site to check multiple lenders’ rates and terms, or you can go to individual websites to find a match for your goals.
What Is a Personal Line of Credit?
A personal line of credit, sometimes shortened to PLOC, is a revolving credit account that allows you to borrow money as you need it, up to a preset limit.
Instead of borrowing a lump sum and making fixed monthly payments on that amount, as you would with a traditional installment loan, a personal line of credit allows you to draw funds as needed during a predetermined draw period. You’re required to make payments based only on your outstanding balance during the draw period.
In that way, a PLOC works like a credit card. Generally, you can pay as much as you want each month toward your balance, as long as you make at least the minimum payment due. The money you repay is added back to your credit limit, so it’s available for you to use again.
You can use a personal line of credit for just about anything you like as long you stay within your limit, which could range up to $50,000, and possibly more.
Like a personal loan, a PLOC is typically unsecured, so you don’t need collateral. The lender will base decisions about the amount you can borrow and the interest rate you’ll pay on your personal creditworthiness. The interest rates are generally variable.
Can a Personal Loan or a Personal Line of Credit Be Used to Buy a House?
If you could qualify for a high enough credit limit — or if the property you want to buy is being sold at an extremely low price — you might be able to purchase a house with a personal line of credit or a personal loan. But it may not be the best tool available.
A traditional mortgage, secured by the home that’s being purchased, may have lower overall costs than a personal loan or personal line of credit. There are several different types of mortgage loans to choose from.
If you’re looking at a personal loan vs. a personal line of credit or mortgage, it’s also important to realize that a personal loan is usually for a much shorter term than a mortgage, which is typically 30 years, or most PLOCs. And since personal loans, like PLOCs, are unsecured, they typically carry much higher interest rates than traditional mortgages.
A variable rate, which is typical of personal lines of credit, might not be the best option for a large purchase that could take a long time to pay off. Your payments could go lower, but they also could go higher. If interest rates increase, your loan could become unaffordable. With a traditional mortgage, you would have the option of a fixed rate or a variable one.
Another consideration: If you use all or most of your PLOC to make a major purchase like a home, it could have a negative impact on your credit score and future borrowing ability. The amount of revolving credit you’re using vs. how much you have available — your credit utilization ratio — is an important factor that affects your credit score. The rule of thumb is typically to aim for less than 30%.
What Is a HELOC?
A HELOC is a revolving line of credit that is secured by the borrower’s home. It, too, usually has a variable interest rate.
Lenders typically will allow you to use a HELOC to borrow a large percentage of your home’s current value minus the amount you owe. That’s your home equity.
A lender also may review your credit score, credit history, employment history, and debt-to-income ratio (monthly debts / gross monthly income = DTI) when determining your borrowing limit and interest rate.
Turn your home equity into cash with a HELOC from SoFi.
Access up to 90% or $500k of your home’s equity to finance almost anything.
Personal Line of Credit vs HELOC Compared
If you’re comparing a personal line of credit with a HELOC, you’ll find many similarities. But there are important differences to keep in mind as well.
Personal Loan vs HELOC Compared
If you’re looking at a HELOC vs. a personal loan, you’ll find many ways in which the two are different, but also some ways they’re alike.
Similarities
Here are some shared aspects of a personal loan vs. a home equity line of credit.
• The money that you borrow can be used for virtually any purpose you choose.
• Easy access to your money. A personal loan gives you the money in a lump sum and a HELOC allows you to draw funds at will (up to a set limit) during the draw period.
• You must pay interest on your loan, and rates are typically lower than they would be for credit cards, for instance.
• There are defined periods during which your loan and interest must be repaid in regular installments.
• Lenders may charge a variety of fees, including late or prepayment fees on either. Be sure you know about potential fees before closing.
Differences
There are also many points of difference to take into account when you’re considering a HELOC vs. a personal loan.
• HELOCs are secured by your house, which serves as collateral. Personal pans are typically unsecured. This means that your interest rate is likely to be higher with a personal loan.
• HELOCs are revolving lines of credit and work like credit cards – you use what you need when you need it. A personal loan generally comes as a lump sum.
• Personal loans typically have fixed interest rates, meaning that your monthly payments will always be the same for the length of the loan. HELOCs typically have adjustable rates, meaning that your payments can change with the market as well as with how much you withdraw.
• Personal loans generally have terms of 10 years at most. HELOCs often have a 10-year draw period followed by a 20-year repayment period, for a total of 30 years.
• Lender requirements vary, but you’ll generally need a FICO® score of at least 610 for a personal loan, while for a HELOC, it may be 680. Higher scores are likely to result in better interest rates and possibly higher loan limits.
• Since your home is collateral for a HELOC, you may need to pay for an appraisal to establish how much your home is worth. Depending on your lender, you may also need to pay other closing costs.
Personal Loan vs. Home Equity Line of Credit
Personal Loan
HELOC
Flexible borrowing and repayment
✓
✓
Convenient access to funds
✓
✓
Annual or monthly maintenance fee
Not typically
Varies by lender
Typically a variable interest rate
✓
Secured with collateral
✓
Approval based on creditworthiness
✓
✓
Favorable interest rates
✓*
✓*
*Rates for secured loans are usually lower than for unsecured loans. Rates for personal loans are generally lower than credit card rates.
Personal Line of Credit vs HELOC Compared
If you’re comparing a personal line of credit with a HELOC, you’ll find many similarities. But there are important differences to keep in mind as well.
Similarities
Here are some ways in which a personal line of credit and a HELOC are alike:
• Both are revolving credit accounts. Money can be borrowed, repaid, and borrowed again, up to the credit limit.
• Both have a draw period and a repayment period. The draw period is typically 10 years, with monthly minimum payments required. The repayment period may be up to 20 years after the draw period ends.
• Access to funds is convenient. Withdrawals can be made by check or debit card, depending on how the lender sets up the loan.
• Lenders may charge monthly fees, transaction fees, or late or prepayment fees on either. It’s important to understand potential fees before closing.
• Both typically have variable interest rates, which can affect the overall cost of the line of credit over time. (Each occasionally comes with a fixed rate. The starting rate of a fixed-rate HELOC is usually higher. The draw period of a fixed-rate personal line of credit could be relatively short.)
• For both, you’ll usually need a FICO® score of 680. Your credit score also affects the interest rate you’re offered and credit limit.
Differences
The biggest difference when you’re looking at a personal line of credit vs. a home equity line of credit is that a HELOC is secured. That can affect the borrower in a few ways, including:
• In exchange for the risk that HELOC borrowers take (they could lose their home if they were to default on payments), they generally qualify for lower interest rates. HELOC borrowers also may qualify for a higher credit limit.
• With a HELOC, the lender may require a home appraisal, which might slow down the approval process and be an added expense. HELOCs also typically come with other closing costs, but some lenders will reduce or waive them if you keep the loan open for a certain period — usually three years.
• A borrower assumes the risk of losing their home if they default on a HELOC. A personal line of credit does not come with a risk of that significance.
Personal Line of Credit vs. Home Equity Line of Credit
Personal LOC
HELOC
Flexible borrowing and repayment
✓
✓
Convenient access to funds
✓
✓
Annual or monthly maintenance fee
Varies by lender
Varies by lender
Typically a variable interest rate
✓
✓
Secured with collateral
✓
Approval based on creditworthiness
✓
✓
Favorable interest rates
✓*
✓*
*Rates for secured loans are usually lower than for unsecured loans. Rates for personal loans are generally lower than credit card rates.
A HELOC and personal line of credit share many of the same pros and cons. An advantage of borrowing with a HELOC, however, is that because it’s secured, the interest rate may be more favorable than that of a personal line of credit or a personal loan.
A HELOC may offer a tax benefit if you itemize, spend the funds on buying, building or significantly improving your home, and can take the mortgage interest deduction. But there are potential downsides, too.
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Pros:
• Flexibility in how much you can borrow and when.
• Interest is charged only on the amount borrowed during the draw period.
• Generally, interest rates are lower than those on credit cards or unsecured borrowing.
• Interest paid may be tax deductible if HELOC money is spent to “buy, build, or substantially improve” the property on which the line of credit is based.
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Cons:
• Your home is at risk if you default.
• Variable interest rates can make repayment unpredictable and potentially expensive.
• Lenders may require a current home appraisal for approval.
• A decline in property value could affect the credit limit or result in termination of the HELOC.
Pros and Cons of Personal Loans
A personal loan can be a good choice when you need a lump sum of money – say, for a major purchase or bathroom remodel – especially if it’s not an extremely large amount. You’re likely to get a better interest rate than you would on a credit card, and a shorter repayment term than you’d have for a PLOC or HELOC. But there’s a lot to consider.
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Pros:
• You borrow what you need and can spend it as you wish.
• Interest charges are typically fixed, meaning you always know what your payments will be.
• Interest rates are typically lower than credit cards.
• You aren’t putting your home or another asset at risk if you default.
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Cons:
• Interest rate may be higher than for a secured loan.
• A relatively short repayment term may mean that your monthly payments are higher than you’d like.
• Qualification can be more difficult than for secured credit.
• The debt can have a negative impact on your DTI ratio.
Pros and Cons of Personal Lines of Credit
Because you draw just the amount of money you need at any one time, a personal line of credit can be a good way to pay for home renovations, ongoing medical or dental treatments, or other expenses that might be spread out over time.
You pay interest only on the funds you’ve drawn, not the entire line of credit that’s available, which can keep monthly costs down. As you make payments, the line of credit is replenished, so you can borrow repeatedly during the draw period. And you don’t have to come up with collateral.
But there are other factors to be wary of. Here’s a summary.
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Pros:
• You have flexibility in how much you borrow and when
• Interest charges are based only on what you’ve borrowed.
• Interest rates are typically lower than those on credit cards.
• You aren’t putting your home or another asset at risk if you default.
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Cons:
• Variable interest rates can make repayment unpredictable and potentially expensive.
• Interest rate may be higher than for a secured loan.
• Qualification can be more difficult than for secured credit.
• Convenience and minimum monthly payments could lead to overspending.
Alternatives to Lines of Credit
As you consider the pros and cons of a HELOC vs. a personal LOC or personal loan, you may also wish to evaluate some alternative borrowing strategies, including:
Personal Loan
As you’re thinking about a personal loan vs. a personal line of credit, the big difference is that, with a personal loan, a borrower receives a lump sum and makes fixed monthly payments, with interest, until the loan is repaid.
Most personal loans are unsecured, and most come with a fixed interest rate. The rate and other terms are determined by the borrower’s credit score, income, debt level, and other factors.
You’ll owe interest from day one on the full amount that you borrow. But if you’re using the loan to make a large purchase, consolidate debt, or pay off one big bill, it may make sense to borrow a specific amount and budget around the predictable monthly payments.
Personal loan rates and fees can vary significantly by lender and borrower. You can use a loan comparison site to check multiple lenders’ rates and terms, or you can go to individual websites to find a match for your goals.
Auto Loan
If you’re thinking about buying a car with a personal loan, you may want to consider an auto loan, an installment loan that’s secured by the car being purchased. Qualification may be easier than for an unsecured personal loan or personal line of credit.
Most auto loans have a fixed interest rate that’s based on the applicant’s creditworthiness, the loan amount, and the type of vehicle that’s being purchased.
Down the road, if you think you can get a better interest rate, you can look into car refinancing.
Beware no credit check loans. Car title loans have very short repayment periods and sky-high interest rates.
Mortgage
A mortgage is an installment loan that is secured by the real estate you’re purchasing or refinancing. You’ll likely need a down payment, and borrowers typically pay closing costs of 2% to 5% of the loan amount.
A mortgage may have a fixed or adjustable interest rate. An adjustable-rate mortgage typically starts with a lower interest rate than its fixed-rate counterpart. The most common repayment period, or mortgage term, is 30 years.
Your ability to qualify for the mortgage you want may depend on your creditworthiness, the down payment, and the value of the home.
Credit Cards
A credit card is a revolving line of credit that may be used for day-to-day purchases like groceries, gas, or online shopping. You likely have more than one already. Gen X and baby boomers have an average of about four credit cards per person, Experian® has found, and even Gen Z, the youngest generation, averages two cards per person.
Convenience can be one of the best and worst things about using credit cards. You can use them almost anywhere to pay for almost anything. But it can be easy to accrue debt you can’t repay.
Because most credit cards are unsecured, interest rates can be higher than for other types of borrowing. Making late payments or using a high percentage of your credit limit can hurt your credit score. And making just the minimum payment can cost you in interest and credit score.
If you manage your cards wisely, however, credit card rewards can add up. And you may be able to qualify for a low- or no-interest introductory offer.
Credit card issuers typically base a consumer’s interest rate and credit limit on their credit score, income, and other financial factors.
Student Loans
Federal student loans typically offer lower interest rates and more borrower protections than private student loans or other lending options.
But if your federal financial aid package doesn’t cover all of your education costs, it could be worth comparing what private lenders offer.
Home Equity Loans
If you’re a homeowner with equity in your house and you’re not comfortable with the adjustable payments of a HELOC, you might want to consider a home equity loan. These lump sum loans typically have fixed interest rates, meaning that you’ll know in advance what your payments will be every month and can plan accordingly. And since they’re secured with your home, interest rates are typically lower than they’d be for unsecured loans. Just remember that, as with a HELOC, your home is at risk if you can’t make your payments.
The Takeaway
A HELOC, a personal loan, or a personal line of credit can be useful for a borrower in need of funds. Each kind of loan has different advantages and drawbacks, so it’s important to consider each carefully in light of your financial situation so you can assess what would work best for your needs.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.
FAQ
What is better, a home equity line of credit or a personal line of credit?
If you qualify for both, a HELOC will almost always come with a lower interest rate. However, it does put your home at risk if you can’t make your payments.
Can I use a HELOC for personal use?
Yes. HELOC withdrawals can be used for almost anything, but the line of credit is best suited for ongoing expenses like home renovations, medical bills, or college expenses. Some people secure a HELOC as a safety net during uncertain times.
How many years do you have to pay off a HELOC?
Most HELOCs have a “draw period” of 10 years, followed by a repayment period, which may be up to 20 years.
What happens if you don’t use your home equity line of credit?
Having a HELOC you don’t use could help your credit score by improving your credit utilization ratio.
How high of a credit score is needed for a line of credit?
Personal lines of credit are usually reserved for borrowers with a credit score of 680 or higher. A credit score of at least 680 is typically needed for HELOC approval, but requirements can vary among lenders. Some may be more lenient if an applicant has a good debt-to-income ratio or accepts a lower loan limit.
Does a HELOC increase your mortgage payments?
The HELOC is a separate loan from your mortgage. The two payments are not made together.
Photo credit: iStock/KTStock
²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945. All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Can you pay off someone else’s loan? As a general rule, yes — so if you’re a student loan borrower and someone offers you assistance in paying off your loans, you may want to take them up on it.
However, it’s important to understand the implications. While a parent, grandparent, or even a mysterious benefactor could pay off your student loans, they may be responsible for a gift tax if they contribute more than the annual limit. The gift could also come with emotional strings attached.
Read on to learn about the tax implications of paying off someone else’s student loans — and how to repay your loans if the responsibility is all yours.
• If someone pays off your student loans, they may face a gift tax if the amount exceeds the annual IRS exclusion limit.
• Employers can contribute to your student loans without it counting as taxable income, up to a certain amount per year.
• Payments made by parents or others directly to the loan servicer do not count as taxable income for the recipient.
• Gift tax implications apply if a single individual gifts more than $19,000 in one year, but actual tax liability may depend on lifetime gift amounts.
• Ways to pay off your student loans include student loan consolidation, student loan forgiveness, student loan refinancing, and income-driven repayment plans.
Student Loan Repayment
Repaying student loans is a significant financial commitment that requires careful planning and management. After graduation, most federal student loans enter a grace period, typically lasting six months, during which no payments are required. This grace period allows you to get settled into your post-graduation life and start preparing for regular monthly payments. Once the grace period ends, you will begin making payments according to the repayment plan you have chosen.
The standard repayment plan is a fixed monthly payment over 10 years, but there are several other options available to accommodate different financial situations, including income-driven repayment plans.
Common Repayment Scenarios Involving Third Parties
Third parties, such as family members, friends, or employers, can play a significant role in helping borrowers pay off their student loans.
For instance, parents or grandparents might choose to make payments directly to the loan servicer, or they could gift money to the borrower to be used for loan repayment.
Employers may offer student loan repayment assistance as part of their benefits package, contributing a set amount each month or year toward the borrower’s loans. Through CARES Act legislation, employers can contribute up to $5,250 per employee per year toward student loans without the payment counting toward the employee’s taxable income, through 2025.
While these third-party contributions can be a huge relief, it’s important for borrowers to communicate clearly with their servicers and ensure that payments are applied correctly to avoid any administrative issues.
Tax Implications of Employer Student Loan Assistance
Employer-provided student loan assistance can offer significant financial relief, but it also comes with potential tax implications. As of 2023, the first $5,250 of employer contributions toward an employee’s student loans is tax-free. Any amount above this threshold is considered taxable income and must be reported on the employee’s W-2 form. This means that the employee will owe income tax on the additional amount, which could affect their overall tax liability.
Can Parents Pay Off Their Child’s Student Loans?
Yes, they can. But can parents pay off student loans without a gift tax? It depends. If a parent is a cosigner, paying the student loans in full will not trigger a gift tax. In the mind of the IRS, the parent is not providing a gift but is paying off a debt.
However, if a parent is not a cosigner, a gift tax could be triggered, depending on how much they pay.
How the Gift Tax Works
The gift tax applies to the transfer of any type of property (including money), or the use of income from property, without expecting to receive something of at least equal value in return, the IRS says — adding that if you make an interest-free or reduced-interest loan, you may be making a gift.
There are some exceptions. Gifts between spouses aren’t included in the gift tax. That means if you are married and your spouse pays off your loans, that would not trigger a gift tax event.
Tuition paid directly to qualifying educational institutions in the United States or overseas is also not subject to gift tax, but student loans are different.
The annual exclusion for gifts is $19,000 in 2025. That means an individual can give you up to $19,000 without triggering the gift tax, which the givers, not receivers, generally pay. If your parents file taxes jointly, they would be able to give a combined $38,000 a year, which could include paying down loans. Borrowers who have the good fortune to snag $19,000 from mom, dad, granddad, and grandma could get a total of $76,000 without any family member having to file a gift tax return.
As stated, the annual gift tax exclusion for 2025 is $19,000. However, a gift of more than $19,000 towards your student loans doesn’t mean that your benefactor is on the hook for paying a tax on their gift.
The excess amount just gets added to the lifetime exclusion — currently set at $13.99 million. As long as the benefactor’s total lifetime gifts are below that amount, they don’t have to worry about paying a gift tax. Still, if bumping against that lifetime exclusion is a concern, they can spread out their support over the years to avoid gifting you more than $19,000 in a calendar year.
Filing Requirements for Gifts Over the Limit
When an individual gives a gift that exceeds the annual exclusion limit, they are required to file a gift tax return, Form 709, with the IRS.
If the total value of gifts given over the years, including the current gift, does not exceed this lifetime exemption of 13.99 million, no gift tax will be due. However, failing to file the required return can result in penalties and interest. Therefore, it’s essential for individuals who make large gifts to stay informed about these requirements and to consult with a tax professional to ensure compliance and manage their tax obligations effectively.
What Happens When Someone Pays Off Student Loans For You?
• Paying you, with the expectation you will pay the lender
But if someone pays off your debt, is that income? Once another person has paid off your student loans, it’s as if you had paid them off yourself. You would not have any tax liability.
Financial and Tax Consequences
When someone pays off a student loan on your behalf, the financial and tax consequences can vary. Financially, the immediate benefit is the reduction or elimination of your debt, which can build your credit score, free up cash flow, and reduce financial stress.
However, from a tax perspective, the situation is a bit more complex. If the payment is made by a family member or friend, it is generally considered a gift and is not taxable to you, provided it does not exceed the annual gift tax exclusion limit, which is $19,000 per recipient as of 2025. If the gift exceeds this limit, the giver may need to file a gift tax return, but this typically does not result in immediate tax for the recipient.
If the payment is made by an employer, up to $5,250 of the assistance is tax-free, but any amount above this threshold is considered taxable income to you and must be reported on your W-2.
Impact on Credit and Loan Balances
When someone pays off your student loan, the impact on your credit and loan balances is generally positive. Your loan balance will decrease or be completely eliminated, which can significantly improve your debt-to-income ratio and reduce your monthly financial obligations.
The timely payment of your student loan can have a positive effect on your credit score, as it demonstrates responsible debt management. However, it’s important to ensure that the lender reports the payment to the credit bureaus, as this will help reflect the positive change in your credit report.
Other Options to Pay Off Student Loans
Not everyone has a benefactor, of course. While someone taking your student loan balance down to zero can seem like a dream, there are realistic ways to ease the burden of student loans, no third party required.
The one thing that won’t help: if you stop paying your student loans. Ignoring your student loan payments will result in an increased balance, additional fees, and a lower credit score.
If you hold federal student loans and stop paying them, part of your wages could be garnished, and your tax refund could be withheld. If you default on a private student loan, the lender might file a suit to collect from you.
In other words, coming up with a repayment plan is crucial. Strategies to pay off undergraduate and graduate student loans include student loan consolidation, student loan refinancing, student loan forgiveness, and income-driven repayment plans.
Student Loan Consolidation
If you have federal student loans, you may consider consolidation, or combining multiple loans into one federal loan. The interest rate is the weighted average of all the loans’ rates, rounded up to the nearest one-eighth of a percentage point.
Federal student loan consolidation via a Direct Consolidation Loan can lower your monthly payment by giving you up to 30 years to repay your loans. It can also streamline payment processing.
Consolidating federal loans other than Direct Loans may give borrowers access to programs they might not otherwise be eligible for, including additional income-driven repayment plan options and Public Service Loan Forgiveness.
Student loan forgiveness is a program designed to alleviate the financial burden of student debt for eligible borrowers. These programs are often aimed at individuals who have pursued specific careers in public service, teaching, or other fields that benefit society. To qualify, borrowers typically need to meet certain criteria, such as making a set number of on-time payments and working in a qualifying job for a specified period. The most well-known program is the Public Service Loan Forgiveness (PSLF) program, which forgives the remaining balance of federal student loans after 120 qualifying payments.
Borrowers who take out loans on or after July 1, 2026 can still benefit from PSLF so long as they choose the RAP and not the standard repayment plan.
Another way students can get their loans forgiven is through a disability discharge. Disability discharge is a provision that allows borrowers with total and permanent disabilities to have their federal student loans forgiven. To qualify, borrowers must provide documentation from a physician or the Social Security Administration (SSA) confirming their disability status. Once approved, the borrower’s remaining loan balance is forgiven, and they are no longer responsible for making payments.
Student Loan Refinancing
With student loan refinancing, a borrower takes on one new, private student loan to pay off previous federal and/or private student loans. Ideally, the goal is a lower interest rate. The repayment term might also change.
However, refinancing federal loans means that borrowers will no longer be eligible for federal repayment plans, forgiveness programs, and other benefits. If a borrower needs access to those programs, student loan refinancing won’t make sense.
But for borrowers who have no plans to use the federal programs, a lower rate could make refinancing worthwhile. Using a student loan refinancing calculator can help a borrower see how much money they might save by refinancing one or all of their loans.
Income-driven repayment (IDR) plans are federal student loan repayment options designed to make monthly payments more affordable by basing them on a borrower’s income and family size. These plans typically cap your monthly payment at 5% to 20% of your discretionary income and extend the loan term to 20 or 25 years, depending on the specific plan.
Starting on July 1, 2026, income-driven repayment plans PAYE, ICR, and SAVE will be replaced by a new Repayment Assistance Plan (RAP). The existing IDR plans will be eliminated by July 1, 2028. With RAP, payments range from 1% to 10% of adjusted gross income with terms up to 30 years. After the term is up, any remaining debt will be forgiven.
Refinancing Student Loans With SoFi
Even if your parents, grandparents, or others in your life are not in a position to pay off your student loans for you, understanding your options for potentially lowering your monthly payments or saving money over the life of a loan can give you multiple avenues to explore as you work toward taking control of your finances.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQ
Can I pay off my child’s student loans?
Yes, you can pay off your child’s student loans. But, depending on the amount, there may be tax implications.
Is paying off a child’s student loans considered a gift?
Yes. Paying student loans for someone else is considered a gift and would incur a gift tax for any gift above $19,000, which is the gift exclusion cutoff for 2025. That means both parents can contribute $38,000 per calendar year toward their child’s student loans without owing gift tax.
Can I pay off my sibling’s student loans?
Yes. You can absolutely win sibling of the year and pay off your sibling’s student loans. Just know that any gift above $19,000 in 2025 will trigger a gift tax that you will be responsible for paying.
Do I owe taxes if someone else pays my student loans?
If someone else pays your student loans, the amount paid may be considered taxable income, especially if it exceeds the annual gift tax exclusion. However, if the payments are made directly to the lender, they are generally not taxable. Always consult a tax professional for specific advice.
Can paying off someone’s loans impact their eligibility for forgiveness programs?
Paying off someone’s loans can impact their eligibility for forgiveness programs, as these programs often require a specific amount of unpaid debt and a history of consistent payments. If the loans are fully paid off, the individual may no longer qualify for forgiveness. Consult the specific program’s rules for details.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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A pass/fail grading system allows a student to receive either a grade of “P” (pass) or “F” (fail) for a particular class instead of the usual letter grading system. Many colleges offer this option in order to encourage students to explore new academic areas without having to worry about it affecting their transcripts.
However, the pass/fail grading system comes with some limitations, including restrictions on which and how many classes you can take pass/fail each year. And, in some cases, taking a class pass/fail can still have an impact on your academic record.
Read on to learn exactly what pass/fail means, what a passing (and failing) grade is, and when to consider a pass/fail option.
• A pass/fail grading system allows students to receive a “P” (pass) or “F” (fail) instead of letter grades.
• Many colleges offer this option to encourage academic exploration without affecting GPA.
• Pass/fail courses usually apply to electives and may not count toward a major or minor.
• While a passing grade has no impact on GPA, a failing grade can affect it similarly to traditional grading.
• Some employers and graduate programs may prefer letter grades but also value diverse coursework and intellectual curiosity.
How Pass/Fail Grading Works
The traditional grading system was initially established centuries ago by English universities like Oxford and Cambridge as a way of encouraging students to work harder. While letter grades may still be the dominant system in American universities, some schools have deviated from this structure, establishing their own ways of evaluating students largely based on the pass/fail system.
Reed College in Portland, Oregon has a unique style of grading that encourages students to “focus on learning, not on grades.” While students are still assigned grades for each course, these grades are not distributed to students. Instead, students are given lengthy comments and reports on their academic performance. Reed does not have a dean’s list or honor roll either.
At Brown University, students can take an unlimited number of classes “satisfactory/no credit (S/NC),” and GPAs are not calculated. They also do not name students to a dean’s list.
Some schools, including Swarthmore College and MIT, have students take all classes pass/fail in the first semester of their freshman years. Swarthmore’s policy is meant to encourage students to stretch themselves and take risks, and is aligned with their policy of collaboration as opposed to competition with classmates. MIT’s policy is designed to help students adjust to increased workloads and variations in academic preparation and teaching methods.
In both cases, taking the emphasis off grades is meant to improve students’ experiences of higher education, helping them to take full advantage of their time on campus.
Of course, most schools emphasize letter grades more than Brown and Reed, as it allows them to distinguish high achievers and highlight specific areas where students excel or may need to improve.
It’s common, however, for colleges to allow students to take one class pass/fail per semester. Typically, this is only offered for elective (not core) classes. Often, a grade of “P” is equal to a grade of D- or higher, but has no impact on the student’s overall grade point average. A grade of “F,” however, will usually have the same effect on the grade point average as a traditional failure.
💡 Quick Tip: Private student loans offer fixed or variable interest rates. So you can get a loan that fits your budget.
What Are the Benefits of Pass/Fail?
While college can be a rewarding and stimulating time for students, it also has its challenges, including constant pressure to keep up your grades. The beauty of taking a class pass/fail is the sense of freedom it gives you — once the stress of getting a perfect grade is removed, you are at liberty to fully embrace the kind of intellectual curiosity that should be at the heart of a college experience.
Maybe you’re a pre-med student and want to take a painting class, or perhaps you’re majoring in sociology and want to dabble in art history. These options can lead you down unexpected paths, opening creative doors you might have avoided if you were solely focusing on your GPA.
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The Limits to Pass/Fail
The pass/fail system also has some potential downsides. One is that should you end up doing really well in the class, you generally can’t change your mind and ask to take the class for a grade rather than pass/fail. By the same token, if you do poorly in a class, you can’t make a belated request for a pass/fail.
In addition, pass/fail grades generally don’t count toward a major or minor, which limits your options when deciding whether or not to go this route.
While it’s hard to know for sure, some students feel that taking a higher number of pass/fail classes could reflect poorly on their college academic record and be a strike against them when applying for a job or to graduate school. However, it’s also possible that a potential employer or an admissions officer might be impressed by a student’s breadth of study and sense of initiative in studying “outside the box.”
Taking a few of your classes pass/fail can be a great way to explore new academic areas of interest during college, and is unlikely to adversely impact your post-grad opportunities, including summer internships, employment, and graduate school.
Whether you take a class pass/fail or for a letter grade won’t have any impact on how many credits you get from the course — or the cost of tuition. If you’re concerned about how you’ll cover the cost of your education, keep in mind that you have a range of options — including savings, scholarships, grants, work-study programs, and federal or private student loans.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
FAQ
How does pass/fail grading work?
Pass/fail grading simplifies academic evaluation by assigning a “pass” for satisfactory performance and a “fail” for unsatisfactory performance, typically without letter grades. It reduces pressure and allows students to explore subjects without impacting their GPA.
Does pass/fail hurt your GPA?
Pass/fail courses generally do not affect your GPA. A “pass” does not add points, and a “fail” may or may not lower it, depending on the institution’s policy. Check your school’s guidelines for specific details.
Does a pass/fail class look bad?
Pass/fail courses typically don’t impact your GPA. A “pass” doesn’t add points, while a “fail” might or might not lower it, depending on your school’s policy. Always check your institution’s guidelines for clarity.
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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Owing money to the IRS can be stressful, especially if you’re not prepared for a tax bill. Whether it’s due to under-withholding, freelance income, or capital gains from selling an asset, you might find yourself facing a tax bill you can’t afford to cover up front. If that happens, you may wonder: Can I get a loan to pay taxes?
The answer is, yes. Taking out a loan, such as a personal loan, to pay taxes is an option. However, it’s important to weigh the pros and cons carefully against other possibilities like payment plans offered by the IRS.
Below, we explore what tax loans are, the available options for paying taxes when you’re short on cash, and the potential advantages and disadvantages of using a loan to cover your tax obligations.
• You can use a loan to pay your taxes and it could potentially save money on penalties and interest.
• Personal loans offer fixed repayment terms and quick funding, but rates can be high if you don’t have strong credit.
• Home equity loans and HELOCs use home equity, providing potentially lower interest rates.
• A credit card with a 0% introductory rate could be an affordable option if you can pay off the balance before rates go up.
• Consider an IRS payment plan before deciding on any financing option.
What Is a Tax Loan and How Does it Work?
A tax loan is any form of financing used to pay off a tax debt. This can come in many forms, including personal loans, home equity loans/credit lines, payday loans, or even credit cards. These loans and credit lines are not issued by the IRS, but rather by private lenders, banks, or online financial institutions.
A tax loan allows you to pay your tax bill in full. You then repay the loan over time according to the lender’s terms. This could include fixed monthly payments over many months or years, along with interest and possible fees. Essentially, you’re swapping your debt to the IRS for a different kind of debt, one with a financial institution.
In some cases, the cost of a loan may be lower than the combination of interest and penalties the IRS charges if you don’t pay your taxes on time. Normally, the late-payment penalty is 0.5% of the unpaid taxes for each month the tax remains unpaid (not to exceed 25% of your unpaid taxes). The IRS also charges interest on your unpaid tax bill. The rate can change each quarter but was set to 7% for the third quarter of 2025.
Options to Pay Taxes
Before turning to a loan, it’s a good idea to consider all your options. The best choice for you will depend on your credit profile, financial health, and how quickly you can repay any borrowed funds.
IRS Payment Plans
The IRS offers payment plans, which you can apply for online. These plans allow you to spread the amount you owe into smaller payments without involving a third-party lender. Interest and penalties on your unpaid tax bill continue to accrue while you’re on an IRS payment plan, but the late-payment penalty drops to 0.25% per month.
There is a short-term plan for those who owe less than $100,000 and can pay the balance within 180 days. There is also a long-term plan for those who owe less than $50,000 but need more than 180 days to pay their balance. It’s free to set-up the short-term plan but the long-term plan comes with a set-up fee ($22 if you enroll in direct debts or $69 if you don’t).
Credit Cards
If your tax debt is relatively small and you have room on your credit card, paying the IRS with plastic can be a quick fix. However, this option should be approached with caution.
While the IRS allows tax payments via credit card, it does so through third-party payment processors that charge a convenience fee of around 1.75%. And if you can’t pay the credit card balance off immediately, you’ll be stuck paying high interest rates that can add up quickly.
One exception: If you can qualify for a credit card that offers a 0% introductory rate, using a credit card could be an affordable way to pay your tax bill over time. The key is to pay off your balance before the promotional rate ends (often 15 to 21 months). Otherwise this could be a costly way to get a loan to pay your taxes.
Loved Ones
Borrowing from family or close friends might be a viable option if you’re short on cash and want to avoid high-interest loans. This type of informal loan can offer flexibility in repayment terms, and often, little or no interest. It also doesn’t require a credit check, which can make it an appealing choice for people who may have a limited or poor credit.
However, mixing money with personal relationships can be tricky. If you don’t make agreed-upon payments on time or run into trouble repaying the loan, it could strain or damage relationships.
If you do decide to go this route, it’s important to be clear about expectations from the beginning. You might even want to draw up a simple agreement to outline expectations.
Payday Loans
Payday loans are short-term, high-interest loans intended to cover urgent financial needs until your next paycheck. They are typically easy to get and require little credit history, making them seem attractive for those looking for fast cash who might not qualify for other borrowing options.
However, payday loans come at a steep cost. According to the Consumer Financial Protection Bureau, fees often run around $15 for every $100 borrowed, which equates to an annual percentage rate (APR) of nearly 400%. Repayment periods are also typically short, generally two to four weeks.
Many borrowers fall into a cycle of renewing loans or taking new ones to pay off the previous ones, leading to a dangerous spiral of debt. These should only be considered as an absolute last resort.
Home Equity Loan or Line of Credit
A home equity loan and a home equity line of credit (HELOC) are both ways to borrow money using the equity in your home as collateral. A home equity loan provides a lump sum of money with a fixed interest rate, while a HELOC functions like a credit card, allowing you to borrow, repay, and borrow again against a set credit limit, often with a variable interest rate.
Home equity financing typically comes with lower interest rates than unsecured loans. But if you default on your loan or line of credit, you could potentially lose your home. This type of funding can also take some time to get, as the underwriting process typically requires multiple steps (including a home appraisal).
Personal Loans
A personal loan can be a practical solution for paying off taxes. There are different types of personal loans but typically these loans are unsecured, meaning you don’t need to put up any type of collateral. You borrow a fixed amount and repay it in equal installments over a predetermined term, typically one to seven years.
Interest rates vary widely depending on your credit score, income, and the lender’s policies. For borrowers with excellent credit, rates can be relatively low. However, those with fair or poor credit may face higher rates and fewer options.
Pros and Cons of Using a Personal Loan to Pay Taxes
Taking out a personal loan to pay taxes can be a smart financial move in some cases, but it’s not for everyone. Here’s a breakdown of the advantages and drawbacks.
Pros
• Fixed repayment terms: Personal loans come with fixed monthly payments, which can make budgeting easier and help you plan your finances. Term lengths also tend to be longer than what you could get with an IRS payment plan.
• Lower interest rates (with good credit): For borrowers with strong credit, personal loans typically offer lower rates than credit cards.
• Quick funding: Many lenders can approve and fund a personal loan within a week; some even faster. That can be helpful if your tax payment deadline is looming.
• Avoid IRS Penalties: Using a loan to pay your taxes on time can help you avoid late payment penalties and compounding interest from the IRS.
• Credit Building: Successfully managing and repaying a personal loan can have a positive impact on your credit profile.
• Interest costs: Depending on your credit, personal loans can carry high interest rates that add significantly to your overall repayment amount.
• Fees: Some personal loans come with origination fees, prepayment penalties, or late fees, which can increase the total cost of borrowing.
• Could negatively impact credit: Taking out the loan will trigger a hard credit inquiry which can cause a small, temporary drop in your credit scores. Any late or missed payments could have a more damaging effect on your credit profile.
• Increases your DTI: Since a personal loan adds another monthly debt payment, it directly increases your debt-to-income ratio (DTI) (a metric that compares your monthly debt payments to your gross monthly income). This could make it harder to qualify for other types of financing, such as a mortgage or car loan, in the future.
• Not a long-term fix: A personal loan is a temporary solution. If your tax issue stems from deeper financial problems, it’s important to address the root cause.
The Takeaway
If you can’t pay your full tax liability by the deadline, it may be possible to get a loan, such as a personal loan or home equity loan, to cover the shortfall. This can help you avoid owing penalties and interest to the IRS, but it’s important to keep in mind that loans generally come with their own costs.
Before you borrow, you’ll want to carefully evaluate your financial situation, shop around for the best loan terms, and compare the total cost of borrowing against using an IRS payment plan. Understanding your options and choosing wisely can help you stay out of trouble with the IRS and protect your long-term financial health.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Can I get a loan to pay taxes?
Yes, you can potentially get a loan to pay your taxes. One option is to apply for a personal loan from a bank, credit union, or online lender, and use it to cover your tax debt. If you own a home and have sufficient equity, another option is to take out a home equity loan or line of credit and use the funds to pay your taxes. A 401(k) loan or a credit card (ideally with a low a 0% promotional rate) are other potential options.
Before you borrow money to pay your taxes, however, it’s a good idea to explore an IRS payment plan. While the agency continues to charge interest and penalties on your unpaid balance, the cost could be lower than some borrowing options.
What is a tax loan?
A tax loan is any form of financing used to pay off a tax debt. For example, you can use a personal loan as a tax loan. This type of financing offers a lump sum you can use to pay the IRS or your local tax authority immediately. This helps avoid penalties, interest charges, or tax liens. However, tax loans also come with costs, so it’s important to weigh your options carefully.
How does a tax loan work?
A tax loan often works like a standard personal loan. You apply through a lender (such as a bank, credit union, or online lender) and if approved, you receive a lump sum, which you use to pay your tax bill. You then repay the loan in fixed monthly installments over a set period with interest.
A tax loan can be helpful if you don’t have enough cash to cover your tax bill, but it’s important to consider their potential costs and risks to determine if it’s the best approach for your situation.
Is using a personal loan for taxes better than using a credit card?
Using a personal loan for taxes can be better than using a credit card, depending on the terms. Personal loans often have lower interest rates than credit cards, especially for borrowers with good credit. They also offer fixed repayment terms, which can make budgeting easier. However, if you can qualify for a credit card with a 0% introductory rate and can pay off the balance before the rate goes up, that option might be more cost-effective.
What credit score do you need for a tax loan?
If you’re thinking of getting a personal loan to pay your tax bill, lenders generally prefer borrowers with good or excellent credit scores (mid 600s and above), though requirements vary. Borrowers with higher scores are more likely to qualify for better interest rates and loan terms. If your credit score is lower, you may still qualify through subprime lenders, but you’ll likely face higher rates. Many lenders also consider other factors — such as income, employment history, and debt-to-income ratio — when evaluating your application, not just your credit score.
Can I use a personal loan to pay property taxes?
Yes, you can use a personal loan to pay property taxes. This option can be useful if you’re facing a large, unexpected bill or trying to avoid late fees or a tax lien. A personal loan provides quick funding and fixed monthly payments, allowing you to spread the cost over time. Before going this route, however, it’s a good idea to compare interest rates and loan terms to other options, such as payment plans from your local tax authority.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
