Personal Loans for Students

Navigating student loan options can feel more complicated than calculus homework.

You need enough money to cover tuition, books, meals and maybe even housing for several years. But financial aid and federal student loans – which are some of the best options for covering the bill – might not be enough.

If you need more money to pay all your college expenses, personal loans could be a solution, and they’re much cheaper than some alternatives like racking up credit card debt. Just make sure you understand the drawbacks before applying, since student debt can stay with you for years or even decades after graduation.

» Learn More: College Students and Credit Card Debt

How Personal Loans for Students Work

Personal loans give you a lump sum of money up front, and then you pay the money back (plus interest) in equal monthly payments over a set period of time. Most personal loans are unsecured loans, which means you don’t have to give the lender any collateral. Secured loans, on the other hand, require you to pledge collateral such as a car or savings account in exchange for the loan.

If the lender allows it – some don’t – you can use a personal loan to pay for tuition. The funds from a personal loan can also be used for general college expenses like rent and school supplies. Unlike federal student loans, however, you usually have to begin making regular payments or even interest-only payments during school.

But before you can qualify for a personal loan, whether for student expenses or not, the lender will need to review your credit information and income. Based on what they find, they may or may not determine whether you can afford a loan.

Types of Personal Loans for College Students

If you’ve ruled out federal loans and you’re considering a personal loan for students, these are some loan types to consider:

• Traditional personal loans: Personal loans are generally offered by banks, credit unions, and online lenders, and you may be able to use them for college expenses. If you qualify, the funds go directly to your bank account.
• Private Education Loans: Some lenders have a personal loan for students, also known as a Private Education Loan or Alternative Education Loan. Your school may be able to provide you with a list of these lenders on request. As a benefit, some Private Education Loans and other personal loans for students have lower interest rates than traditional personal loans. If you qualify, the lender sends the money directly to your school.

How to Qualify for a Personal Loan as a Student

Qualifying for a personal loan as a student can be tricky. You usually need to build credit before you can be approved for a loan, but you may not have had a chance to do that just yet.

Before applying, take some time to shop around and compare lenders. Each one has different requirements, and some may be more flexible for students than others. Just keep in mind that most reputable lenders have the following requirements in common:

• Credit Scores: You may be able to qualify for a loan with poor credit (FICO scores of 580 or lower) but the lower your scores, the more you’ll have to pay in interest and lender’s fees. If you can, take time to improve your credit before applying. It will help you avoid denials and save a lot of money on interest charges down the line.
• Income: Lenders want to make sure you can repay the loan. To do this, they review your income and debt – usually by reviewing your pay stubs, tax returns and credit reports. Some won’t approve your loan application if you have less than two years of employment history.

What If You Don’t Qualify for a Personal Loan?

Did your efforts to get scholarships, grants, federal loans AND personal loans come up short? It might seem like you’ve reached the end of the road, but there are still options to explore:

• Find a cosigner: A cosigner is someone who shares full responsibility for a debt. By agreeing to cosign on your loan, your family member or loved one takes on a big responsibility, but can also be a huge help. Having a cosigner can boost your chance of being approved, especially if it’s someone with great credit. But if you miss a payment, both of you will face credit damage and may have to pay fees to the lender.
• Borrow from family: Unlike going to a lender, family loans (hopefully) don’t come with credit score requirements or fees. When approaching a loved one for a loan, sweeten the deal by offering to write out the loan terms, including the details of your repayment plan.

Pros and Cons of Using a Personal Loan as a Student

As we mentioned above, you could end up repaying school loans for decades. Given the impact they have on your future, it’s worth weighing ALL the pros and cons of student loans vs personal loans before applying.

Advantages of Personal Loans for Students

• No FAFSA: Unlike federal student loans, you don’t have to fill out the Free Application for Federal Student Aid (FAFSA) form or keep an eye on FAFSA deadlines.
• Flexible use: Student loans can’t be used for certain costs associated with college, such as food and travel, but a personal loan can.
• Build credit: When you make on-time payments on your loan, you add positive information to your credit reports and help your credit scores grow.
• Lower Interest Compared to Credit Cards: The difference is substantial. The rate for a personal loan is 11-12% compared to about 24-25% APR for a credit card.

Disadvantages of Personal Loans for Students

• Lender requirements: Unlike federal student loans, the credit score requirements for personal loans vary from lender to lender, and your scores will impact your interest rates. Plus, you typically need documented employment history to qualify.
• Limited flexibility: Repayment options for private loans are far less flexible than federal student loans. Private loans don’t come with income-driven repayment plans or loan forgiveness
• Higher interest rates: Student loan interest rates for federal student loans are typically the lowest interest rates available. As of mid-2023, federal student loans ranged from 5% to 8.05% (fixed). At the same time, the average APR on a 24-month personal loan was 11.48%. Plus, unlike most federal student loans, private loans may have variable interest rates, meaning they can increase over time.
• No grace period: For federal student loans, payments aren’t due until after you graduate or leave school, and some aren’t even due until six or nine months later. With traditional personal loans, payments start right away.

Personal Loans vs. Student Loans

Comparing federal student loans to personal loans is like comparing apples to oranges. Federal programs are built specifically for students and, as such, they come with ample flexibility for repayment. But they also have limited uses in comparison to personal loans.

Here’s a quick reference guide to help you identify the differences between the types different of loans you can use for school expenses::

Can You Pay Off Student Loans with Personal Loans?

Yes, you can use personal loans to pay off student loans, but it’s certainly not recommended.

Using a new loan to pay off an old one, also known as refinancing, is a good idea if it gets you into a lower interest rate, a lower monthly payment or more flexible payment terms.

That’s not likely to happen when you refinance from a federal student loan to a private loan, since the Department of Education offers some of the lowest rates and best repayment options available. On top of that, you may have to pay an origination or application fee to the new lender.

Instead, of refinancing to a personal loan, you might look into a federal Direct Consolidation Loan or an income-driven repayment plan.

How to Choose the Right Loan for You

Searching for the right loan can feel like prepping for final exams. In both cases, you don’t want to go in unprepared. When you’re shopping for loans and deciding where to apply, be sure to examine the following details:

• Eligibility requirements
• Minimum and maximum loan amount
• APR range
• Fixed or variable APR
• Length of repayment
• Hardship payment programs or income-based repayment plans
• Lender fees
• Prepayment penalty (if applicable)
• Timeline to receive funds

Unlike taking an exam, you don’t have to solve the loan problem on your own. If you want help finding the best personal loans for students, improving your credit before applying or handling other financial challenges, credit counseling from a nonprofit credit counseling agency can walk you through all of your options.