Personal loans cannot be used to pay for your college education, but you might be tempted to borrow for living expenses. Here’s why you shouldn’t:
The repayment begins immediately. Unlike most student loans, which allow you to defer loan payments for up to six months after leaving school, your first personal loan bill would be due right after you receive the money.
You will pay high rates. Unless you have a long credit history and a high credit score, you will be paying higher interest rates than even student loans offered to borrowers with bad credit.
You will have a shorter repayment period. The repayment of personal loans tends to last for no more than five years. It may seem like an advantage, but you will have to repay while you are in school, and your loan repayments will be higher than with student loans, which have longer repayment periods.
Still not convinced? Here are the answers to four common questions about using personal loans for college.
Can I use a personal loan to pay for my tuition?
Any lender who gives a loan for educational purposes faces regulatory bureaucracy under federal law, but personal use loans do not have such rules. This is why lenders who provide personal loans do not allow the loans to be used for college.
Either way, you have better alternatives available.
To have financial aid for college by submitting a free federal student aid application, or FAFSA. This is the key to aids like grants, scholarships and work-study programs, which you must accept before considering borrowing. This type of help does not need to be repaid, so it is your best option to pay for your education.
If you’ve borrowed all possible federal loans and still need money to close a college payment gap, compare offers on private loans from banks, credit unions and online lenders.
Can I use a personal loan for college living expenses?
Personal loans, like all loans, must be repaid with interest. If you need money for living expenses, look to other financial sources first. You could find a part-time job on or off campus to help you with your personal expenses. Or, explore the opportunities for private scholarships, which do not need to be reimbursed.
If you want to borrow for your living expenses, go for student loans. Personal loans do not offer the same protections designed for students as student loans, especially federal student loans.
Personal loans also tend to carry much higher interest rates than most student loan options. Student loan repayment times tend to be longer – 10 years is the norm – so you have more time to pay off your debt. This can keep monthly payments lower and more affordable with student loans compared to personal loans.
Can I use a personal loan in an emergency?
If you need emergency cash in college and are considering a personal loan, first contact your school’s financial aid office to discuss available emergency aid options.
Schools often have short-term emergency loans, scholarships, grants, or vouchers available for students in an emergency. An emergency that could fall under these programs would typically include a health emergency, death in the family, natural disasters, or loss of family employment.
Personal loans from a bank, credit union, or online lender can be used in an emergency, but they carry very high interest rates.
Can I use a personal loan for existing student loans?
If you are considering this option because you cannot afford your current payments, consider signing up for a income based repayment plan to make monthly payments more affordable.
If you are looking to find a better rate on your debt, many lenders specialize in student loan refinancing for those with good credit and a stable income.
If I want a personal loan, what are my options?
If you are interested in a personal loan, it is difficult to apply on your own without a co-signer as most lenders require borrowers to have a credit history.
First of all try a credit union, which tend to offer lower interest rates for those with average or bad credit and are often willing to consider more than your credit.
If you are considering an online lender, Reached is one of the few that lend to students who do not have a credit history. Instead, they consider your potential for post-graduation earnings.