Refinancing your student loan debt into a personal loan may seem like a way to simplify payments and escape federal loan complexity. Before you make the switch, understand what you might give up and whether it’s worth it.
Can You Use a Personal Loan to Pay Off Student Loans?
Personal loans typically offer flexibility in how you use the funds. While some lenders don’t allow you to use personal loans to pay tuition, they often can be used to pay off debt, including student loans.
“In most cases, you can use a personal loan to pay off existing student debt, and typically, there aren’t restrictions,” says Kevin Krebs, founder of college planning service HelloCollege. “Most lenders focus on whether you qualify financially for the loan, not how you use the funds.”
[Read: Best Personal Loans.]
Why Pay Off Student Loans With a Personal Loan?
There are few advantages to paying of a student loan with a personal loan. One scenario where it might make sense is if you expect you will face severe financial hardship and need to discharge the debt.
“A personal loan can be discharged in bankruptcy — something federal student loans generally don’t allow,” says Krebs.
Federal student loans can’t be discharged in bankruptcy unless you can prove you have an “undue hardship.” But personal loans are treated like other unsecured debts and may be eligible for discharge.
You may also be interested in refinancing your student debt with a personal loan if you’re trying to streamline your debt payments, or prefer a shorter, more straightforward repayment plan.
[Read: Best Private Student Loans.]
Personal Loans Lack Federal Student Loan Benefits
Refinancing student loans into a personal loan means giving up numerous benefits. Federal student loan benefits include income-driven repayment plans, loan forgiveness programs such as Public Service Loan Forgiveness, deferment and forbearance options and federal protections.
“It’s better to have access to these programs and options than to leave the system,” says Jay Zigmont, a certified financial planner and founder and CEO of Childfree Trust.
You could miss out on federal student loan relief if you move your student loan debt to a personal loan that’s not likely to offer the same leniency during an emergency. For example, federal student loan payments and interest were paused during the COVID-19 pandemic.
A personal loan is also likely to have a higher interest rate than federal student loans. Current federal student loan rates are 6.39% for direct subsidized and unsubsidized loans for undergraduates, while the average personal loan annual percentage rate is 11.57% for a 24-month term.
Pros and Cons of Using Personal Loans to Pay Off Student Loans
Pros
— Can offer a clearly defined payoff timeline
— Easier to discharge in bankruptcy than federal student loans
— Fixed interest rates and a single, predictable monthly payment
Cons
— Loss of federal protections and forgiveness programs
— Higher interest rates
— Risk of denial or worse terms
[Read: Best Student Loan Refinance Lenders.]
Who Should Consider a Personal Loan for Student Loan Debt?
Those facing severe financial distress might benefit from moving student loan debt to a personal loan. This option may also appeal to borrowers who want more certainty in a fixed APR, monthly payment and repayment schedule.
Borrowers with income that’s too high to meaningfully benefit from income-driven repayment plans may also prefer a personal loan, though it makes sense to check the APR.
Those who are eligible for federal student loan forgiveness programs shouldn’t refinance student loans into a personal loan, because you’ll be disqualified from forgiveness opportunities.
Likewise, you should stick with federal student loans if you have low or unpredictable income and can benefit from income-driven repayment plans. And if you think you might need to use deferment, forbearance or relief programs, you’ll have better opportunities with federal student loans.
“The benefit of a personal loan is the flexibility,” says Krebs. “You can potentially restructure your debt on different terms. However, this does come with a risk, since private loans often come with higher costs and no safety nets like federal loan programs.”
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Should You Use a Personal Loan to Pay Off Student Loans? originally appeared on usnews.com
