Can You Use a Personal Loan to Pay Off Student Loans
At a Glance
If you’re facing a mountain of student loan debt, you may be willing to do anything to pay it off. And while many options exist to pay off student loans quickly, from income-driven repayment plans to refinancing, you may be wondering if taking out a personal loan to pay off student loans makes sense. Here’s what you need to know about taking out a loan to pay student loans and when it’s a good idea to do so.
In this article, you’ll find:
Benefits of Personal Loans
Personal loans are a popular loan for people who need help paying for a large expense, like a wedding or an emergency. And they’re also frequently used for debt consolidation. That’s because personal loans tend to have a reasonable interest rate and can save borrowers a lot of money by consolidating high-interest debts down to a lower, predictable payment.
But when it comes to using a personal loan to pay off student loans, you’ll need to discuss it with the personal loan lender first. Some lenders have strict requirements around allowing personal loans to be used for paying off student loans.
When it Makes Sense to Use a Personal Loan to Pay Off Student Loan Debt
If you’re drowning in debt, there are a few situations when there’s a strong case for borrowing money to pay off student loans.
When the Interest Rate is Lower
If you have private student loans, the interest rate on a personal loan may be low enough to save you cash over the life of the loan. But since interest rates on a personal loan depend on your credit score, borrowers working to improve their credit score may not receive the most favorable rates.
When You’re Considering Bankruptcy
Most student loans will not be discharged when you file for Chapter 7 bankruptcy. But personal loans, as well as other unsecured debt like credit cards, can be discharged. While bankruptcy should be a last resort for debt relief, opting to pay off your student loan using a personal loan first might be a smart move if you’re thinking about filing.
When to Stick With Your Student Loan Repayment Plan
While using a personal loan to pay student debt may make sense in some circumstances, there are a few times when it might be best to stay the course or consider an alternative option outlined below.
When Your Loans are Federal
Federal student loans offer protection that won’t be extended by a lender issuing personal loans. For example, the government issued a student loan forbearance period where no borrower was required to make mandatory payments. So if you choose to use a personal loan to pay off student loans, you’d be stuck making payments on the loans instead of seizing the forbearance opportunity to save and work toward other financial goals.
If You’re Working to Improve Your Credit Score
Personal loans may be difficult to qualify for, especially if you have a below-average credit score. If you’re taking steps to improve your score, it may make sense to continue making timely payments with your current lender to boost your score, then reapply at a later date.
When You’re Writing Off a Lot of Interest
The interest you pay on qualifying student loans is tax-deductible up to $2,500, depending on income. So if you’re used to taking a hefty student interest deduction at tax time, you may face a smaller refund or none at all by converting your student loan debt to a personal loan.
Alternatives to Using a Loan to Pay Off Student Loans
Other options are available to pay off student loans that don’t include taking out a personal loan.
Create a Debt Management Plan
A debt management plan is a service typically offered by non-profit credit counselors. As part of the plan, the counselors work with your creditors to lower interest rates and payments. Debt management plans are typically used as an option by those facing debts in collections. As part of a debt management plan, you may also have an opportunity to repair your credit score.
Deferment
If you’re struggling to make student loan payments, you can request a deferment, which means a temporary reprieve from mandatory payments. But you may still need to pay interest during the deferment window.
Forbearance
Both deferment and forbearance act as temporary reprieve to help when you can’t afford to make student loan payments. Those who apply for forbearance are typically experiencing financial hardships that may prevent them from making payments. As with deferment, during a forbearance window, interest may still accrue and increase what you owe.
Settlement
Debt settlement means you’re offering an amount to lenders less than what you actually owe. Settlement is typically used as an option for those close to or at the point of defaulting on loans. But unless you can convince the lender to mark the debt as paid, it may remain on your credit report as delinquency for seven years.
Refinancing
Refinancing your student loans means you may end up with a lower interest rate, which can save you money. But refinancing federal loans may mean you’ll become ineligible for certain government programs. Private student loan refinancing is generally wise if you have excellent credit, which means you can lock in a lower interest rate.
Loan Consolidation
Consolidating loans means you’ll pay a single, predictable monthly payment. And using debt consolidation in a new loan means you may be able to lock in a lower interest rate and increase savings.
Payment Plans
Those with federal student loans can apply for several types of repayment plans, including income-driven repayment plans. If accepted, you may be able to pay less on your loans each month based on your income and family status.
The Bottom Line
While it’s possible to pay off a student loan with another loan, the better question is, should you? Taking out a new loan to pay student debt doesn’t actually mean you’re paying down any debt but rather moving it to a new place. But if you would save significant money in interest or decrease your repayment term, it might be worth considering.
While you may be able to use a bank loan to pay off student loans, it’s not always the smartest financial move. Consider taking out a loan to pay student loans if a lower interest rate will save you money or if you’re considering bankruptcy. Otherwise, it may be best to stay the course and consider alternative options like debt management plans, government payment plans, or student loan consolidation. When in doubt, it always makes sense to consult a financial professional who can advise on the best move for your unique situation.
6 min 
