Paying Off Student Loans
Maybe you heard of people taking out a personal loan to pay off their student loans, but have you wondered whether that’s a good idea? Have they uncovered a secret way to fast-track their student loan repayment that you don’t know about? Or are you better off leaving your loans as is or taking out a private student loan to refinance them? We break down the benefits and drawbacks of taking out personal loans to pay off student loans.
Starting to Repay Your Student Loan Debt
When you graduate from college, you likely don’t have to start repaying your federal student loans right away.
Some federal student loans have a grace period of six months, but with some it can last as long as 9 months. Interest may accrue while your loans are in the grace period, so some people make interest-only payments so that the total loan balance does not increase.
If you’re unable to pay your federal student loans after the grace period ends, you may be able to defer your loans for a number of reasons including if you’re returning to school, are unemployed, are experiencing extreme economic hardship, are on or have recently been on active duty service in the military, and other reasons.
If you don’t qualify to defer your loans, you might be able to forbear your loans. To qualify for forbearance, you need to be experiencing financial difficulties, medical expenses, changes to employment, or other reasons that your student loan servicer approves. With both deferment and forbearance, you don’t have to make payments on your loans, but interest on certain types of loans may continue to accrue.
But what happens if you can’t afford your payments but don’t fit any of those criteria and don’t have any other help paying for school?
As your salary increases, you will likely be better financially able to pay your loans but, in the first few years after graduation your salary may not cover much more than basic expenses. Luckily, there are other ways you can lower your payments.
Basing Student Loan Payments Off Your Monthly Income
If you’re struggling to cover your basic monthly living expenses, you might consider enrolling in an income-driven repayment program .
There are various repayment plans to choose from that allow you to limit your monthly payments to a percentage of your monthly discretionary income. That will often reduce your monthly payments to a more manageable level.
After 20 to 25 years of on-time student loan payments — or 10 years if you’re enrolled in the Public Service Loan Forgiveness Program — your loans may qualify to be forgiven under these repayment plans. If you’re interested in enrolling in one of these plans, contact your student loan servicer for information on how to do so.
Can You Use a Personal Loan to Pay Off Student Loans?
While it is possible to use a personal loan to pay off your student loans, either federal or private, many lenders may not approve your application if they know you will be using the loan for this purpose. There are specific rules around using personal loans for paying for post-secondary education, so it’s important to be upfront with your lender about the purpose of your loan.
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Personal Loans Explained
A personal loan is a loan for which the borrower receives a one-time, lump sum amount of money and repays it, with interest, over a set amount of time in equal installments, typically monthly.
How a personal loan works doesn’t vary much from lender to lender. The time from application to decision may vary — some lenders may approve or deny in a week, some in a few days, while others might give you a decision the day after you submit a loan application.
Generally, after receiving a loan application a lender will do a hard credit check, which could have a slight negative effect on your credit score. They’ll look at factors such as your income, credit score, payment history, and debt-to-income ratio, among others.
Typically, personal loans are unsecured, which means the lender doesn’t ask for collateral to back the loan. If you opt for a secured personal loan, however, the application process will likely be longer because the lender will need to verify the value of the collateral.
If you’re approved for a personal loan, the funds are disbursed directly to you, the borrower, after closing. This could be a paper check or an electronic deposit into your bank account. Once you have the funds, you’re free to spend them in a wide variety of ways. Some common uses of personal loans are for debt management, home repairs and maintenance, vacation expenses, wedding expenses, and others. There are restrictions to the use of personal loan funds, though, so it’s important to check with your lender before applying. Some common restrictions of personal loan use are for post-secondary education and business expenses.
Repayment usually begins within a month. Installment payments are the same over the life of the loan, each payment having a portion applied to principal and a portion applied to interest. More of the total payment is allocated for interest at the beginning of the loan’s term, and less is allocated for principal. An amortization schedule will show you how much principal and interest are included in each payment.
Pros of Using Personal Loans to Pay off Student Debt
Why would someone choose a personal loan to pay off student loans? There are a few potential benefits.
• A potential reduction in the amount of interest that you’re paying if you qualify for a lower rate on your personal loan.
• You might qualify for a different loan term — or length — potentially reducing your monthly payments by spreading them out over a longer period of time.
• Unlike student loans, in some cases personal loans can be discharged in bankruptcy.
Cons of Using Personal Loans to Pay off Student Debt
However positive some of the advantages may seem, there are some drawbacks to consider.
• You’ll forfeit protections and benefits of federal student loans such as the grace period and the ability to defer or forbear your loans.
• If you have federal student loans, you also lose the opportunity to use income-driven repayment plans to repay your loans and to take part in any student loan forgiveness programs.
• It might be difficult to qualify for a personal loan to pay off your student loans since they won’t be able to confirm that you’ll use the money to pay off your student loans.
• The lender will assess your creditworthiness, which typically includes checking your credit, during the approval process. Most federal student loans don’t require a credit check.
| Pros of Using Personal Loans to Pay off Student Debt | Cons of Using Personal Loans to Pay off Student Debt |
|---|---|
| You might qualify for a lower interest rate on a personal loan than you have on your student loan. | Loss of some protections that typically come with federal student loans, such as deferment and forbearance. |
| If you qualify for a longer loan term, your monthly payments could decrease by stretching them out over a longer period of time. | You won’t be able to use an income-driven repayment plan if you replace federal student loans with a personal loan. |
| Personal loans may be able to be discharged in bankruptcy, unlike student loans, which typically cannot be. | Your creditworthiness is a factor in personal loan approval, unlike federal student loans, most of which don’t require a credit check. |
Why Refinancing Your Student Loans Might Be a Better Plan
When it comes to either reducing your monthly payment on your loans or paying less in interest, you may want to consider refinancing your student loans with private student loans.
Refinancing your student loans means that you take out a new private student loan to pay off your existing student debt. When you do this, you might be able to save money if you qualify for a lower interest rate on your private student loan than on a personal loan. Because student loan debt typically can’t be discharged in bankruptcy, lenders may consider this as incentive to offer a lower rate.
You might also consider getting a longer-term private student loan with lower monthly payments. This will likely mean that you’ll pay more in interest over the life of your loan, but that could give your budget some breathing room. A student loan refinancing calculator can help show how much you may be able to save each month by refinancing your existing student loans.
While refinancing student loans may help students save money, refinancing federal student loans means forfeiting benefits that you might otherwise qualify for, such as deferment, forbearance, and income-driven repayment plans.
While private student loans don’t offer the same protections and benefits as federal student loans, some do offer deferment or forbearance in certain circumstances. Personal loans do not typically offer these benefits.
The Takeaway
Deciding whether to use a personal loan or a private student loan to pay off existing student debt, there are many lenders to choose from. A good way to begin is to consider your current budget (how much money do you have to allocate toward student loan payments), what your goal is (e.g., lowering your interest rate, lowering your monthly payment, paying off the debt as soon as possible), and other overall financial goals.
If a SoFi Personal Loan will help you meet your goals, consider taking one minute to check your rate. There are no fees with a personal loan from SoFi and rates are competitive with other lenders.
Learn more about personal loans from SoFi
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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL MAY 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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