Can You Use A Personal Loan To Pay Off Student Loan Debt?

Sometimes, it’s easy to feel like you’ll never pay off your entire student loan debt balance. In fact, respondents to a One Wisconsin Institute survey said on average, it took them 21 years to pay off their student loan debt. So it can be pretty tempting to look for creative ways to pay down your debt a little quicker.

Personal loans can generally be used on any large expense (like a wedding, a home renovation or an emergency expense), but for many people, they are an instrumental way to consolidate debt or pay down high-interest debt a little faster.

On average, personal loans have a lower interest rate compared to credit cards — according to the Federal Reserve, the current average APR for a two-year personal loan is 9.58% while the average APR for a credit card is 16.30%. 

Of course, the interest rate on a personal loan will depend on your credit score. And, generally, the higher your credit score, the more likely you are to receive a lower interest rate among other more favorable terms for a personal loan. Some lenders, like LightStream, actually offer interest rates as low as 2.49%. And peer-to-peer lenders like LendingClub can also offer lower-than-average interest rates (LendingClub’s rates start around 7.04%).

By contrast, interest rates on federal student loans will depend on the type of loan (undergraduate, graduate or parent PLUS loan), but the average rate across the board is 5.8%. And when it comes to private student loans, average interest rates can range from 6% to 7% but can be as high as 12.99% among major private lenders. So the idea of using a lower-interest personal loan to pay off a student loan can seem like a chance to save on interest.

So can you use a personal loan to pay off student loan debt? It depends. Here’s what you should consider before trying this strategy.

Interest rates for personal loans can sometimes be lower than interest rates on private student loans (depending on the lender and your credit score, of course), but not always. The only time you’ll actually save money by using a personal loan to pay off your student loans is if you’re definitely receiving a lower interest rate on the loan.

Some lenders have tools you can use to estimate what loans you qualify for and what your interest rate is likely to be. Prosper Personal Loan, for example, has a rate tool that can show you how much you’ll qualify for, what your monthly payments will look like and how much you’ll pay in interest, all without hurting your credit score. This can help you get a preview of what’s to come if you do decide to submit an application.

In 2020, all federal student loan payments went into a forbearance period as a result of the Covid-19 pandemic. This forbearance period was recently extended through Jan. 31, 2022. This means that federal student loan borrowers are not required to make student loan payments at this time, and their balances will not accrue interest until after the pause ends next year. If you have private student loans, or you refinanced your federal student loans, however, you don’t qualify for this protection.

Bankruptcy is a process where a person can seek relief from some or all of their debts if they are unable to repay them. Chapter 7 bankruptcy can completely eliminate any debts you have. And while it can damage your credit score, filing for bankruptcy provides something of a financial reset — by improving your financial habits, you can work to rebuild your credit score over time.

But most student loans aren’t discharged when you file for bankruptcy. According to the American Bar Association, both private and federal student loans are unable to be discharged in bankruptcy unless a borrower can prove that the loan payment is an “undue hardship.” However, it is notoriously difficult to prove the standards for undue hardship (here’s more on what you need to know about filing bankruptcy on student loans).

Personal loans, though, can be discharged in bankruptcy. This is arguably one of the few advantages to paying off a student loan using a personal loan.

Refinancing is a popular option for student loan borrowers because they can usually land a lower interest rate and might even end up with lower monthly payments, too. The terms around refinancing a student loan also aren’t as restricting as they are when it comes to using a personal loan to pay off student loan debt. Just keep in mind that when refinancing, you’ll typically lose federal protections on your student loans. But it can be a smart move for anyone with private student loans.

There are also many options available when it comes to finding a lender that will refinance your student loans. Interest rates for refinancing a loan at SoFi start at 2.74% if you make your monthly payments using autopay. And SoFi is currently offering student loan refinance terms similar to the terms of the federal forbearance period — it’s allowing borrowers to lock in a lower interest rate with 0% interest until Dec. 20, 2021 and make no payments on their balance until Feb. 2022.

If you worry you’ll have trouble making on-time loan payments, you should contact your student loan servicer to discuss the possibility of extending forbearance on an individual basis. Oftentimes, you can ask for a payment plan that better suits your circumstances.

Paying off your student loans is a huge accomplishment, but it can be one that is often difficult to reach. Many people are left making student loan payments well into adulthood. And while using a lower-interest personal loan to pay off your student loans can be a clever way to save money, it’s a strategy that should be very carefully considered — especially when it comes to understanding the terms of use of the loan.