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

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Sometimes it’s easy to feel like you are doing it never pay off all of your student loan debt. In fact, in a survey by the One Wisconsin Institute, respondents said it took an average of 21 years to pay off their student loan debt. So it can be quite tempting to look for creative ways to pay off your debt a little faster.

Personal loans can generally be used for any major expense (like a wedding, a home renovation, or an emergency expense), but for many people it is a tool to consolidate debt or pay off high-interest debt a little faster.

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

Of course, the interest rate on a personal loan depends on your creditworthiness. And, in general, the higher your creditworthiness, the more likely you are to get a lower interest rate and other better terms on a personal loan. Some lenders, like LightStream, even offer interest rates as low as 2.49%. And peer-to-peer lenders like LendingClub can also offer below average rates (LendingClub rates start at around 7.04%).

LightStream Personal Loans

  • Annual percentage (APR)

    2.49% to 19.99% * when you sign up for Autopay

  • Loan purpose

    Debt Consolidation, Home Improvement, Auto Finance, Medical Expenses, Wedding and Others

  • Loan amounts

  • conditions

  • Credit needed

  • Origination fee

  • Early withdrawal penalty

  • Late fee

In contrast, federal student loan interest rates vary depending on the type of loan (student, graduate, or parent PLUS loan), but the average total interest rate is 5.8%. And when it comes to private student loans, the average interest rates can be anywhere from 6% to 7%, but they can go as high as 12.99% for large private lenders. So the idea of ​​using a low-interest personal loan to repay a student loan can seem like an opportunity to save interest.

So, can you use a personal loan to pay off student loan debt? It depends. Here are some things to consider before trying this strategy.

Terms of use for the personal loan

Interest rates on student loans vs. personal loans

Interest rates on personal loans can be sometimes Be lower than the student loan interest rate (depending on the lender and your creditworthiness, of course), but not always. The only time that you will actually save money by using a personal loan to pay off your student loan is when you are definitely getting a lower interest rate on the loan.

Some lenders have tools that can help you estimate what loans you will qualify for and what your interest rate is likely to be. Prosper Personal Loans, for example, has an installment tool that shows you how much you qualify, what your monthly payments are, and how much interest you will be paying without affecting your creditworthiness. This can help you get a preview of what’s to come if you decide to submit an application.

Personal loans prosper

  • Annual percentage (APR)

  • Loan purpose

    Debt Consolidation / Refinance, Home Improvement, Auto / Motor, Medical or Dentistry, Bulk Purchase, and more

  • Loan amounts

  • conditions

  • Credit needed

  • Origination fee

    2.41% to 5%, deducted from the loan proceeds

  • Early withdrawal penalty

  • Late fee

    5% of the monthly payment or $ 15, whichever is higher (with a grace period of 15 days)

Federal student loan protection

In 2020, all payments of the federal student loan due to the Covid-19 pandemic went into a deferral period. This grace period was recently extended to January 31, 2022. This means that federal student loan borrowers will not have to make student loan payments at this point, and interest will not be earned on their balances until the break has ended next year. However, if you have a personal student loan or have refinanced your federal student loan, you are not eligible for this protection.

If you take out a personal loan with the intent to use the money to pay off your federal student loan balance, you will lose all protections that come with federal loans. That’s you You cannot qualify for any federal loan repayment programs, such as:

These initiatives are designed to make it easier for you to repay your credit as a federal student loan borrower, but will no longer be available to you once you take out a personal loan to repay the credit. This can be a financially stressful situation if you really need some economic relief from the payments in the end.

Bankruptcy protection

Bankruptcy is a process whereby 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 all of the debts you have. And while it can hurt your creditworthiness, filing for bankruptcy is like a financial restart – by improving your financial habits, you can work to restore your creditworthiness over time.

But most student loans aren’t settled when you file for bankruptcy. According to the American Bar Association, both personal and federal student loans cannot go bankrupt unless a borrower can demonstrate that the loan payment is “undue hardship.” However, it is notoriously difficult to prove the undue hardship standards (learn more about what you need to know about student loan filing for bankruptcy here).

However, personal loans can be dissolved in bankruptcy. This is arguably one of the few advantages of paying off a student loan with a personal loan.

Other options

Refinancing is a popular option for student loan borrowers because they typically get a lower interest rate and may even have lower monthly payments. The conditions for refinancing a student loan are also not as restrictive as when using a personal loan to pay off student loan debts. Just keep in mind that if you refinance you will usually lose federal protection for your student loans. But it can be a smart move for anyone with private student loans.

There are also many ways to find a lender to refinance your student loans. The interest rates for refinancing a loan with SoFi start at 2.74% when you make your monthly payments with Autopay. And SoFi currently offers student loan refinancing terms that are similar to the terms of the state deferral period – allowing borrowers to set a lower interest rate at 0% interest through December 20, 2021 and not make any payments on their balances through February 2022.

Refinancing the SoFi student loan

  • costs

    No origination fees for refinancing

  • Eligible Loans

    Federal, personal, graduate and graduate loans, Parent PLUS loans, doctor and dentist loans

  • Loan types

  • Variable rates (APR)

    From 2.24%; from 2.37% for doctors / dentists (prices include 0.25% autopay discount)

  • Fixed prices (APR)

    From 2.99%; from 3.12% for doctors / dentists (prices include 0.25% Autopay discount)

  • Credit terms

  • Loan amounts

    Starting at $ 5,000; over $ 10,000 for medical / dental residence loans

  • Minimum creditworthiness

  • Minimum income

  • Allow a co-signer

If you are concerned that you are having problems with the timely payment of the loan, you should contact your student loan service provider to discuss the possibility of an individual deferral extension. Often times, you can ask for a payment plan that better suits your circumstances.

Bottom line

Paying back your student loan is a huge accomplishment, but it is often difficult to achieve. Many people continue to pay student loans into adulthood. And while a low-interest personal loan to pay off your student loan can be a smart way to save money, it’s a strategy that should be considered very carefully – especially when it comes to understanding the terms of the loan.

However, there are other options for anyone looking for a little more financial flexibility when paying out their student loan. Refinancing is a popular way to save money on payments by giving you a lower interest rate. However, if you feel that you are unable to meet the minimum required payments on your student loan, contact your loan service provider as soon as possible to discuss additional options.

Your LightStream loan terms, including the APR, may vary depending on the loan purpose, amount, duration and your credit profile. Excellent creditworthiness is required to qualify for the lowest rates. The price is quoted with an AutoPay discount. The AutoPay discount is only available prior to loan financing. Tariffs without AutoPay are 0.50% points higher. Subject to the loan approval. Conditions and restrictions apply. The prices and conditions shown are subject to change without notice. Payment example: Monthly payments on a $ 10,000 loan at 3.99% APR and a term of three years would result in 36 monthly payments of $ 295.20.

Note to editors: The opinions, analyzes, reviews or recommendations expressed in this article are solely those of the Select editors and have not been reviewed, approved or otherwise endorsed by third parties.


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