Why You Can’t Use Some Personal Loans To Pay College Tuition

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A personal loan can be used to cover a variety of expenses, including an unexpected bill, a vacation, or even a home repair. And it can be a cheaper way to cover those expenses, since some personal loans have lower interest rates than most credit cards, and you can be approved for up to $100,000.

However, there are some personal loan applications that fall more into a gray area, and tuition is one of them.

Can You Actually Use a Personal Loan to Pay for Tuition? The short answer is, you need to double-check the lender’s terms of service, as some of them do not allow borrowers to use personal loans to pay college tuition.

Restrictions on the use of personal loans

There’s a fine line between being able to use a personal loan for college tuition and being banned from doing so — and it really comes down to which loans follow specific federal regulations.

Regulations that mention “private educational loans” refer to a form of credit that is not federally insured, does not include a line of credit or other loan that must be secured and is provided to a borrower for educational expenses, according to the federal register.

Personal loans are not subsidized or insured by the government, often do not require a borrower to provide collateral, and borrowers can apply for the loan specifically for educational expenses.

But under the Higher Education Opportunity Act of 2008, lenders making personal education loans must make special disclosures, allow a 30-day cooling off period, allow borrowers to cancel within three days of funds being disbursed, and not liaise with schools associate. These are just some of the regulations that educational loans must follow.

Not all lenders offer personal loans that meet all of these requirements. Because they don’t follow these strict regulations, many lenders simply prohibit their personal loans from being used for college-related expenses.

Further funding opportunities for students

As long as the lender does not prohibit the use of their personal loan for educational expenses, borrowers are technically free to use one to cover college expenses.

“The exact intended use is in the loan agreement itself,” said Leslie Tayne, founder and manager of Tayne Law Group. “Generally speaking, if the loan is designed for you to use as you wish, it’s fine to use the money to pay for college.”

At the same time, however, Tayne explains that it’s highly unlikely that a college student straight out of high school would even have sufficient credit history to be approved for a personal loan. Also, private student loans offer some benefits that personal loans simply don’t offer.

Tayne says you generally get charged a lower interest rate for personal student loans. When you take out a personal loan, you must start repaying it immediately. However, you may have the option to defer repayment of a personal student loan while you are in school.

Personal loans typically have shorter repayment periods than personal student loans. With a personal loan, you only have up to seven years, with a private student loan, on the other hand, you usually have up to 20 years. This could mean that your monthly personal loan payments will be higher.

Alternatives to personal loans

If you’ve exhausted government financial aid and private student loans and still need additional funds to cover expenses like school supplies and textbooks, there are other loan products that are better suited for students.

A student credit card like the Discover it® Student Cash Back card has no annual fee, a short introductory period of 0% APR, and is aimed at students with fair or no credit. But if you’re a student who’s managed to build a credit history that’s in good standing, you can apply for Bank of America® Travel Rewards for Students, which also has no annual fee and a generous 0% APR introductory period, so you can defer paying a large expense (or better yet, split it into smaller payments over several months). Additionally, new cardholders can earn 25,000 bonus points if they spend $1,000 within the first 90 days of opening the account.

Discover it® Student Cash Back

On the safe side of Discover

  • reward

    Earn 5% cashback every quarter on everyday purchases at various locations like Amazon.com, grocery stores, restaurants, gas stations and when you pay with PayPal, up to the quarterly maximum when you activate it. Plus, earn unlimited 1% cashback on all other purchases – automatically.

  • welcome bonus

    Discover will double all cashback you’ve earned at the end of your first year

  • Annual fee

  • Enter the effective annual rate

    0% for 6 months on purchases

  • Regular APR

  • transfer fee

    3% transfer fee for introductory balance, up to 5% fee for future transfers (see conditions)*

  • foreign transaction fee

  • credit needed

Bank of America® Travel Rewards for Student Credit Card

  • reward

    Unlimited 1.5 points for every $1 spent on all purchases

  • welcome bonus

    25,000 bonus points after making at least US$1,000 in purchases within the first 90 days of account opening, redeemable for US$250 credit toward qualifying travel purchases

  • Annual fee

  • Enter the effective annual rate

    0% APR for the first 12 billing cycles on purchases

  • Regular APR

    13.99% to 23.99% variable

  • transfer fee

    Either $10 or 3%, whichever is greater

  • foreign transaction fee

  • credit needed

bottom line

Although you may not be able to use some personal loans to cover college expenses, you should first exhaust your other funding options, such as government student grants and private student loans. The terms are often much more favorable for students and you can feel more confident in setting up an appropriate repayment plan.

Click here for Discover it® Student Cash Back card pricing and fees here.

Information about Bank of America® Travel Rewards for Students was collected independently by Select and has not been verified or provided by the issuer prior to publication.

Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editors and has not been reviewed, approved, or otherwise endorsed by any third party.

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