Saddled with overwhelming student debt, many college graduates are looking for novel ways to pay off their student loans. Using small personal loans to pay off high-interest loans is emerging as the preferred option for many. But does it make financial sense to use a personal loan for student loan debt?
Take a look at the pros and cons of paying off student debt with a personal loan.
Pros of Personal Loan Payoffs
- Personal loans typically have shorter payoff periods, which can help if your goal is to pay off your loans as quickly as possible. You get to pay off your loans and get out of debt faster.
- You may have access to a lower, fixed-rate loan when you take a personal loan. In other words, you would accrue less interest paying off a personal loan, compared to a student loan.
- If you qualify for the personal loan on your own, you can release any cosigners you have on your student loans so they are no longer obligated on your new loan. This can be a huge relief to cosigners since their credit score and financial standing can be affected if something happens with the cosigned loan.
Cons of Personal Loan Payoffs
- If you use a personal loan to pay off your federal student loan, you could lose the benefit of deferment or forbearance options. You also aren’t guaranteed a lower interest rate with personal loans.
- If you use a personal loan to pay off your private student loan, you could lose the benefit of reduced payment options. All in all, you may lose the benefits that were helping you before. Check to make sure what benefits you’re losing if you do decide to take a personal loan to pay for your student loans.
- Not all lenders allow borrowers to pay off student loans with their personal loan and those typically limit the amount that can be borrowed since personal loans do not require any collateral. This means you will only be able to pay off a small portion of the loan.
Before you use a personal loan for student loan debt, you should look into student loan refinancing. Refinancing means a lender takes your loan and gives you essentially a new one from them. You would get a new set of terms and a different interest rate. Some refinancing lenders will pay off your existing loans and also offer lower rates as compared to personal loans.
If you have multiple student loans, you should also look into consolidating. Consolidating takes multiple loans and combines it into one. The new interest rate is the average of all your old interest rates. Consolidating helps people keep track of their loan and payments since it’s now just one loan. It may also have a lower interest. This is just another option to consider before turning to personal loans.