Can you use a personal loan to pay off your student loan?

The short answer is: It depends.

If your lender approves it, you can pay off your student loans with a personal loan. The catch is that lenders have to abide by requirements in the Higher Education Act. If your potential personal loan doesn’t meet those eligibility requirements, then the answer is no.

Assuming you can use a personal loan to pay off your student loan balance, the better question is – should you?

In this article, we’ll walk through the pros and cons of paying off student loans with personal loans, some factors to consider, and even some alternative approaches to getting rid of student debt without a new loan.

Pros and cons of paying off student loans with a personal loan

If you’re fortunate enough to find a lender who will allow you to use a personal loan to pay off student debt, you could benefit in a few ways.

Pros

Some advantages may include:

• Potentially lower interest rates. Personal loan rates are generally higher than interest rates on student loans, but depending on your creditworthiness you might qualify for a better rate. Those with excellent credit have the best chance to end up with more favorable terms.

• Different payment structure. With a new loan, you may qualify for a different loan term. If you’re in a pinch financially, a longer repayment term would lower your monthly payments, though you would end up paying more over the life of the loan.

• Possible discharge options. Student loans are very difficult to discharge in the case of bankruptcy. If you ever face that unfortunate situation, a personal loan may be easier to have discharged.

Read more: What about paying student loans with a credit card?

Cons

On the flip side, using a personal loan to pay off student loan debt definitely has its share of disadvantages and risks.

• Higher interest rates for some borrowers. Though it’s possible to score a lower interest rate with a personal loan (as we mention above), it’s unlikely. The average interest rate on a federal student loan in 2023 is 5.5%, while the average rate on a personal loan is 12.17%.

• Loss of federal loan benefits. Federal student loans come with some nice benefits and protections. For example, you have a six-month grace period after graduation before you have to begin paying off that loan amount. You also have the option to defer or forbear your loans. Personal loans don’t come with those same benefits.

• Impact on credit score. Personal loan lenders run a "hard credit check," which could ding your credit score temporarily.

Keep in mind, if you’re still enrolled in college, personal loan funds could help pay for other educational expenses such as books and supplies — or even housing and transportation. Ideally, the student loan should cover this, but if you find yourself needing to pay for these needs, a personal loan could help.

Factors to consider before making a decision

A lot of factors are at play when you’re considering using a personal loan to pay student debt.

This is an important decision that you shouldn’t take lightly, as there are definitely risks involved in taking on personal debt versus federal loan debt.

Some of the factors to think about:

• Current financial situation and stability. If you’re in a stable job with a consistent salary, and you’re already able to make your federal student loan payments, taking out a personal loan probably doesn’t make sense. You really only want to consider it if a new lender’s terms get you better interest rates, monthly payments, term length and so on.

• Credit score and credit history. As we’ve mentioned, your credit score and history will come into play if you take out a personal loan. Usually, you’ll need at least a score around 610 to 640 minimum to get approved. A score of 650 or higher will allow you to get better loan rates. That’s a major difference compared to federal student loans, which require no credit check or minimum score.

• Interest rate comparison. You’ll definitely want to compare interest rates if you’re considering student loan refinancing. Typically, personal loans have higher interest rates than student loans backed by the government. In 2023, the average interest rate on a federal student loan is 5.5%, compared to 12.17% on a personal loan.

• Loan repayment terms and flexibility. The standard repayment on federal student loans is 10 years. That’s 120 payments over the life of the loan. Private lenders typically offer terms between 1 and 5 years, though some may offer longer. Shorter repayment terms will mean higher monthly payments but you’ll save money over the long haul. Keep those factors in mind when making your decision.

• Loan forgiveness and income-driven repayment plans. Other options might put you in a more favorable situation than taking on a personal loan. Student loan forgiveness is available for people who work in the public sector – teachers, government workers, nonprofit employees, nurses, and more. Income-driven repayment plans could also help lower your monthly payment, depending on your income and family size (more on these later).

• Tax implications. Another benefit of federal student loans is the student loan interest tax deduction. Based on income, this perk allows you to deduct up to $2,500 in interest from your taxes. Personal loans do not qualify for this benefit.

Alternatives ways to repay or refinance student loans

Though using a personal loan to pay off student debt may work for you in some situations, you’ll likely have other alternatives that make more financial sense.

Loan consolidation and refinancing

Consolidation is useful if you have multiple federal student loans. This move would reduce your loans to a single payment and it could lower your monthly payment if the term is longer. Keep in mind, with a longer term you would pay more interest over the life of the loan.

The Department of Education handles the consolidation process, meaning the loans stay federally backed and come with the same protections, forgiveness options, and repayment programs.

Refinancing options are different from loan consolidation. When you refinance, you combine private and/or federal loans into one private loan.

In this case, you can actually refinance to a lower interest rate, which might also bring lower monthly payments with less total interest over the loan term. By refinancing to private loans, however, you will lose the benefits and protections that come with a federal loan.

Federal student loan forgiveness programs

The federal government offers many forgiveness related programs to student loan borrowers.

The Public Service Loan Forgiveness (PSLF) program is one such option available to public service workers in professions like teaching, nursing, the military, nonprofit workers, and others.

Your loans could also be discharged under certain specific situations – such as your school closed or misled you – and in other situations if you’re a Federal Perkins loan borrower. You may also qualify if you become disabled, are a victim of forgery, and, in rare cases, bankruptcy.

Exploring income-driven repayment options

In 2022, the Department of Education announced a one-time Income Driven Repayment (IDR) adjustment that might make loan forgiveness possible for some borrowers.

The DOE said that any borrower with federal loans that have accumulated time in repayment of at least 20 or 25 years will see automatic forgiveness, even if the loans are not currently on an IDR plan.

The following would count toward the 20 to 25 years of repayment:

• Any months with time in repayment status (regardless of the payments made, loan type, or repayment plan).

• Twelve or more months of consecutive forbearance or 36 or more months of cumulative forbearance.

• Months spent in economic hardship or military deferments after 2013.

• Months in deferment prior to 2013 (except in-school deferment).

• Any time in repayment prior to consolidation on consolidated loans.

Borrowers need to apply for the benefit by the end of 2023 to qualify. Here’s what you need to know to apply.

What about other types of loans?

Private student loans

If you have a private loan (i.e., not federal), you’ll face some of the same issues in trying to pay off the debt with a personal loan.

Many lenders won’t allow you to pay off student loans with a personal loan. You can find out if your lender allows it in your loan agreement.

If you signed that agreement and the lender found out you still used the personal loan to pay off your private student loan, you would likely have to pay back the full amount. You could also be charged with fraud for providing false information on a loan application – so, in sum, don’t do that.

Now if you’re seriously considering this move, and you have a lender who approves it, pay special attention to interest rates. Currently, personal loans average around a 12% rate, while private student loans run between 4% to 5%. That’s a high-interest tradeoff over the course of your loan, so again, check rates.

Since private loans don’t have the same federal benefits – such as a 6-month grace period and forgiveness, deferment and forbearance options – those protections don’t come into play here.

Still, the higher interest rates should make you carefully consider paying off your private student debt with a personal loan.

Parent Plus loans

Parent Plus loans are federal loans available to parents to pay for their child’s undergraduate education.

As of 2023, the interest rates on these loans is 8.05%, which still makes them less of an interest burden than a private loan. There are also fees attached with Parent Plus loans, which is a percentage of the loan amount and is proportionately deducted from each loan disbursement. For loans first disbursed on or after Oct. 1, 2020, that rate is 4.228%.

Unlike private loans, these are federally backed loans, meaning they could qualify for potential forgiveness, cancelation or discharge.

When your child gets older and has a stable income, you can refinance the loans in their name. There is no direct process to transfer the loans through the federal government.

In terms of paying off Parent Plus loans with a personal loan, you’ll also need to carefully consider whether the higher interest rates and loss of federal loan benefits are worth it.