How to use a personal loan to pay for college

If your student loans fall short, you may be able to take out a personal loan to help cover the extra costs of paying for school. However, not all personal loan providers allow you to use these funds for tuition and other college expenses, so you’ll need to do your homework first.

And watch out for high interest rates and short repayment terms that can make these loans difficult to repay on a college student’s budget.

Why use a personal loan for college?

Personal loans allow students and parents to apply for amounts from $2,000 to $50,000 or more. You repay what you borrow plus interest and fees over a period of time both you and the lender agree to.

Lenders typically express the cost of a personal loan as an APR, your annual percentage rate. APRs can range from 6% to up to 36%, but you might have a hard time qualifying for a 6% APR as a student.

Repayment terms can range from one to seven years through monthly installments that begin shortly after you receive your funds.

Top 5 personal loans to pay for school

If the tuition’s covered but you need help with other expenses, you can take advantage of standard personal loans offered by banks and credit unions.

But if you’re looking for a personal loan to help cover educational expenses, your options are more limited since most lenders restrict using a personal loan for college. Compare these online lenders that allow you to apply your funds to educational expenses.

Am I eligible for a personal loan?

Many students haven’t yet built a strong credit history, which often comes with steadier footing after graduation. Because they require steady employment, a minimum income and more, college students might want to bring on a parent as a cosigner. Or, parents might prefer taking out a personal loan in their name.

You’ll need to meet common eligibility requirements that include:

• Steady income
• Good or excellent credit
• A strong credit history
• At least 18 years old
• US citizen or permanent resident
• Debt-to-income ratio (DTI) below 43%

4 types of personal loans available to pay for college

Your options for personal loans may be limited if you’re still hitting the books. But many banks and lenders accept cosigners, which can help you qualify for stronger rates and better terms than you’d find on your own.

The best option for you will depend on your situation, budget and goals.

1. Unsecured personal loan in the student’s name

• Best for graduate and part-time students with steady jobs and a credit history.

If you’re steadily paying off student loans or credit cards while supporting your studies, you might qualify for an unsecured personal loan on your own.

Alternative lenders like Upgrade consider your educational background when determining your eligibility. And SoFi’s personal loans come with perks like career advice and mentorship programs.

2. Unsecured personal loan in the parent’s name

• Best for undergrads who rely on their parents financially.

If you’re not financially independent, you might have trouble qualifying for a personal loan even with a cosigner. Instead, you and your parents may want to consider taking out a personal loan in their name.

If one of your parents has a high income and long history of repaying debt on time, you’ll find more competitive rates and terms than for someone who’s still in school.

To show that you’re committed to repaying your loved ones, consider drawing up an informal agreement that includes how much you’ll pay monthly and by when. Or look to a service like Loanable, which helps you create a legally binding contract after you’ve landed a job.

3. Unsecured personal loan with a cosigner

• Best for students with expenses outside of tuition and other school costs.

It’s tough to find a personal loan provider that allows you to both apply with a cosigner and put the funds toward school. But for expenses that aren’t directly related to school — like paying your off-campus rent — a cosigner might help you qualify for competitive rates.

Review your lender’s requirements for cosigners to make sure you can meet minimum income, credit scores and more.

4. Home equity loan

• Best for parents who own equity in a home.

Home equity loans — sometimes called second mortgages — allow your parents to borrow against the equity of their home. Because their property acts as collateral for the loan, you’ll see more competitive rates than for unsecured loans. People also use home equity loans to consolidate student debt.

You can typically borrow between 80% and 90% of your home’s equity, paying it off over a longer period than a traditional personal loan. Given competitive rates and longer repayment terms, lenders like M&T Bank suggest a home equity loan as a student loan alternative.

Personal loans vs. private student loans

That providers limit borrowers from using personal loans for educational expenses isn’t surprising: Students just don’t have the same needs and ability to repay as your average borrower.

Key differences between personal loans and private student loans include:

• Interest rates. Student loans often offer lower interest rates than personal loans — typically between 2% and 20%.
• Fees. Private student loans don’t often come with application, origination or prepayment fees. Yet these fees are common with personal loans.
• Terms. Student loan repayment terms can range from five to 25 years. Personal loans come with much shorter terms of one to seven years.
• Repayment. Student loans offer perks like waiting up to six months after graduation before you start repayments, deferment or interest-only payments while you’re in school, as well as multiple deferment and forbearance options after. Personal loan repayments start right away and typically won’t allow you to pause payments if you hit a financial snag.
• Loan amounts. Student loans often start at $5,000 and top off at your school’s total cost of attendance. Personal loans come in as low as $1,000 in some cases but rarely go above $100,000.
• Cosigners. Almost all student loan providers allow you to apply with a cosigner, which just isn’t available with a personal loan.
• Eligibility. The rigid requirements of personal loans could prevent many students from finding financing. Still, you might not be eligible for a federal or even private student loan if you don’t attend a Title IV or degree-granting institution.
• Tax benefits. While you won’t be taxed on the amount you borrow with a personal loan, you also can’t write off the interest you pay. With a student loan, you may be able to deduct interest from your taxes. You can check with the IRS to see if your loan is eligible.

How personal loans and student loans compare

Should I take out a personal loan for college?

It depends on your circumstances and finances. Ask yourself the following questions to help you decide if a personal loan is right for you.

Are federal and private student loans an option?

Federal loans tend to offer the most competitive rates among options. They also come with benefits that private lenders just can’t offer, like public service forgiveness.

While not as competitive as federal loans, private loans can be less expensive than personal loans. Qualifying is easier than for personal loans, and they come with forgiveness, deferment and forbearance. They can also cover school-related costs that federal loans won’t, like bar exam study courses.

Both tend to have lifetime borrowing limits, however. If you or your child has exceeded that limit, a personal loan may be your only option.

Can I meet the eligibility requirements?

Parents might have an easier time getting a personal loan to pay for school than students on their own. Students with parents who are also ineligible might need to find another individual to act as a cosigner.

What expenses need to be covered?

If you need help covering your or your child’s tuition, your options are limited. Most personal loan providers don’t let you use the funds for educational costs. However, many providers allow you to use a personal loan to cover expenses that aren’t directly related to school — like help paying rent or covering day-to-day expenses.

Have I exhausted all other financial aid options?

Personal loans are not designed for students. They can be expensive and difficult to repay while you’re in school. And taking on debt for your child can make it more difficult to get other types of financing in the near future because it lowers your debt-to-income ratio (DTI).

Talk to the school’s financial aid office about scholarships, grants and work-study options that can help fill in the gaps left by student loans.

Can I afford repayments right away?

If you or your family can’t pick up the repayments while you’re still in school, a personal loan could hurt your credit rating. That’s because the biggest factor in your credit score is your history of making payments on time. A low credit score can make it more difficult for you to get a credit card, mortgage or other type of credit in the future.

How much do I need?

Because personal loans tend to come with higher rates and immediate repayments, try to reserve them for smaller expenses. If you need to borrow more than $50,000 at a time, you won’t have as many options.

Personal loan alternatives to pay for college

Personal loans aren’t the only option for students needing help with extra expenses before they graduate.

• Income share agreement (ISA). An ISA allows students to pledge a percentage of their income for a set number of years in exchange for tuition. Universities like Purdue offer it directly, but if yours doesn’t, you can apply through an ISA provider like Align.
• Crowdfunding. Got a particular project or goal you need to fund — like paying for study abroad? Consider setting up a campaign on PeduL, Kickstarter or GoFundMe to raise money from your peers and social network.
• Get a side gig. Making a little extra money on the side might be easier than you think. It can be as simple as selling your photos instead of posting them on Instagram or offering services you’re already proficient at, like editing or furniture assembly.

Bottom line

Personal loans aren’t designed for students. You generally need a job, strong credit and the ability to repay what you owe right away. Parents typically have an easier time qualifying if they have a steady job and strong credit. They can either apply on their own or cosign their children’s loans.

But both options may not be ideal: you just might find other sources of financing by talking with your school’s financial aid office. Learn more about how it all works with our comprehensive guide to student loans.

Frequently asked questions

What happens if I lie on my application?

You could face rejection or immediate repayment if you’re caught. If you apply for a personal loan that’s not intended for educational use, some lenders like LendingClub could cancel your loan. Most likely, your lender will reject your application if it finds out before you’re approved.

Can I use a personal loan to refinance student debt?

Yes, but you might want to check out your student loan refinancing options instead. They often come with more competitive rates and flexibility than your standard personal loan, including forgiveness programs.

Can anyone apply for a student loan?

No. Federal loans require at least half-time enrollment at a Title IV school. For private student loans, you also must either meet your lender’s credit and income requirements on your own or apply with a creditworthy cosigner.

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