Which should you use to pay for your education?
When it comes to paying for school and even paying off your student debt after college, you have multiple financing options. Two of these are personal loans and student loans. But which is right for your situation? Read further to see how personal loans and student loans compare.
Personal loans through Prosper
You could borrow up to $35,000 for a variety of purposes, with rates from 5.99%–35.99%%.
- Recommended Credit Score: 640 or higher
- Minimum Loan Amount: $2,000
- Maximum Loan Amount: $35,000
- Loan Term: 3 or 5 years
- Turnaround Time: 1-3 business days
- Simple online application process
- No prepayment penalties
How do personal loans differ from student loans?
A personal loan is a type of financing that can be used for just about any purpose. You can generally borrow up to $50,000 (though some lenders offer more) and pay it back with terms that range from one to seven years.
A student loan is restricted for educational use — things like tuition and housing while in school. If you’ve graduated from college already, you may be interested in student loan refinancing, which is a loan to pay off your existing student debt at a lower interest rate.
Here’s how personal loans and student loans differ in five important categories:
- How you can use your funds. If you get a personal loan, you can use the money for just about any legitimate purpose. But with a student loan, you’re required to use the funds toward education-related expenses.
- How you receive your money. With a personal loan, the lender deposits your approved funds directly in your bank account. Whereas with your typical student loan, a lender disburses your funds directly to your school’s financial aid office first, then you can claim any remaining amount to use for other education-related expenses.
- Types of lenders available. You’ll find many banks, credit unions and online lenders that offer personal loans. With student loans, you can choose from private lenders or loans funded by the federal government.
- How you repay your loan. Personal loans generally require that you start repayments after the first month. With a student loan, you’ll start repayments after graduation, often after a grace period of at least six months. Some loans allow you to start payments while still in school at low fixed amounts of $50 to $100.
- Tax benefits. A personal loan comes with virtually no tax benefits. But with a student loan, you’re often able to deduct the interest you’ve paid from your annual taxes.
Quick snapshot: Five ways personal loans and student loans differ
|Personal loan||Student loan|
|Use of funds||Any legitimate purpose||Education-related expenses only|
|Receiving funds||Direct deposit to bank account||School financial aid office receives funds while you’re in school; if refinancing after graduation, you’ll receive the funds|
|Lender type||Banks, credit unions and private online lenders||Federal government, banks and private online lenders|
|Repayment terms||Generally start repayments after the first month||Start repayments after graduation, often after a grace period of at least six months; refinancing loans tend to allow pausing payments in the event of job loss|
|Tax benefits||None||Interest paid is often deducible from your annual taxes<|
Compare top online personal loans and student loans
A selection of loan offers from the best personal loan providers
A selection of loan offers from the best student lenders
What are the benefits of personal loans and student loans?
- Use funds for any purpose. You’re free to use the money you get from a personal loan to travel, buy a car or just about any other purpose. You can also use a personal loan to consolidate your debt, including credit card balances and other loans.
- It’s simple to apply. You won’t need to provide the kind of details that student loans require. So you won’t have to gather all those documents verifying your education with a personal loan.
- Lower interest. Student loans often come with lower interest rates when compared to general personal loans. You could also qualify for a government-subsidized loan, like a Stafford Loan, which could come with even lower rates.
- Repayment flexibility. Depending on your loan and lender, you may be able to make interest-only and even no payments at all while you’re studying. Student loans tend to come with longer repayment terms of up to 20 years.
- Tax-deductible. With most student loans, you can write off the interest you’ve paid to reduce your overall taxable income.
What are the drawbacks of personal loans and student loans?
- Higher interest. The interest rates that come with personal loans are often higher than specialized loans designed for cars, education or housing.
- Repayments start immediately. You get no grace period when it comes to payments — instead, you’ll start paying toward your loan’s principal and interest soon after approval. Most personal loan lenders also don’t offer benefits that protect you in the event of financial hardship.
- Funds restricted to education. You must use your funds toward tuition, textbooks, housing and other education-related expenses.
- It’s easy to borrow too much. When facing the cost of tuition, housing and other potential expenses, you can end up overestimating how much you actually need. Remember that you’re paying interest on the full amount.
Which borrowing option is better suited for me?
Personal loans can be better when you’re looking for extra money that extends beyond education-related expenses — like paying for a destination wedding, buying a boat or getting over a financial hump.
But if you’re going to college or recently graduated, a student loan or student loan refinancing — with lower rates and more flexible terms — can be your better bet.
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