There are some solid benefits to both personal loans and student loans when it comes to paying for school. Personal loans have fewer limits on how you spend your funds but student loans are typically more flexible. But if you don’t have a credit history, you may not be able to qualify for a personal loan on your own. Which option is right for you depends on your unique situation.
Quick snapshot: 6 ways personal loans and student loans differ
Personal loan
Student loan
Loan purpose
Nearly any legitimate purpose, though some restrictions may apply
May only be used for secondary education expenses
Disbursement
Many lenders can directly deposit your funds into a bank account
Your school’s financial aid office receives your loan funds
Potential lenders
Banks, credit unions and private online lenders
Federal government, banks and private online lenders
Repayment terms
Repayments generally start after the first month
Repayments generally start after a grace period of at least six months after graduation
Tax benefits
None
Interest paid is often deductible from your annual taxes
Discharge
Can be discharged through bankruptcy
Much more difficult to discharge; may require a court appeal
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What’s the difference between a student loan and a personal loan?
Personal loans can be used for just about anything, though some lenders restrict how you spend your loan funds. On the other hand, student loans have just one purpose: being used for secondary education expenses.
These differences mean you need to break down a few points to see how they compare.
How you can use your funds
Personal loans can be used for just about anything, but some lenders don’t allow you to use your loan for secondary education expenses. Read the lender’s terms carefully to make sure you’re allowed to apply your loan toward the cost of college. Otherwise, you may need to take out a student loan to pay for tuition and a personal loan to pay for living expenses.
Student loans are meant for any expenses related to attending a college or university. You can use your loan for tuition, room and board, books or any other legitimate education expense.
How you receive your money
A lender will deposit your loan directly into your bank account. This can be handy if you have a lot of expenses in different places, or if you need to use your loan for education and other bills, but it means you’re responsible for paying everything and making sure your money gets where it needs to go.
Student loan lenders disburse your loan funds directly to your school’s financial aid office first. Once tuition and other university costs are paid for, you can claim any remaining amount to use for other education-related expenses. This can be especially useful if you don’t want to deal with the hassle of setting up payment to your university.
Types of lenders available
There are a number of personal loan lenders out there, including banks, credit unions and online lenders. Terms and interest rates vary widely, so compare your personal loan options before settling on a lender.
With student loans, you can choose from private lenders or loans funded by the federal government. Both ways are legitimate and can often be stacked to pay for your whole education so you aren’t left footing a bill with your savings.
How you repay your loan
Personal loans have quick turnaround. You should expect to start paying your loan back within the first month. Since terms are also shorter, between one and seven years, you may be stuck making large monthly payments that cut into your budget and force you to work during school.
With a student loan, you start repayments after graduation. Many student loans also have a grace period of at least six months. Some lenders even allow you to start payments while still in school at low fixed amounts of $50 to $100. This added flexibility can help you find a decent job after school or pay down interest while working part-time in college.
Tax benefits
A personal loan comes with virtually no tax benefits. While personal loans aren’t considered taxable income, you won’t find many other tax benefits when you borrow, even if your loan is applied to college or university costs.
With a student loan, you may be able to deduct the interest you’ve paid from your annual taxes. This can help keep your tax bill low, especially if you’re making interest-only payments while you search for your dream job.
Discharging your debt
If you can no longer make payments and are forced to declare bankruptcy, you can discharge your personal loan debt. This has a huge impact on your credit, but it means that you may have your debt forgiven completely.
Student loans don’t have this option. Even private student loans are difficult to discharge, with many requiring a court order and an appeal process that proves undue hardship. Without this, you’ll be stuck paying for your student loans no matter how bad your financial situation gets.
What are the benefits of personal loans and student loans?
Personal loans
Use funds for any purpose.In general, you’re free to use the money you receive from a personal loan for just about anything, although your loan contract may prohibit you from spending your money on anything beyond the original purpose.
It’s simple to apply.Personal loans have much less strenuous requirements than student loans. You won’t need to have any documentation verifying your education with a personal loan.
Student loans
Lower interest.Student loans often come with lower interest rates when compared to general personal loans. You may qualify for a government-subsidized loan, which could come with even lower rates.
Repayment flexibility.Depending on your loan and lender, you may be able to make interest-only or no payments at all while you’re studying. Student loans also tend to come with longer repayment terms of up to 20 years.
What are the drawbacks of personal loans and student loans?
Personal 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.
Student loans
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.
A personal loan may be a better option if you need money for more than just education. They can help with day-to-day expenses that may come up, or your loan funds can be used to pay for a unique trip during your college experience that you may not be able to take without a little extra funding. If you recently turned 18, a personal loan will be difficult to qualify for, since few lenders accept cosigners.
However, if you know you’ll want a long-term loan and more flexibility when it comes to payment, a student loan may be a better choice. Because they have lower interest rates and don’t require you to start paying back immediately, you can focus on your education without needing a job or payment plan.
Compare personal loans to even more borrowing options
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Personal loans and student loans have their own unique features that make them regular borrowing choices for students across the US. If you’re looking for quick turnaround and only need a small loan, a personal loan may be better for your budget. But if you’re going to need to pay for four years of education expenses, the low interest and payment flexibility of a student loan may be more appealing.
You can read more about how student loans work and personal loans work by ready our guides. Carefully compare your loan options and weigh all the benefits with the drawbacks. After all, you’ll be paying for the next few years of your life.
Frequently asked questions
Explore personal loans and student loans even further with these answers to common questions.
Both personal loans and student loans come with two types of interest rates: fixed or variable. Fixed interest rates remain the same throughout the specified term, which may be for the entire loan term or for an introductory period. If you opt for a variable rate loan, you’ll receive the advertised rate, but this rate may change throughout the loan term depending on interest rate movements in the market.
When will I start paying interest on my student loan?
Depending on your loan and lender, you could get a grace period of six or more months after graduation in which you can start repaying your loan’s principal only — meaning no interest. Otherwise, you begin paying interest with your first repayment according to your loan’s terms.
I don’t have a credit history yet. What are my options when it comes to paying for education?
You don’t necessarily need a credit history to qualify for a student loan — especially if you have a credit-worthy cosigner. Read more about your options in our guide to student financing. Personal loans, on the other hand, will generally require you to have an established credit history and good to excellent credit in order to qualify.
How do I get a large personal loan?
Each lender will offer a different maximum loan amount. You can see the different maximum amounts for personal loans in the table above. If you’re looking for a personal loan of up to $100,000, read our page on $100,000 loans to learn which lender might be best for you.
What’s the most I can borrow with a student loan?
The maximum student loan amount you can borrow depends on your several factors such as the cost of attendance at your school, which year you’re in and the degree you’re studying. Some private student lenders offer loan amounts as high as $500,000.
Aliyyah Camp is a SEO content strategist and former publisher at Finder, specializing in consumer and business lending. Her writing and analysis has been featured in CentSai, the Dough Roller and the Chicago Tribune. She holds a BA in communication from the University of Pennsylvania.
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