If you are having difficulty repaying your student loans, you are not alone. The change in the economy has made this a particularly tough time for people from all walks of life. As you explore your options, you may wonder if you can use a personal loan to pay off your student loans. The short answer is yes, but before you decide whether this is the right option for you, you should consider other options and other details so you can make an informed decision based on your unique situation.
Repaying Student Loans
Using a personal loan to pay off your student loans simply means replacing one type of debt with another. You may receive a different interest rate and loan term, but that’s the main point. You will still be obligated to make monthly payments until the debt is fully repaid.
Personal Loan vs. Student Loan Refinancing
According to Jared Andreoli, a Certified Financial Planner (CFP) and president of Simplicity Financial, refinancing is usually better than a personal loan, as you may be able to get a lower interest rate. Refinancing is also a simpler process, as the lender will automatically pay off your previous student loans. In the personal loan scenario, you will receive a large sum of money and have to repay the student loans yourself. Travis Tracy, CFP and founder of Fortitude Financial Planning, agrees that refinancing is usually the better option as long as you can secure a lower interest rate. One of his clients had private student loans with a 12% interest rate through Sallie Mae. Tracy helped the client connect with a local credit union and refinance so she could enjoy a lower monthly payment and save a lot of interest over time.
Advantages and Disadvantages of Using a Personal Loan to Repay Student Loans
If you’re unhappy with the terms of your current student loans and can obtain better terms such as a lower interest rate, paying off student loans with a personal loan may be a good option. A lower interest rate can lead to lower monthly payments and allow you to pay off your balance sooner. “Additionally, if you choose a personal loan through a credit union or community bank, for example, you may get more flexibility if you face difficulties,” said Leo Marti, CFP and head of Abundant Advisors for The Balance. However, the reality is that there are more drawbacks than benefits to using a personal loan to repay student loans. This is especially true if you have federal student loans, as you’ll miss out on income-driven repayment plans and government loan protections and forgiveness options. “Personal loans don’t offer these options, so you will be obligated to repay until you pay them off,” said Logan Murray, CFP at Pocket Project for The Balance.
Comparing Options
When you use a personal loan to pay off your student loans, you are simply replacing one debt with another, and you will be responsible for repaying this personal loan with less protection if you cannot make payments. When trying to figure out how to manage your student loans, you should look at all the options available to you first. Don’t hesitate to reach out to lenders and see if they can assist you. It is also wise to take a close look at your income and expenses so you can find ways to increase savings and reduce student loan debt as quickly as possible.
Frequently Asked Questions
Will I still qualify for general repayment of service loans if I refinance?
No. If you obtain a personal loan to pay off your federal student loans, you are entering into a new contract with a new servicer (on their terms), and you will no longer have access to government repayment or forgiveness options.
Will
Is refinancing the same as consolidation?
Although both methods involve restructuring your loan for better terms, the way this is done differs. Refinancing is when you swap your current loan for a new one, while in the case of consolidation, you may be able to keep your current loan and simply combine multiple loans into one more manageable loan.
Source: https://www.thebalancemoney.com/personal-loan-to-pay-off-student-loans-5088373
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