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

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Sometimes it’s easy to feel that you’re going never pay off your entire student loan balance. Indeed, respondents to a A survey by the Wisconsin Institute said on average, it took them 21 years to pay off their student loan debt. So it can be quite tempting to look for creative ways to pay off your debt a little faster.

Personal loans can usually be used for any major expense (like a wedding, home improvement, or emergency expense), but for many people, they’re a vital way to consolidate debt or pay off debts a bit faster. high interest debts.

On average, personal loans have a lower interest rate than credit cards – depending on the Federal Reserve, the current average APR for a two-year personal loan is 9.58% while the average APR for a credit card is 16.30%.

Of course, the interest rate on a personal loan will depend on your credit score. And, generally, the higher your credit score, the more likely you are to benefit from a lower interest rate among other more favorable terms for a personal loan. Some lenders, like LightStream, in fact offer interest rates as low as 2.49%. And peer-to-peer lenders like Loan Club may also offer lower than average interest rates (LendingClub rates start around 7.04%).

LightStream personal loans

On the secure LightStream site

  • Annual percentage rate (APR)

    2.49% to 19.99% * when you sign up for automatic payment

  • Purpose of the loan

    Debt Consolidation, Home Renovation, Auto Financing, Medical Expenses, Marriage and Others

  • Loan amounts

  • terms

  • Credit needed

  • Original fees

  • Prepayment penalty

  • Late charge

However, interest rate on federal student loans will depend on the type of loan (undergraduate, graduate or parent PLUS loan), but the average rate overall is 5.8%. And when it comes to private student loans, average interest rates can range from 6% to 7%, but can reach 12.99% with major private lenders. So, the idea of ​​using a low-interest personal loan to pay off a student loan may seem like a chance to save on interest.

So, can you use a personal loan to pay off student debt? It depends. Here’s what you should consider before trying this strategy.

Conditions of use of the personal loan

Interest rates on student loans vs personal loans

Personal loan interest rates can sometimes be less than interest rates on private student loans (depending on the lender and your credit score, of course), but not always. The only time you’ll save money by using a personal loan to pay off your student loans is if you definitely receive a lower interest rate on the loan.

Some lenders have tools you can use to estimate which loans you qualify for and what your interest rate is likely to be. Prosper personal loan, for example, has a rate tool that can show you how much you’ll qualify for, what your monthly payments will look like, and how much interest you’ll pay – all without hurting your credit score. This can help you get a glimpse of what to expect if you decide to submit an application.

Prosper personal loans

  • Annual percentage rate (APR)

  • Purpose of the loan

    Debt Consolidation / Refinancing, Home Renovation, Automotive / Automotive, Medical or Dental, Big Buy and more

  • Loan amounts

  • terms

  • Credit needed

  • Original fees

    2.41% to 5%, deducted from the loan proceeds

  • Prepayment penalty

  • Late charge

    5% of monthly payment amount or $ 15, whichever is greater (with a 15-day grace period)

Federal student loan protections

In 2020, all federal student loan payments entered a forbearance period due to the Covid-19 pandemic. This The forbearance period was recently extended to January 31, 2022. This means that federal student loan borrowers are not required to make student loan payments at this time, and their balances will not accrue interest. until after the end of the break next year. However, if you have private student loans or have refinanced your federal student loans, you are not eligible for this protection.

If you take out a personal loan with the intention of using the money to pay off your federal student loan balance, you will lose all the protections offered by federal loans. This means that you you will not be able to qualify for any federal loan repayment programs, such as an income-based repayment plan, repayment grace periods, and a Public Service Loan forgiveness (PSLF), and you will also lose access to the current abstention period.

These initiatives are designed to make it easier to pay off your balance as a federal student loan borrower, but they will no longer be available once you take out a private personal loan to pay off the balance.. It can present a difficult financial situation if you really end up needing economic relief to make payments.

Bankruptcy protection

Bankruptcy is a process by which a person can seek relief from all or part of their debts if they are unable to repay them. Chapter 7 bankruptcy can completely eliminate all the debt you have. And while he can Damaging your credit score, filing for bankruptcy offers a kind of financial reset – by improving your financial habits, you can work to rebuild your credit score over time.

But most student loans are not canceled when you file for bankruptcy. According to American Bar Association, private and federal student loans cannot be discharged in bankruptcy unless a borrower can prove that paying the loan is “undue hardship.” However, proving undue hardship standards are notoriously difficult (here’s more on what you need to know about filing for bankruptcy on student loans).

Personal loans, however, can be discharged in bankruptcy. This is arguably one of the few advantages of paying off a student loan using a personal loan.

Other options

Refinancing is a popular option for student loan borrowers because they can usually get a lower interest rate and may even end up with lower monthly payments. The terms for refinancing a student loan are also not as restrictive as they are when it comes to using a personal loan to pay off student loan debt. Just keep in mind that when refinancing, you will usually lose federal protections on your student loans. But it can be a smart move for anyone with private student loans.

There are also many options for finding a lender who will refinance your student loans. Interest rate for refinancing a loan at SoFi start at 2.74% if you make your monthly payments using auto pay. And SoFi is currently offering student loan refinancing terms similar to the federal forbearance period – it allows borrowers to lock in a lower interest rate with 0% interest until December 20, 2021 and no payment on their balance until February 2022..

SoFi student loan refinancing

  • Cost

    No origination fees to refinance

  • Eligible loans

    Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans

  • Types of loans

  • Variable rates (APR)

    From 2.24%; from 2.37% for medical / dental residents (rates include a 0.25% discount on automatic payment)

  • Fixed rates (APR)

    From 2.99%; from 3.12% for medical / dental residents (rates include a 0.25% discount on automatic payment)

  • Loan conditions

  • Loan amounts

    From $ 5,000; over $ 10,000 for medical / dental residence loans

  • Minimum credit score

  • Minimum income

  • Authorize a co-signer

If you are concerned about having difficulty repaying your loan on time, you should contact your student loan manager to discuss the possibility of extending the forbearance on an individual basis. Often times, you can request a payment plan that best suits your situation.

At the end of the line

Paying off your student loans is a huge accomplishment, but it can often be elusive. A lot of people are left make student loan payments until adulthood. And while using a low-interest personal loan to pay off your student loans can be a smart way to save money, it’s a strategy that needs to be carefully considered, especially when it comes to money. It is about understanding the terms of use of the loan.

However, there are other avenues for anyone looking for a little more financial flexibility when it comes to your student loan payments. Refinancing is a popular way to save money on payments by getting a lower interest rate. But if you think you won’t be able to make the required minimum payments on your student loan balance, contact your loan officer as soon as possible to discuss additional options.

The terms of your LightStream loan, including the APR, may differ depending on the purpose of the loan, amount, term, and your credit profile. Excellent credit is required to benefit from the lowest rates. The rate is shown with the AutoPay discount. AutoPay rebate is only available before the loan is funded. Rates without AutoPay are 0.50% higher. Subject to credit approval. Conditions and limitations apply. The advertised rates and conditions are subject to change without notice. Example Payment: Monthly loan payments of $ 10,000 at 3.99% APR with a three-year term would result in 36 monthly payments of $ 295.20.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.


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