Published in: Personal Loans | April 22, 2019

Can Personal Loans Be Used for School?

You can use personal loan proceeds to pay for whatever you want, but they typically aren’t the best option to pay for school.College student studying in a library.Image source: Getty Images.

The short answer is yes, personal loans can be used to pay for school. In fact, personal loans can be used for virtually any purpose a borrower has in mind. While the most common uses for personal loans are things like credit card consolidation, home repairs, and medical expenses, there’s no reason you can’t use a personal loan to pay for school expenses.

Having said that, just because you can do something doesn’t necessarily make it a good idea. Here’s why personal loans aren’t ideal for certain expenses, including school, and what alternative options for borrowing money for educational expenses may be available instead.

Personal loans are not ideal for some expenses

While you can use personal loan proceeds for pretty much whatever you want, there are some expenses for which personal loans generally aren’t the best choice.

Buying a car is one good example. An auto loan is a form of secured credit. It is secured by the car the loan is funding, so the lender has the right to repossess the car if you don’t pay the loan. Because this creates a bit of a safety net for the lender, auto lenders are generally willing to accept a somewhat lower interest rate than lenders that originate unsecured loans, like personal loans. The same logic holds true for any other purchase for which asset-backed loans are readily available, like buying a home, boat, etc.

Educational expenses are a generally unwise use of personal loan proceeds as well, but for a different reason. In this case, there are specialized loans designed for student borrowers. Federal loans offer better terms than personal loans because they’re made by the U.S. government. Private student loans aren’t backed by a tangible asset like a car but are based on the assumption that you’ll acquire something (a degree) that will increase your earnings power, and therefore your ability to pay the loan back -- so they tend to offer favorable terms as well.

Downsides to using personal loans for school expenses

With all of that in mind, here are some of the specific reasons why personal loans typically don’t measure up to student loans when it comes to paying for school:

  •         Student loan interest is tax-deductible, up to $2,500 per year. You can even take this deduction if you don’t itemize on your tax return. Meanwhile, personal loan interest isn’t deductible in this manner.
  •         Because of the unsecured nature of personal loans, the interest rates you can get from personal lenders will generally be much higher than you’ll find from either federal or private student loans. The current interest rates for federal student loans are 5.05% for undergraduates and 6.6% for graduate and professional students, and many private student lenders offer rates competitive with these.
  •         Personal loan repayment terms are shorter. It’s rare for a personal lender to offer repayment terms of more than seven years, and most won’t even let you stretch repayment that long. The standard student loan repayment period is 10 years, and repayment periods stretching to as long as 30 years are common. With a shorter-duration personal loan and the high cost of college today, the monthly payments on a personal loan can be much more expensive than a student loan of the same amount.
  •         Another downside to unsecured loans is that credit standards tend to be relatively high. Federal student loans are easy to qualify for from a credit standpoint, and even private student loans tend to have looser borrowing standards than many of the top personal lenders.
  •         You generally don’t have to start repaying federal student loans until you’ve been out of school for six months. Meanwhile, personal loan payments begin right away.

Federal student loans are the top choice

If you need to borrow money to pay for school, federal student loans are the way to go. In addition to the advantages over personal loans listed in the previous section, federal student loans have some unique advantages.

  •         Some federal student loans may be subsidized. This means that the government pays the interest on these loans while you’re in school, or while your loans are in a qualified deferment.
  •         Federal student loans have extreme flexibility when it comes to repayment options. In addition to the standard and extended repayment options, federal student loans offer income-driven repayment plans that cap your monthly payment at a certain percentage of your discretionary income.
  •         There are several ways to get federal student loans forgiven. The Public Service Loan Forgiveness program allows public service employees to get rid of any remaining balance after 10 years of on-time payments, and Teacher Loan Forgiveness is worth up to $17,500 in forgiveness after five years of qualified teaching experience. If you’re on an income-driven repayment plan, any remaining balance is forgiven after a certain period of time -- 20 or 25 years, depending on your loans and exact repayment plan.
  •         Federal student loans are eligible for deferments and forbearance (both ways to suspend repayment) if you’re going through difficult financial times. It’s unlikely any other type of lender would let you skip, say, a year of loan payments.

Current federal student loan borrowing limits can be found in this table. Amounts in parentheses represent the maximum amount of subsidized student loans that can be taken out.

Year in School

Dependent Students

Independent Students

First-Year Undergraduate

$5,500 ($3,500)

$9,500 ($3,500)

Second-Year Undergraduate

$6,500 ($4,500)

$10,500 ($4,500)

Third-Year Undergraduate or Beyond

$7,500 ($5,500)

$12,500 ($5,500)

Graduate or Professional Student

N/A

$20,500 (N/A)

Aggregate Loan Limit

$31,000 ($23,000)

$57,500 ($23,000) -- Undergraduates

$138,500 ($65,500) -- Graduates and Professional Students

Data source: Studentaid.ed.gov.

Private student loans can generally beat personal loans as well

While they aren’t quite as appealing as federal student loans, student loans from private lenders can be much better choices than personal loans.

Some borrowers don’t qualify for federal student loans to cover their entire borrowing need. For example, if you aren’t in a degree program, you can’t get federal student loans. If your borrowing need exceeds the limits shown in the table above, private student loans can be used to bridge the gap.

Private student loans have long repayment terms, in-school deferments, and generally have competitive interest rates. To name one example, Discover Student Loans currently offers student loans with fixed interest rates as low as 5.99% or variable rates as low as 4.49%. The company offers a six-month grace period after leaving school (same as federal loans) and 180-month repayment terms.

Another good example is Sallie Mae, which offers fixed interest rates starting at 5.74% and a 0.25% discount when agreeing to auto-debit. Loan terms range from five to 15 years after beginning repayment and allows loans for up to 100% of the cost of school attendance.

The bottom line on personal loans for education

To sum it up, while you can use personal loan proceeds to help pay for school, there are better options on the table. Federal student loans are the best way to go if you qualify, and even private student loans are typically a smarter choice than a personal loan.

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