You may be able to use a personal loan to pay for all or some college-related expenses, but it’s likely not your best option. Borrowers can typically use personal loans for any purpose, and some lenders may not ask what the funds will be used for. However, some lenders may refuse to provide a personal loan for education expenses.
“While you certainly can use personal loans for college expenses, these would not be my first choice,” says Joe Orsolini, president of College Aid Planners. “There are far better options, such as federal student loans or private student loans that make a lot more sense for college expenses.”
Some lenders will not provide a personal loan to cover tuition costs because the 2008 Higher Education Opportunity Act placed several requirements on lenders offering private education loans, including special disclosures, a rumination period and an option to cancel the loan up to three days after disbursement.
If you’re considering a personal loan to pay for education-related expenses, make sure you speak with your lender first. Personal loans are typically unrestricted and can be used for items like books or living expenses while attending school, but you may be prohibited from using a personal loan to pay tuition.
Federal student loans should be your first stop for funding education expenses, and private student loans are likely a better option than a personal loan.
“Students should explore federal and private student loan options first, as they often offer more favorable terms and benefits,” says Ross Loehr, a certified financial planner with The Sovereign Investor. “Federal loans often have lower interest rates, flexible repayment options and potential loan forgiveness. Private student loans can bridge funding gaps and offer competitive rates tailored to education expenses.”
However, a personal loan may be a suitable option to pay for books or other expenses.
“While personal loans can fund college expenses, they should be a last resort,” Loehr says. “Federal and private student loans often offer more favorable terms and benefits, making them more suitable options for most students.”
Let’s explore why most borrowers should exhaust federal and private student loans and other alternatives before seeking a personal loan to fund their education.
What Is a Personal Loan?
Personal loans are typically unsecured, meaning there is no collateral involved, and such loans can finance a variety of expenses. Borrowers opting for personal loans will receive a lump sum of money, typically at a fixed rate, to be repaid over an agreed-upon time period. Personal loans offer lower interest rates than credit cards and fixed monthly payments over a predetermined number of years.
What Can Personal Loans Be Used For?
Personal loans can be used for nearly anything and are commonly used to consolidate debt, make home improvements and pay for one-time expenses, like vacations or weddings.
If you’re considering using a personal loan to pay for college, you should first check with lenders since many have restrictions against using personal loan funds for postsecondary education. Another important consideration is that most college students do not have the income, assets and credit history to qualify for a sizable personal loan without a co-signer.
Which Loans Are Best for Education?
Federal student loans should always be your first option, according to Orsolini. “They have lower rates and offer more repayment options, such as income-based or graduated repayment plans,” he says.
Federal student loans, which are administered by the federal government, are almost certainly the best option to pay for your college education. Such loans were expressly designed to help people pay for higher education, and borrowers do not need excellent credit and don’t have to show proof of income or assets. Every student qualifies for federal student loans if they complete the Free Application for Federal Student Aid, Orsolini says, and students do not need a co-signer to access federal student loans.
Federal student loans carry lower interest rates and have longer repayment terms than personal loans. They also allow borrowers access to forbearance or income-driven repayment plans. Some student borrowers may also qualify for federal relief programs.
If a student needs more funds after federal student loan options are exhausted, private student loans are likely the next best option. Private student loans are provided to students by banks, credit unions and other lenders. Private student loans typically carry a slightly higher interest rate than federal loans and may not offer the same flexible repayment terms, but they are still likely preferable to personal loans.
“Private student loans are typically more suitable for covering educational costs than personal loans,” Loehr says. “They are designed for students and offer features like deferment, co-signer options and income-driven repayment plans. Personal loans lack these education-specific advantages.”
Personal loans have several drawbacks compared with student loans, Orsolini says, including when you must start paying back the loan. Student loan repayment typically begins several months after a borrower completes their education, rather than immediately upon disbursement of the funds. Orsolini notes student loans also have a longer payback term, typically 10-plus years, while personal loans typically need to be repaid in five to seven years.
Lengthy repayment terms could be a downside for borrowers who want to clear their debt quickly, but you can repay the debt faster, even while you’re still in school, if your financial situation allows. It also may be advantageous to have longer repayment terms, which typically translate to lower monthly payments over the life of the loan.
Student loans, both federal and private, also provide borrowers with a tax deduction on interest paid, Orsolini says. Personal loans would not qualify for the deduction, even if the funds were used to pay for school.
Other Financing Options to Consider
If you’re faced with a shortfall of funds to attend college, here are some other options to consider that don’t fall under the typical lender-borrower relationship:
File an appeal. If a layoff, a pay reduction or a death of a family member has caused your financial situation to change, consider contacting your school’s financial aid office.
School-sponsored payment plans. Some schools offer payment plans, likely through a third party, that allow students to split the cost of each semester’s tuition into several payments. These plans typically do not charge interest but may come with a small enrollment fee.
Transfer to a less-expensive school. If your funding gap is significant and likely to recur year after year, it may make sense to explore other education options.
Scholarships. Scholarships can help cover the costs of books, living expenses and even tuition. Loehr recommends exploring scholarship and grant programs to reduce your reliance on loans.
Family loans. Loans from a parent or another relative could be an ideal way to fill a gap in financing, although all parties should be upfront about their needs and be careful of the potential pitfalls.
Should a Parent Use a Personal Loan?
Parents often play a role in paying for their children’s education and might consider a personal loan to cover part of the cost. There are likely better options available, particularly if your student is in the first or second year of college. Using a personal loan to fill a college-related funding gap each year can lead to an unmanageable debt load, but if it’s a one-time expense, it may be a smart move.
Other options for parents could include:
A federally backed loan. A Parent PLUS loan has a higher interest rate than most federal student loans but lenient credit qualifications and longer repayment periods than most loan products.
A home equity loan or home equity line of credit. These could be attractive options, but borrowers should always exercise caution when using their home as collateral. Home equity borrowing typically comes with a lower interest rate than a personal loan, but if you’re unable to pay back the loan, your home could belong to your lender.
IRA or 401(k) withdrawals. Parents with 401(k)s or individual retirement accounts could elect to borrow from those accounts to help pay for their children’s college, but there are potential drawbacks. Parents should understand the pros and cons before using any of these options to pay college costs.
If you are considering private student loans or a personal loan, Loehr says to shop around and compare loan offers from multiple lenders to find the best terms. Interest rates, repayment terms, loan forgiveness potential and deferment and forbearance plans are among the most important items to consider when shopping for a loan, Loehr says.
“Borrowers should carefully compare rates, terms and eligibility criteria to make informed financial decisions for their education,” Loehr says. “Only borrow what you need and understand the terms of your loans.”
If you’re unsure of the best way to fund your education, Loehr recommends speaking with the financial aid office at your school for personalized advice.