Should You Use Personal Loans for College? 7 Factors to Consider

If you’re a college student, you know how scarily expensive school can be. Your tuition and fees make up only a small portion of your college expenses. According to The College Board, the average student at a public, four-year university will spend $17,100 per year on other costs, such as room and board, transportation, and textbooks.

If you need help paying for school, you might consider taking out a personal loan to cover some of your expenses. However, using personal loans for college is rarely a good idea. Here’s what you need to know about personal loans, how to get a loan, and what you can do instead to pay for school.

Can you use personal loans for college?

Personal loans generally can’t be used to pay for your post-secondary education. Most personal loan lenders explicitly prohibit using your loan to pay for expenses like tuition, room and board, textbooks, or classroom fees.

That restriction is in place because lenders that issue education loans must follow the Higher Education Opportunity Act, which instituted rigorous requirements for lenders. Personal loan lenders make sure borrowers only use personal loans for approved uses so they don’t have to follow these guidelines.

You could use a personal loan for other expenses that are related to your education, such as transportation, food, or a laptop — but even then, a personal loan may not be the best idea.

Should you use a personal loan while in college? 7 things to consider

Personal loans can be appealing. In many cases, you can complete an application online in just a few minutes and get approved right away. If approved, you could get your money in as little as one business day.

So why shouldn’t you use a personal loan while in college? Here are seven reasons to keep in mind.

1. Personal loans have shorter repayment terms

Personal loans usually have short repayment terms when compared to student loans. Most personal loans have repayment terms of two to seven years, which means you’ll have a much more expensive monthly payment.

By contrast, student loans typically have repayment terms of 10 years. And, if you sign up for an alternative payment plan or consolidate your debt, you could have a loan term of 20 years or more, making your monthly payments more affordable.

2. Student loans tend to have lower interest rates

In general, personal loans tend to be more expensive than student loans. According to the Federal Reserve, the average interest rate on a two-year personal loan was 10.16%, as of August 2022. That’s significantly higher than the rates on most student loans. For example, Federal Direct Unsubsidized Loans have an interest rate of just 4.99% for the 2021-22 school year.

3. Student loans are easier to qualify for

As a student, you likely don’t have much credit history or income, making it difficult to qualify for a personal loan on your own. Even if you do qualify for a loan, you’ll likely get a much higher interest rate than you’d get if your credit were more established.

Student loans work quite differently. You can qualify for a federal student loan without undergoing a credit check, even if you don’t have any income. They’re much easier to qualify for as a college student.

4. Student loans have benefits that personal loans don’t

Federal student loans have extra benefits that even the best personal loans don’t offer, such as loan deferment and forbearance. If you face a financial hardship, such as a job loss or medical emergency, you can postpone making payments without defaulting on your loans. A deferment or forbearance gives you time to get back on your feet without having to worry about loan payments.

Personal loans generally don’t have deferment or forbearance options. If you suddenly take a pay cut or are laid off from work, you’re still responsible for keeping up with your personal loan payments.

5. Student loans often have grace periods

With student loans, you typically have a grace period after you graduate. The grace period generally lasts for six to nine months, and you don’t have to make payments during this time. It gives you a chance to find a job and get settled before you have to start repaying your loans.

Personal loans don’t have grace periods. Your repayment starts right after the loan is disbursed, so you’d likely have to make payments while you’re still in college. When you’re on a tight student budget, affording your monthly payments can be downright impossible.

6. Student loans have tax benefits

Both federal and private student loans can help you at tax time. If you made payments toward your loans, you can deduct the interest you paid under the Student Loan Interest Tax Deduction. You can deduct the lesser of $2,500 or the amount of interest you actually paid during the year, decreasing your taxable income.

Personal loans don’t have this perk. The interest you pay toward your personal loans isn’t deductible on your taxes.

7. Student loans may be eligible for forgiveness

If you have federal student loans, you may be able to qualify for loan forgiveness. There are several forgiveness programs, including Public Service Loan Forgiveness, Teacher Loan Forgiveness, Total & Permanent Disability Discharge, and Income-Driven Repayment Plan Forgiveness.

Even private student loans can qualify for loan forgiveness. Many state repayment assistance programs accept private student loans and will help you pay them off if you meet the requirements.

Personal loans aren’t eligible for loan forgiveness; you’re responsible for repaying the full amount, plus interest.

5 alternatives to personal loans for college students

Now that you know why personal loans typically shouldn’t be used for college expenses, you can explore other funding options to pay for your education. If you still need money for your next semester, consider these five alternatives:

1. Grants and scholarships

Grants and scholarships don’t have to be repaid, making them an ideal way to offset your education costs. Grants are usually based on financial need rather than academic or athletic merit and are issued by the federal government, schools, and non-profit organizations.

Scholarships are offered by schools, companies, and non-profit organizations. They’re usually offered to people who excel in academics, sports, or have other talents, such as music or writing.

Scholarships and grants can be combined to reduce your education costs. You can search for grants and scholarships using resources like FastWeb and Scholarships.com.

2. Federal student loans

Make sure you complete the Free Application for Federal Student Aid (FAFSA) so you get all the federal aid you’re entitled to, including low-interest federal student loans. You can use your loans to pay for your tuition, fees, and even living expenses, and you can usually borrow up to the total cost of attendance.

3. Private student loans

If you still need cash for school after applying for grants, scholarships, and federal loans, consider using private student loans to fill the gap. These loans are offered by private lenders and don’t have the same benefits as federal loans, but can be used to pay for your education expenses.

4. Work-study programs

Another option is a federal work-study program. With this approach, you’re connected with a part-time job, either on-campus or off. It’s typically related to your field of study, and you can use your earnings to pay for some of your education.

5. Part-time job

If you need extra money to cover your living expenses or for entertainment, consider taking on a part-time job or side hustle. Most schools hire students to work in the cafeteria, tutor other students, or as security officers. If your school is in a busy area, you may also be able to get a job in retail or fast food nearby.

If you need more flexibility, you could launch a side hustle and work when it’s convenient for you. As a college student, you could babysit, walk dogs, deliver groceries, or even write for publications from your dorm room.

Paying for school

Paying for college can be difficult, so getting a loan for college expenses or using a credit card can seem like a great idea. However, using a personal loan for post-secondary education is prohibited by lenders, and it would be an expensive source of money, too.

Instead, make sure you explore all of your financial aid options — including grants, scholarships, and student loans — to get the money you need to pay for school.