Should college students consider personal loans?

You may have used federal or private student loans to cover tuition, housing, textbooks and other higher education expenses. Unfortunately, you may still need additional funds to survive for the remainder of the semester or cover a financial emergency.

Credit cards could be an option, but a personal loan may be better. Personal loan interest rates are often lower than credit card rates. Plus, some lenders offer fast funding to help you get back on track right away. Still, before deciding if a personal loan is right for you, there are some factors to consider.

Personal loans for students vs. student loans

Personal loans and student loans can help you survive financially while in college. However, having both could be dangerous if it’s time to repay what you owe and your income is low.

With federal loans, you may qualify for an income-driven repayment plan. Private lenders aren’t always as generous, though. If you fall behind on your loan payments, you risk damaging your credit rating, regardless of your loan type.

Personal loans are different from student loans in a few major ways:

• Loan type: Student loans are unsecured, which means they aren’t backed by collateral. Many personal loans are also unsecured, but some are secured and require collateral to secure funding.
• Eligibility criteria: You’ll typically need good or excellent credit and a steady source of income to qualify for a personal loan with competitive terms or a private student loan. However, federal student loans are issued based on your academic status.
• Usage: Many lenders won’t let you use persona loans for tuition-related expenses are typically off-limits with most lenders. Otherwise, you can spend them as you see fit. On the other hand, federal and private student loans should only be used for higher education expenses, including tuition, fees, books, housing and supplies.
• Funding: Personal loans are deposited into your bank account, and student loans are sent to the school’s financial aid office.

Ultimately, student loans are ideal if you seek funds to cover college-related expenses. But if you need a more flexible funding option to pay for other types of expenses, a personal loan may be best.

Pros and cons of using a personal loan for school

You may qualify for a personal loan as a student, but it may not be a smart financial move. You’ll want to weigh the pros and cons before moving forward.

Pros

• Fast funding times: It could take some time for student loan proceeds to be disbursed to you, but most personal loan lenders offer funding within the same week after approval.
• Lower interest rates than credit cards: As of December, the average personal loan interest rate is 12.29 percent, compared to the average credit card APR of 20.35 percent.

Cons

• More expensive than student loans: If you can get a federal student loan, you could get a better interest rate than you would with a personal loan. The interest rate on Direct Subsidized and Direct Unsubsidized federal student loans is currently 6.53 percent and 8.08 percent for undergraduate and graduate students, respectively.
• Usage restrictions: Many personal loan lenders restrict the use of loans for education expenses, unlike student loans. You can likely use a personal loan for expenses outside tuition and fees, but you’ll have to confirm with the lender first.
• No deferment: You’ll start repaying personal loans the following month, but most student loan lenders give you the option to defer payments until six months after graduation.
• Your assets could be at risk: If you get a secured personal loan, you risk losing your assets if you fall behind on monthly payments.

Where to get a personal loan for school

Banks, credit unions and online lenders may provide personal loans for students, even if you aren’t currently employed or have little to no credit history. A few examples of lenders that may offer personal loans to students are:

• U.S. Bank
• Upstart
• Upgrade
• Prosper

Most lenders don’t allow students to use personal loans to pay for tuition and fees — often listed as education-related expenses — but you can use the loan proceeds to pay for other expenses, including rent, groceries and financial emergencies.

That said, it may not always be the best option. Before moving forward with a personal loan for school, compare lenders. You’ll want to check to make sure you can use the funds for what you need and that you can meet the terms and conditions of the loan agreement.

Alternatives to using a personal loan for school

If a personal loan isn’t a good fit, you’re not entirely out of luck. You may qualify for free funding sources, including scholarships and grants. Ask your financial aid office about options that may be available to you.

Credit cards are also an option but should be used as a last resort. Credit cards can have high interest rates, and it can be difficult to limit spending. Another option is to pick up a part-time job or apply for a work-study program.

Bottom line

If you’re experiencing financial hardship, a personal loan could be a less costly option to get the funds you need. But it’s not without risks, and you should consider the advantages and disadvantages before you apply. Depending on your situation and how you plan to use the money, a student loan or other funding source could be a better fit.