Can Students Get Personal Loans for College Expenses?
College is expensive, there’s no doubt about it.
Some people are fortunate enough to have their parents pay for their entire college education. These students can focus on their studies and not worry about costly loans after graduating.
For a vast majority, though, 100% financial support from a parent isn’t an option. These students often rely on federal loans, private loans, scholarships, and grants to pay for college.
But even when these resources are available, some students still come up short. If you don’t have enough to pay for college, what are your options?
Some people consider getting a personal loan as a last resort in this situation. But although an option, there are a few things to know about using personal loans for educational expenses.
Learn about personal loans and to see if they're good options to help pay for college.
What is a Personal Loan?
Yes, personal loans can be used to pay for college expenses.
But using this type of loan to pay for educational expenses isn’t always the wisest choice.
A personal loan is a loan that you can get from a bank or credit union.
These loans can be either secured or unsecured. And you’re required to make monthly installment payments.
The best part:
Borrowers get personal loans for various reasons.
Some people use loans for home renovation projects, home repairs, and car repairs. Others use personal loans to consolidate their debt, pay for a wedding, and even take a vacation.
Less commonly, some people use personal loans to pay some or all of their college expenses.
Getting this type of loan is similar to getting other types of loans. You’ll first complete an application. Next, the bank’s underwriter reviews your income and your credit history. This determines whether you’re eligible. The underwriter also decides how much you can receive.
You’ll also need to select a repayment term for the personal loan. Typically, the longer the repayment term, the lower your monthly payments.
The main problem with a personal loan is that they are harder to get than a federal student loan.
With a federal loan, you can get approved without a credit history or income.
Even some private student loan lenders (banks) have flexible credit and income guidelines, making these loans more accessible to students.
It’s a different situation with a bank or credit union personal loan. Getting approved can be difficult if you don’t have an established credit score or consistent income.
In this situation, the bank will likely require a cosigner before approving your application. This is someone (such as a parent or grandparent) with regular income and a more established credit history.
They agree to pay the debt if you default. But using a cosigner is easier said than done. Some people don’t want to assume this risk.
The cosigned loan also appears on the cosigner’s credit report. This can increase their debt-to-income ratio, thus making it difficult for them to get their own credit. Plus, if you pay the personal loan late, the late payment might appear on the cosigner’s credit report too, driving down their score.
Why Is Getting a Personal Loan for College Expenses a Bad Idea?
Even though it’s possible to use a personal loan for college expenses, think twice before going down this road. Here’s a look at a few disadvantages:
1. Immediate repayment
If using a personal loan for college expenses, keep in mind that you’ll start making payments immediately. This is different from using a federal student loan.
With a federal student loan, repayment does not start until a few months after graduation.
Even some private student loan lenders will postpone repayment until after you finish school.
2. Higher interest rates
Traditional student loans also have low, competitive interest rates, keeping them affordable.
Interest rates can be higher with a personal loan. More so if you don’t have an established credit history or if you're getting an unsecured personal loan.
Unsecured personal loans are not backed by collateral.
And as a result, they tend to be more expensive due to the greater risk for lenders. Paying a high interest rate can result in paying thousands more for your education, depending on how much you borrow.
Another thing to keep in mind is that a high interest rate combined with immediate repayment can make a personal loan unaffordable. This might be the case if you have limited income.
3. No hardship provisions
Another huge benefit of using a traditional student loan for college expenses is that some loans, namely federal loans, offer hardship provisions.
Although repayment starts a few months after graduation, there’s an option to defer your first payment, if you can’t afford it.
Additionally, federal student loan lenders allow borrowers to temporarily skip payments during financial hardships.
This is known as forbearance. You can skip a payment for one or more months without penalty, although interest continues to accrue.
4. You need a credit score
To reiterate, another major downside to a personal loan for college expenses is that getting approved will require an established credit history.
As a young adult, there’s a chance that you haven’t built a strong credit record yet.
When applying for federal student loans, credit isn’t a factor. You can get approved whether you have a short credit history or no credit history.
What are Alternatives to a Personal Loan for College?
Getting a personal loan for college might feel like the only option, but other resources might be available to you, too.
Speak to a financial aid counselor
Before speaking with a bank or credit union, contact your school’s financial aid office and schedule an appointment.
An advisor might recommend financial assistance that you haven’t considered.
For example, you might be eligible for a work-study program. You can receive a part-time job assignment and earn money to cover some of your college expenses.
Reach out to student loan lenders
Additionally, you can contact your federal student loan lender or private student loan lender to see if you qualify for more money.
If your parents are willing to assist with the cost of your education, they can apply for a Parent PLUS Loan. This is a federal loan program available to parents of graduate students and dependent undergraduates.
To qualify, though, parents must have good credit. Repayment with these loans is also different from traditional student loans. With a Parent PLUS Loan, parents begin repaying the loan within 60 days of disbursement.
Speak with your employer
If you’re currently working while in school, talk to your employer.
As a benefit, some companies will reimburse certain college expenses.
Switch to a cheaper school
If these alternatives aren’t an option, another thing to consider is switching schools. Lowering your overall college expenses might be a cheaper alternative than getting an expensive personal loan.
Lowering expenses can involve transferring to a cheaper school (perhaps an in-state). Or maybe taking some of your core requirement classes at a local community college.
Another option is to live off-campus or live at home with your parents. This eliminates expensive room and board.
What to Do If You Ultimately Resort to a Personal Loan?
The bottom line:
Getting a personal loan for college expenses is costly and shouldn’t be your first choice.
If you’re leaning toward this option, though, take steps to protect yourself.
For example, only borrow what you can afford.
Be honest about your income and what you’re able to handle on a monthly basis. Remember, repayment will start immediately.
It isn’t enough to have a job and income before applying, your income should also be stable and consistent. In other words, you know what you’re bringing in on a month-to-month basis.
Good credit expected
Also, you should only apply for a personal loan if you have good credit, or at least a cosigner with good credit.
This not only helps with the approval process, it can also help you receive a lower interest rate. A lower rate can keep your monthly payments affordable.
It’s also important to compare lenders before applying. Personal loan rates and requirements can vary considerably from bank to bank.
At the very least, get quotes from three different lenders.
You should also compare monthly payments over several terms, and choose the term with the most affordable payment.
Make on-time payments
Make sure you make your monthly payments on time every month.
This helps you maintain a good credit history.
Plus, timely payments will add additional positive activity to your credit report. As a result, a personal loan can help improve your credit history.
With a stronger credit history, it’ll be easier to get other financing in the future.