What’s the Difference?
While a student loan and a personal loan are both debts that a borrower is responsible for, they are quite different to each other. With the student loan, you are taking out money for the sole purpose of paying for education. With a personal loan, you are taking out money for any purpose you wish. Remember, that a private student loan cannot be used to pay for anything beyond educational expenses. In fact, it’s the law.
Private Student Loans
For the purpose of this article, we are referring to student loans given out by private lenders. A federal student loan is completely different, and quite frankly is almost always the best way to go, if you are eligible. Most of the time, people taking out private student loans are either going to a top-tier school, or are already maxed out with federal funding, and going into a graduate program, such as a school of medicine.
Even though private student loans are required by law to be used for educational expenses, there are some “loopholes” that people can freely use. For example, you can pay for housing expenses, child care for your dependents so that you can go to school, a new laptop, and other things that can be explained as being necessary to succeed. You can also use a private student loan to consolidate or refinance existing student debt. Private student loans cannot be discharged through bankruptcy very easily, so if you default on them, they tend to stick around on your credit report.
Personal loans are simply loans given by a lending institution that allow you to borrow money for any purpose. You certainly can use the funds to pay for schooling, and many people do. However, they tend to be a bit more stringent with qualifying, and sometimes require a bit more in the way of collateral. Your credit score comes into play, so keep that in mind. One of the advantages of a personal loan is that if you declare bankruptcy, it can be wiped out and forgiven.
The Interest Rate Differential
Interest rates for private student loans tend to be lower than those for personal loans. In the long term, you typically pay much less for a private student loan then you do a personal loan, but while a personal loan normally has a fixed interest rate, a private student loan can have a variable interest rate. This is one of the main reason some people will take out personal loans instead of private student loans. However, most of the time you are much better off with the student loan.
Another aspect of interest rate payments for these loans is that you can write off private student loan interest payments on your taxes up to $2,500. However, the loan has to qualify according to the rules of the IRS, so make sure you check into this. Most private loans will meet these qualifications, however, a personal loan, obviously will not.
The Main Take Away
When it comes to funding education, the easiest and most flexible way is a federal student loan. After that, you then enter the realm of private student loans and personal loans. The private student loan is typically going to be the better choice for the average American, with a personal loan being the last resort. This is mainly because of the interest rate situation in the United States, and of course the ability to have lower payments.
While both of these types of loans can help you finance higher education, especially graduate education, you should probably make sure you have exhausted all forms of grants, scholarships, federal aid, and of course, federal loans before walking down this path. Once you do, most of you will find that a private student loan works out better over the longer-term. However, keep in mind that both of these types of loans will require you to make payments while you are in school, unlike the federal programs. It is because of this that you need to understand how much you are paying a month, and make sure that it is something that you can afford.
There are many more tax advantages to a private student loan as well, so if you are currently working and pay taxes in that position, this can help you out as well, as it could relieve some of your tax burden. Always consider your situation and what matters most before making your final choice.