Personal Loans Vs Student Loans – Which Is Better For Higher Education?

Higher education is easily one of the biggest expenses an individual can incur in their lives, second only to buying a house. 

Fortunately, there are plenty of options to fund this expense, with a $4 trillion student loan market leaving no stone unturned in getting as many high school graduates through the doors of college as possible.

That being said, however, a student loan is not a golden ticket that lets students get through their four years of college like an all expenses paid vacation. There will likely be certain gaps, and students might be forced to search for alternatives to pay for them.

Apart from taking up a part-time job, applying for scholarships, and maxing out credit cards, one increasingly popular option among many students is to take another personal loan.

Personal Loans Vs Student Loans – How Do They Differ?

Student loans differ from personal loans like chalk differs from cheese, with the only similarity being that they are both loans, and need to be paid back. 

All in all, student loans are the preferred option for funding higher education, just a quick scan through a personal loan comparison page should make this fairly evident.

Here are some key areas where they differ, which goes to show that personal loans are absolutely nothing like student loans, and vice versa.

1. Lender

In the case of student loans, it might be funded by the Federal Government, in the case of Federal Student Loans, or private lenders such as banks, credit unions, and financial institutions such as SoFi, in which case they are called private student loans.

A personal loan has no government involvement whatsoever, with borrowers directly dealing with banks and financial institutions before agreeing with the terms and rates.

2. Loan Approval Requirements

A government guaranteed student loan does not involve any credit checks or minimum income requirements.

Private student loans and personal loans, however, require a credit check, or at least a cosigner with good credit in order to be approved.

3. Collateral

Both a student loan and personal loan are unsecured debt, which means they don’t require any collateral. This is as far as any similarities between them go.

4. Use Cases

A personal loan is fairly versatile, with the borrower free to use it, invest it, or spend it in any way they like, but in the case of a student loan, the amount disbursed is earmarked for education expenses, and nothing else.

Student loans have expanded their offerings in recent years, allowing students to fund online learning programs and bootcamps, instead of only recognized college courses.

Suggested Read: 4 Smart Strategies For Avoiding Student Loan Debt

5. Disbursement

While funds disbursed for a personal loan is deposited directly in the borrower’s bank account, in the case of a student loan, it is disbursed to the education institution’s financial aid office.

6. Interest Rates

Federal student loan interest rates remain on the lower end, between 4% to 7%, as of writing this, given the low risk of default.

Private student loans and personal loans, however, can see interest rates go all the way up to 13%, and even 24%, given the lack of collateral, and no income for the borrower.

7. Repayment Terms

One of the biggest differences and a key advantage of student loans over a personal loan is the repayment term.

With a student loan, repayments start 6 months after graduation, whereas in the case of a personal loan it usually starts the very next month following the disbursal of funds.

8. Tax Deductions

Student loans allow for the interest paid to be deducted from annual taxes, while personal loans don’t offer any such facility.

9. Discharge

A personal loan can be discharged by filing for personal bankruptcy, but the process is fairly more complicated when it comes to student loans, requiring a court appeal, and a lot more to successfully discharge the loan. Advantage personal loan!

Which Is Better For Higher Education?

With this, it should be fairly obvious that the scales tip massively in favor of student loans, over personal loans when it comes to funding higher education. 

Unless there is a gap, and all other avenues have been exhausted, borrowers should stay clear of personal loans, especially when they are still studying, and don’t have a regular source of income to start paying installments right away.

Final Words

It’s best to exhaust available funds before opting for something as drastic as a personal loan. In fact, there are plenty of options such as student aid, scholarships, and even credit cards aimed at students, offering 0% APRs for the first few months, which can be quite beneficial for those who are truly desperate. A personal loan is truly the last resort at this stage. 

Also Read: 6 Tips & Best Practices For Student Loan Management