Taking on debt is something that most students do in order to afford a college education. And once you’ve completed your studies and graduated, the burden of having to repay tens or hundreds of thousands of dollars can be anxiety-inducing.
If the regular repayments on your student loan are steep, you might consider clearing your obligation for this debt with a personal loan, and effectively switching what you owe over to a new provider with more amenable rates.
The question is whether you can do this, and if it’s possible, whether you should. Let’s cover all the angles to give you a good route forward.
Should You Take On a Personal Loan to Pay Off Student Loans?
Terms and conditions matter
The first point to make is that not all personal loans will be eligible for paying off debt you’ve accumulated as a student. Some lenders will make it explicitly clear in their terms and conditions that you can use your loan for a lot of things, but not for this precise purpose.
This might not seem fair, but the good news is that there are lenders out there that take a less militant stance on this matter, and some that will actually court customers who want to pay off student loans.
Given that it takes an average person over two decades to repay a student loan, if you can find the right deal with the right lender, making the leap could be wise.
Rates are relevant
One thing which will determine whether or not you should pick up a personal loan to replace your student debt is the rate of interest which applies.
If you find a low-interest personal loan, that will lead to cheaper monthly repayments. The rates will have to be below those you’re currently charged on your student loan package, of course, otherwise the move won’t make financial sense.
Your circumstances will impact loan affordability
Taking out a personal loan and getting a good rate of interest isn’t just about the wider market conditions. Indeed more attention will be paid to your circumstances, and the extent to which a lender sees you as a low-risk, reliable customer.
Your credit score will be key in this regard. If you’ve got a good history of keeping up with loan repayments, then your score will rise. If you miss repayments, or you’ve got a limited amount of credit history to begin with, it will be lower.
The higher your credit score, the more affordable personal loan packages will become. You should still shop around, of course, but it’s important to first focus on getting a better rating.
Checking eligibility before applying is sensible
If you decide that taking on a personal loan to pay off student debt is the right move, you shouldn’t just dive straight in and send off an application to the lender of your choice. The reason for this is that if you apply and you get turned down for whatever reason, your credit score will actually go down.
Rather than getting into this vicious cycle of being denied credit, it’s better to check with a lender that you meet their eligibility requirements before you go any further. Some companies will look into your circumstances without doing a hard credit check, and will pre-approve you for a personal loan, which will give you peace of mind.
The type of student loan you have is impactful
Another sticking point to consider is whether your student loan has other benefits which make it worth keeping, even if a move to a personal loan might reduce the amount of interest you have to contend with.
Specifically, if you’ve got a federal student loan, then there are perks unique to this, such as enjoying forbearance in times of major upheaval, with the recent pandemic being the best example of this.
If your student loan is privately provided, on the other hand, it is closer to a personal loan in that it won’t be managed in the same way as a federal loan. This means that moving from a private student loan to a personal loan could be savvier, depending on all of the factors mentioned so far.
The bottom line on paying off student debt
There’s no sure fire answer to whether using a personal loan to replace your student loan is the best option for you. It’s necessary to consider your circumstances, check the products available, and ensure that you’re eligible before you decide either way.
It’s a good idea to consult an expert if you’re still confused at this juncture. The worst thing you can do is put up with loan repayments of any kind which are financially crippling, especially as there are so many ways to consolidate debt and reduce costs today so you don’t need to suffer.
