A personal loan Should not be your first choice for college funding, but it can still be an option. Technically, you can apply funds from a personal loan to pay for anything, and this can be a good way to cover some of the costs related to college. Here’s a look at why other options are a better option.
What is a personal loan?
A personal loan is a term loan, usually without collateral. When you take out a personal loan, you typically receive a lump sum of money from about $ 1,000 to $ 100,000 and pay back in installments over one to seven years.
Can a personal loan be used?
There are many personal loan uses, ranging from home repair and renovation, to consolidating high-interest debt, or to financing a holiday or even a wedding.
Typically, a personal loan is designed to use the money at your discretion, says Rod Griffin, senior director of public education and advocacy for the credit bureau Experian. “If it meets the lender’s criteria and there are no restrictions toward that end, you can certainly use a personal loan to pay tuition and other college costs,” Griffin says. “The question is whether this is the right tool for the job.”
To use a personal loan to pay for college, you must first check with a lender – many have specific restrictions against using personal loan funds for post-education education.
Furthermore, it is unlikely that a college student will have sufficient income, assets, and credit history to qualify for their own personal loan, and the possibility that parents are required to co-sign Will be.
Is a personal loan better than a student loan?
If you are using a personal loan to pay for college, then you should first consider how it stacks up against your student loan options.
“With whatever loan you are going to take, you need to see what the conditions are and it would be better to compare with other vehicles,” says Griffin.
Federal or private student loans are a better lending option for college students, as these loans are explicitly designed for those trying to pay for higher education.
Federal student loans are generally the cheapest way to borrow, including no credit check, low fixed interest rate, and potential eligibility for federal relief programs, prohibitions, and income-driven repayment plans.
“You don’t always have those options with other types of loan products,” Griffin says.
Private student loans are also an option, but their interest rates are often higher than federal loans and interest will increase during college.
With student loans, repayment usually starts after you leave school and can be as long as 20 to 25 years – longer than typical personal loan installment plans. This can be a problem if you want to clear your loan quickly, but you may find it beneficial for a longer period, which usually results in lower monthly payments over the life of the loan.
As students pay off student loan debt, they can deduct tax of up to $ 2,500 per year. There is no tax deduction for personal loan payments.
But personal loans can have some advantages over student loans. For example, student loans can be difficult if discharge in bankruptcy is not impossible. In addition, you cannot refinance federal student loans through the US Department of Education, although you can consolidate them into one payment or receive Private student loan refinance.
Maryland Silvera, who is the financial advisor at TARR Financial Group in Maryland, says graduate students have substantial incomes, strong credit records and the ability to pay back debt immediately.
For example, he states that he knows international students who were not able to obtain student loans, but obtained personal loans from banks that allowed them to pursue an MBA.
However, there are specific federal and private student loan options for graduate students that may be a better deal.
Should a parent use a personal loan?
Parents often help their children pay for college education and may consider a personal loan to cover part of the cost.
If your student is in the first or second year of college, taking a personal loan every year to fill a college-related funding gap can lead to an unbearable debt load. However, it can work in other situations.
Griffin says, “If the interest rate is right, then a personal loan can make a lot of sense and the term agrees to fill a gap.” “If a student is in the final semester, paid for everything else and you are under $ 2,000, a personal loan may be ideal.”
Other options for parents may include:
Federally Supported Loans. Parent Plus loans have a higher interest rate than most federal student loans, but have shorter creditworthiness and longer repayment periods than typical loan products.
Home equity loan or home equity line of credit. Rising home prices and low interest rates make these two attractive options, but you need to be prepared if house values fall, Griffin says. If this happens, you may find that the value of your home is very low, it leaves you underwater, the level of equity debt is higher than the value of your home, which in 2008 and 2009 many homes have Happened to the owners.
“I’m always cautious about using my home as a security for a loan,” Griffin says.
IRA or 401 (k) withdrawals. It is possible to tap both your 401 (k) and personal retirement account to pay for college expenses. But both have drawbacks – you will pay income tax on the money you withdraw, and 401 (k) withdrawals may incur an additional 10% penalty.
In addition, you will make it very difficult to save enough money for retirement.
“You can definitely finance college education, but you can’t finance retirement,” Silveira says.
Consider other financing options
When you are facing a college funding gap, there are options other than loan-lending loan products and federal student loans, such as:
School Financial Assistance. If there is a significant change in your family’s financial situation, it is possible that a school will pay attention to it and provide more support. Colleges are more fielding Appeal request During the coronovirus epidemic.
Some schools offer Payment plan, Through third parties with no interest and with small enrollment fees. You can pay for a semester for several months or more.
“It’s always worth talking to financial aid offices in schools because they can provide a lot of options,” Griffin says.
Family debt. It may be ideal for the student to fill a gap in debt financing taken from a parent or another relative, although all parties need to be careful of potential obstacles.
Strong communication and a written agreement are required, as well as realistic expectations of when the money will be paid back.
“If there is trust and history within the family to honor commitments, a personal loan from a family member can go a long way,” Cylinder says. “It can benefit all parties – better rates for the lender, better terms for the borrower.”
There are many expenses associated with a college education – from tuition and room and board to books, travel and other personal expenses. Smart financial planning is needed for all to ensure that the cost does not overwhelm a family.
“When you’re looking at college costs, they all fall into the same equation,” Griffin says. “If you are paying for it with a personal loan, it may or may not make sense based on your personal needs. Credit is dependent on a personal situation.