Student loans and personal loans may seem similar at first, but there are many key differences that all borrowers should understand.
In some cases, a student personal loan can be marketed in what appears to be a student loan. Borrowers who understand the differences between the two types of loans can find better interest rates and avoid repayment headaches.
Student Loans vs. Personal Loans Basics
Both personal loans and student loans are usually considered unsecured loans.
An unsecured loan means that there is no asset or collateral associated with the debt. If you fail to make your student loan payments, your lender will not get your diploma or school skills back. With secured loans, non-payment means you could lose your home or car depending on the loan.
At the simplest level, a student loan is just a personal loan with a few additional rules.
The special rules for student debt
Student loans are treated differently from personal loans as follows:
Loan Uses – A personal loan can be used for anything. Students can use student loans for a wide range of educational expenses, but nothing more.
repayment – For most personal loans, the repayment starts immediately. Student loan repayment usually starts after graduation, although some borrowers opt for loans that start repaying from day one.
bankruptcy – In the United States, most debt is treated equally in bankruptcy courts. However, special rules apply to student loans that make it very difficult to pay student debts in bankruptcy courts.
interest – Student loans often have lower interest rates than personal loans. Several factors affect interest rates, including the fact that lenders know that bankruptcy borrowers are unlikely to clear the debt. The reduced risk for the lender can mean lower interest rates for the borrower.
How federal student loans work
Within the student loan category, there are two main types: Federal and private.
At the simplest level, a federal loan is a student loan with some additional benefits.
Two key features separate federal loans from private student loans:
By combining these two characteristics, federal loan borrowers have protection from unemployment and underemployment. Personal loans and personal loans do not offer this protection.
Decision between loan types
When considering options for paying school, the order of preferences should look like this:
- Federal student loan – Between the forgiveness programs and the income-based repayment plans, borrowers should opt for federal loans, even if that means a slightly higher interest rate.
- Private student loans – Most students will find that personal loans are easier to come by and have better interest rates than personal loans.
- Personal Loans – Of the three options, personal loans tend to have the highest interest rates and the strictest repayment options. Borrowers who are seriously considering this option may want to reconsider their study pay plan.
Personal loans versus student loans in refinancing
When it comes to refinancing student loans, the distinction between a personal loan and a student loan is crucial.
Some lenders advertise student loan refinancing but use personal loans for the refinancing process. Arguably this is good for borrowers as it means that bankruptcy debts can be paid off. However, this also means that borrowers lose the interest deduction on student loans.
However, in most cases, traditional student loan refinancing will create a new student loan.
Currently, the following lenders offer the best refinance rates for a traditional student loan refinance: