Private student loans or personal loans: Which is a better choice for college?

Mother helping daughter unload car at college dormitoryImage: Mother helping daughter unload car at college dormitory

In a Nutshell

Financial aid and federal loans are go-to options for funding your college education. But if those sources don’t cover all your college costs, you might be wondering if you should fill the gap with private student loans or personal loans.
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College isn’t getting any cheaper.

The average cost, including tuition and fees, of attending a public 4-year university was $8,800 in the 2016-2017 school year, according to the National Center for Education Statistics. Students at private nonprofit 4-year universities had it even worse, shelling out $33,500 on average.

With a price tag like that, you might wonder how you’ll ever be able to pay for an undergraduate degree. Personal savings, scholarships and federal loans might go a long way toward footing the bill — and indeed, it’s always best to use up these sources first.

But if those options don’t cover all your college-related expenses, you might decide to take out a loan to cover the rest. Private student loans and personal loans for college are two possibilities to help you bridge that last gap, but which one is better?

Let’s look at how each works.

Do private loans or personal loans for college have better interest rates?

In general, interest rates for private student loans are better than interest rates for personal loans, although your credit can strongly affect the interest rate you’re offered for a loan.

The best interest rates on private student loans are typically tied to the Libor (around 2.1% as of July 2018) plus 1.8%, meaning that the best rates could be as low as 3.9% — not bad at all. But they can also reach higher than 18%. On the other hand, the average personal loan interest rate for a 24-month loan from a commercial bank was 10.31% APR, according to a May 2018 analysis by the Federal Reserve.

Fast Facts

What is the Libor?

“Libor” stands for London Interbank Offered Rate, the rate of interest many international banks in London use to make loans to one another in the city’s wholesale money markets. Some of the world’s leading banks use the Libor to set various variable interest rate loans. It’s similar to the U.S.’s prime interest rate, but historically has changed less.

How are private student loans and personal loans for college paid out?

Certified private student loans are typically paid out directly to your school, with anything left over being sent back to you from your school. Noncertified private student loans and personal loans, on the other hand, are typically paid out directly to you. This can be both good and bad. On one hand, it’s easier to get the money quickly, but on the other, you might be tempted to use it for other things or take out more than you need.

What are the repayment terms for private student loans and personal loans?

Both private student loans and personal loans offer a wide variety of repayment terms, depending on the lender.

One difference is that many private student loan lenders offer repayment features that are more beneficial for students than personal loans. For example, if you qualify, some student loan lenders allow you to choose between paying while you’re in school or deferring payments until you’re done with school. But with a personal loan, you’re expected to start repaying the loan immediately.

Some private student loan lenders even allow you to start making interest-only payments while you’re still in school to ease the burden a bit after you graduate. And while every lender might not provide forbearance requests like with federal loans, some will still do so.

Finally, it’s common for private student loan lenders to offer a small discount if you sign up for autopay.

Co-signers and credit requirements

Both private student loans and personal loans will likely require a credit check, unlike most federal student loans. And since it’s common for students to have little, no or even poor credit history, you may need a co-signer to help you get approved for a private student loan or a personal loan. If your co-signer has good credit, you might even be eligible for better interest rates on your loan.

In fact, according to the CFPB, in 2011 over 90% of private student loans were taken out with the help of a co-signer. Of course, your co-signer would be as much on the hook for repaying the loan as you. So if you default (or fail to meet the loan terms), the lender will expect your co-signer to repay the loan. And if you make late payments, it could harm your co-signer’s credit as well as yours.

Your co-signer may eventually be able to have their name taken off your student loan. The lender most likely won’t do it for you automatically — or even notify you when you’re eligible to have your co-signer released. It’ll be on you to check whether the lender offers co-signer release and apply for the release.

Tax deductibility and student loans

Though you can’t deduct the interest paid on personal loans on your taxes, you may be able to write off the interest paid on your private student loans. This tool from the IRS can help you determine if your loan is eligible.

And one of the benefits of the student loan interest deduction is that you may be able to take advantage of it even if you claim the standard deduction rather than itemizing deductions.

But not all good things last forever: If you become a high-earner, this deduction gradually phases out after your income reaches $65,000 (or $135,000 if you file jointly with your spouse).

Bottom line

Paying for college is rarely a one-solution or one-size-fits-all endeavor. While your quest for college financing should always start with financial aid and federal student loans, it’s possible those resources won’t meet all your needs.

If that’s your situation, private student loans and personal loans may be options for bridging the gap. Start by researching some private student loan options, since private student loans often come with lower interest rates and more repayment options designed to help students than personal loans, and the interest on them might be tax deductible.

Should you decide a personal loan is an appropriate loan to fill any gaps for college expenses, make sure to compare lenders, rates and offers carefully. And have a plan in place to begin repaying the loan right away.

About the author: Lindsay VanSomeren is a freelance writer living in Kirkland, Washington. She has been a professional dogsled racer, a wildlife researcher, and a participant in the National Spelling Bee. She writes for websites such a… Read more.