Choosing Between a Personal Loan and a Student Loan

Key Differences at a Glance

When you need to borrow for education or education-related costs, the two main options are student loans and personal loans. Student loans are designed specifically for education expenses, while personal loans offer more flexibility in how you use the funds. But that flexibility comes with trade-offs in repayment terms and borrower protections.

Understanding the fundamental differences helps you match the loan to your situation. The table below summarizes the main points to consider.

• Federal student loans generally have more favorable terms and conditions than private loans or personal loans.
• Personal loans can be used for any legal purpose, while student loans are restricted to education-related expenses.
• Federal student loans do not require repayment until after you graduate, leave school, or drop below half-time enrollment. Personal loans typically require repayment to start within 30 days.
• Federal student loans do not require a credit check for most loans, while both private student loans and personal loans often require a credit check.
• Federal student loans offer flexible repayment plans, including income-driven options, and may be eligible for forgiveness programs. Personal loans typically do not offer these benefits.

Sources: University of Illinois Office of Student Financial Aid, Broadview Federal Credit Union

Scenario: Covering Tuition and Fees

When you need to pay for tuition and mandatory fees, student loans—especially federal student loans—are the recommended first choice. Federal student loans come with fixed interest rates, no credit check for most borrowers, and repayment that starts only after you leave school or drop below half-time enrollment.

If your federal loan limits do not cover the full cost, you may turn to private student loans to fill the gap. Private student loans can also cover tuition and fees, but they typically require a credit check and may need a cosigner if you don't have an established credit history.

Using a personal loan for tuition is generally not recommended. Although it is possible, personal loans often have higher interest rates, require immediate repayment, and lack the borrower protections that come with student loans.

• File the Free Application for Federal Student Aid (FAFSA) to see what federal loans you qualify for.
• Maximize federal student loans before considering private or personal loans.
• If you still have a gap, private student loans may be a better fit than a personal loan because they typically offer deferred repayment while you're in school.

Sources: University of Illinois Office of Student Financial Aid, Federal Student Aid (U.S. Department of Education), Navy Federal Credit Union

Scenario: Paying for Living Expenses

Student loans can be used for more than tuition. They also cover housing, food, books, and transportation. If you are enrolled at least half-time, federal student loans can help with these living costs, and you won't need to make payments until after you leave school.

Private student loans may also be used for living expenses, but they often require payments while you are still in school unless you choose a deferred repayment option, which may come with a slightly higher interest rate.

A personal loan can be used for any purpose, including living expenses while you study. However, because repayment typically starts within 30 days, you would need to budget for those payments while still in school. This could be challenging if you are not working or have limited income.

For living expenses, federal student loans are generally the best choice due to their flexible repayment and deferment options. If you need additional funds, private student loans may be preferable to personal loans because they are designed for education-related costs and often offer in-school deferment.

• Federal student loans cover housing, food, books, and transportation.
• Personal loans require immediate repayment, which may be difficult while you're in school.
• If you choose a personal loan, ensure you have a plan for repaying it while you're still studying.

Sources: Broadview Federal Credit Union, Edvisors

Scenario: Funding a Professional Certificate

Professional certificates and non-degree programs are increasingly important for career advancement. When you need funding for such a program, the type of loan you choose depends on whether the program qualifies for student loans.

If the certificate is offered by a school that participates in federal student aid programs, you may be able to use federal student loans. These loans offer fixed rates, no credit check, and flexible repayment. If not, private student loans might be available, but they are credit-based and may require a cosigner.

A personal loan is a common alternative for professional certificates because it can be used for any purpose, and approval is based on your creditworthiness. The downside is that personal loans typically have higher interest rates and require immediate repayment.

Before choosing a loan, check with the program's financial aid office to see if it qualifies for federal or private student loans. If it does not, a personal loan might be your only option, but be sure to compare interest rates and terms carefully.

• Federal student loans may be available for certificate programs at eligible schools.
• Private student loans can cover certificates but require a credit check.
• Personal loans are a fallback option, but they often have higher rates and immediate repayment.

Sources: University of Illinois Office of Student Financial Aid, Broadview Federal Credit Union, Edvisors

Scenario: Emergency Expenses While in School

When unexpected costs arise while you're enrolled—like medical bills, car repairs, or travel—a personal loan might seem like a quick solution. Unlike student loans, which are restricted to education expenses, personal loans can be used for any purpose.

However, personal loans require repayment to start almost immediately, and they typically come with higher interest rates than federal student loans. If you are already struggling financially, adding a personal loan payment could create additional stress.

Before taking out a personal loan for emergencies, consider other options: Does your school offer emergency aid? Could you use a federal student loan if you haven't borrowed your full amount yet? Federal student loans can cover living expenses, and you won't have to repay until after you leave school.

If you do need a personal loan for an emergency, compare rates and terms from multiple lenders and make sure you can handle the monthly payments while in school.

• Personal loans are flexible but costly for emergencies.
• Check if you can still borrow federal student loans for living expenses before turning to a personal loan.
• If you choose a personal loan, have a clear repayment plan.

Sources: Broadview Federal Credit Union, Edvisors

Decision Checklist: Which Loan Should You Choose?

Use this checklist to evaluate your situation and determine which loan type aligns with your needs. Remember, the recommended borrowing order is: grants and scholarships, federal student loans, private student loans, and finally personal loans.

When comparing loans, pay attention not only to interest rates and eligibility but also to the repayment terms—how long you have to repay, whether payments can be deferred, and what flexibility you have if your financial situation changes.

• Complete the FAFSA to see what federal loans you qualify for.
• Consider your eligibility: Federal student loans do not require a credit check for most loans; private and personal loans do. If you have limited credit, you may need a cosigner for private loans.
• Assess repayment: Can you afford payments while you're in school? If not, federal or private student loans with deferred repayment may be better.
• Review interest rates: Federal student loan rates are set annually by Congress and are typically fixed; personal loan rates vary widely by lender and creditworthiness and may be higher than federal rates.
• Think about borrower protections: Federal student loans offer flexible repayment plans, deferment, forbearance, and possible loan forgiveness. Personal loans generally do not offer these benefits.
• Match the use: If the expense is education-related (tuition, fees, housing, food), choose a student loan. If the expense is for something else, a personal loan might be appropriate.
• Compare loan terms: Look at the length of the repayment period and any options for deferment or forbearance. Federal student loans offer longer repayment terms and flexible plans, while personal loans typically have shorter terms of a few years and less flexibility.
• Check your credit: Private student loans and personal loans typically require a credit check. If your credit is poor, a federal student loan may be your best option.

Sources: University of Illinois Office of Student Financial Aid, Broadview Federal Credit Union