Can you use a personal loan to pay off student loan debt?

Sometimes, it's easy to feel like you'll never pay off your entire student loan debt balance. In fact, respondents to a One Wisconsin Institute survey said on average, it took them 21 years to pay off their student loan debt. So it can be pretty tempting to look for creative ways to pay down your debt a little quicker.

Personal loans can generally be used on any large expense (like a wedding, a home renovation or an emergency expense), but for many people, they are an instrumental way to consolidate debt or pay down high-interest debt a little faster.

On average, personal loans have a lower interest rate compared to credit cards — according to the Federal Reserve, the current average APR for a two-year personal loan is 9.58% while the average APR for a credit card is 16.30%. 

Of course, the interest rate on a personal loan will depend on your credit score. And, generally, the higher your credit score, the more likely you are to receive a lower interest rate among other more favorable terms for a personal loan. Some lenders, like LightStream, actually offer interest rates as low as 7.49% - 25.49% APR with AutoPay.

By contrast, interest rates on federal student loans will depend on the type of loan (undergraduate, graduate or parent PLUS loan), but the average rate across the board is 5.8%. And when it comes to private student loans, average interest rates can range from 6% to 7% but can be as high as 12.99% among major private lenders. So the idea of using a lower-interest personal loan to pay off a student loan can seem like a chance to save on interest.

So can you use a personal loan to pay off student loan debt? It depends. Here's what you should consider before trying this strategy.

Every lender has its own set of terms when it comes to how the funds from a personal loan can be used. For example, while some lenders will allow you to use a personal loan toward small business expenses, others will not, and you'll have to apply for a small business loan instead.

Many lenders actually have terms that prohibit the use of a personal loan for paying off student loan debt. If you aren't sure if a particular lender will allow you to use the funds for this purpose, you should be up front about your intentions to avoid breaching the lender's terms of use. If you use the money for a prohibited purpose, you could be held responsible for paying back the full amount immediately.

Interest rates for personal loans can sometimes be lower than interest rates on private student loans (depending on the lender and your credit score, of course), but not always. The only time you'll actually save money by using a personal loan to pay off your student loans is if you're definitely receiving a lower interest rate on the loan.

Some lenders have tools you can use to estimate what loans you qualify for and what your interest rate is likely to be. Prosper Personal Loan, for example, has a rate tool that can show you how much you'll qualify for, what your monthly payments will look like and how much you'll pay in interest, all without hurting your credit score. This can help you get a preview of what's to come if you do decide to submit an application.

In 2020, all federal student loan payments went into a forbearance period as a result of the Covid-19 pandemic. This forbearance period was previously extended through Jan. 31, 2022. Most recently, it has been extended through Aug. 31, 2022. This means that federal student loan borrowers are not required to make student loan payments at this time, and their balances will not accrue interest until after the pause ends next month. If you have private student loans, or you refinanced your federal student loans, however, you don't qualify for this protection.

If you take out a personal loan with the intention of using the money to pay off your federal student loan balance, you will lose all the protections that come with federal loans. That means you won't be able to qualify for any federal loan repayment programs, like an income-driven repayment plan, grace periods for repayment and public service loan forgiveness (PSLF), and you'll lose access to the current forbearance period as well.

These initiatives are designed to make it easier to repay your balance as a federal student loan borrower, but they'll no longer be available to you once you take on a private personal loan to pay off the balance. This can present a financially strenuous situation if you really end up needing some economic relief from making payments.

Bankruptcy is a process where a person can seek relief from some or all of their debts if they are unable to repay them. Chapter 7 bankruptcy can completely eliminate any debts you have. And while it can damage your credit score, filing for bankruptcy provides something of a financial reset — by improving your financial habits, you can work to rebuild your credit score over time.

But most student loans aren't discharged when you file for bankruptcy. According to the American Bar Association, both private and federal student loans are unable to be discharged in bankruptcy unless a borrower can prove that the loan payment is an "undue hardship." However, it is notoriously difficult to prove the standards for undue hardship (here's more on what you need to know about filing bankruptcy on student loans).

Personal loans, though, can be discharged in bankruptcy. This is arguably one of the few advantages to paying off a student loan using a personal loan.

Refinancing is a popular option for student loan borrowers because they can usually land a lower interest rate and might even end up with lower monthly payments, too. The terms around refinancing a student loan also aren't as restricting as they are when it comes to using a personal loan to pay off student loan debt. Just keep in mind that when refinancing, you'll typically lose federal protections on your student loans. But it can be a smart move for anyone with private student loans.

There are also many options available when it comes to finding a lender that will refinance your student loans. SoFi has variable and fixed-rate refinancing options and offers a discount if make your monthly payments using autopay.

If you worry you'll have trouble making on-time loan payments, you should contact your student loan servicer to discuss the possibility of extending forbearance on an individual basis. Oftentimes, you can ask for a payment plan that better suits your circumstances.

Paying off your student loans is a huge accomplishment, but it can be one that is often difficult to reach. Many people are left making student loan payments well into adulthood. And while using a lower-interest personal loan to pay off your student loans can be a clever way to save money, it's a strategy that should be very carefully considered — especially when it comes to understanding the terms of use of the loan.

However, there are other avenues for anyone seeking a little more financial flexibility when it comes to your student loan payments. Refinancing is a popular way to save money on payments by getting a lower interest rate. But if you feel you will be unable to meet the required minimum payments on your student loan balance, contact your loan servicer ASAP to discuss additional options.

*Your LightStream loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Excellent credit is required to qualify for lowest rates. Rate is quoted with AutoPay discount. AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice. Payment example: Monthly payments for a $10,000 loan at 7.99% APR with a term of 3 years would result in 36 monthly payments of $313.32.