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Loans

Here’s why you can’t use some personal loans to pay college tuition

There are some uses for a personal loan that fall under more of a gray area and college tuition is one of them.

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Younker Hall on the campus of Grinnell College.
Wolterk | Getty Images

A personal loan can be used to cover a variety of expenses, including an unexpected bill, a vacation or even a home repair. And it can be a more cost-effective way to cover these expenses, because some personal loans have lower interest rates than most credit cards, and you can be approved for up to $100,000.

However, there are some personal loan uses that fall under more of a gray area, and college tuition is one of them.

Can you actually use a personal loan to pay college tuition? The short answer is: You'll need to double check the lender's terms of use because some of them don't allow borrowers to use personal loans to pay college tuition.

Restrictions on using personal loans

There's a thin line between being able to use a personal loan for tuition costs and being prohibited from doing so — and it really comes down to which loans follow certain federal regulations.

Regulations mentioning "private education loans" refer to a form of credit that is not federally insured, does not include a line of credit or any other loan that must be secured and is provided to a borrower for educational expenses, according to the Federal Register.

Personal loans aren't subsidized or insured by the government, often don't require a borrower to secure them with collateral, and borrowers may apply for the loan explicitly for the purpose of educational expenses.

But under the 2008 Higher Education Opportunity Act, lenders providing private education loans must make special disclosures, provide a 30-day rumination period, must give borrowers the option to cancel within three days of disbursing the funds and cannot affiliate themselves with schools. These are just some of the regulations that loans for educational use must follow.

Not all lenders offer personal loans that meet all of these requirements. Since they don't follow these strict regulations, many lenders simply prohibit the use of their personal loans for tuition-related expenses.

Other funding options for students

As long as the lender doesn't prohibit the use of their personal loan for educational expenses, borrowers are technically free to use one to cover tuition costs.

"The exact uses can be found in the loan agreement itself," says Leslie Tayne, the founder and manager of Tayne Law Group. "If the loan is designed for you to use it as you please, then it's generally fine to use the money to pay for college."

At the same time, though, Tayne explains that it's highly unlikely that a college student straight out of high school would even have a substantial enough credit history to be approved for a personal loan. Plus, there are some advantages to private student loans that personal loans just don't offer.

According to Tayne, you'll generally be charged a lower interest rate on private student loans. If you take out a personal loan, you'll have to start repaying it immediately. But you may have the option to defer repayments on a private student loan while you're still in school.

Personal loans typically have shorter repayment terms than private student loans. You only have up to seven years to pay off a personal loan, but with a private student loan you generally have up to 20 years to pay it off. This could mean that your monthly payments on the personal loan will be higher.

Alternatives to personal loans

If you've exhausted federal financial aid and private student loan options and still need extra funding to cover expenses like school supplies and textbooks, there are still other lending products out there that are more suitable for students.

A student credit card like the Discover it® Student Cash Back has no annual fee, a short 0% APR intro period on purchases for 6 months (15.24% - 24.24% variable thereafter), and is geared toward students with fair or no credit. But if you're a student who's managed to build up a credit history that's in good standing, you can apply for the Bank of America® Travel Rewards for Students, which also has no annual fee and a generous intro 0% APR period, so you can defer paying off a big expense (or better yet, split it into smaller payments over several month). Plus, new cardholders can earn 25,000 bonus points if they spend $1,000 within the first 90 days of opening the account.

Discover it® Student Cash Back

On Discover's secure site
  • Rewards

    Earn 5% cash back on everyday purchases at different places each quarter like Amazon.com, grocery stores, restaurants, gas stations and when you pay using PayPal, up to the quarterly maximum when you activate. Plus, earn unlimited 1% cash back on all other purchases – automatically.

  • Welcome bonus

    Discover will match all the cash back you've earned at the end of your first year

  • Annual fee

    $0

  • Intro APR

    0% for 6 months on purchases

  • Regular APR

    15.24% - 24.24% Variable

  • Balance transfer fee

    3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*

  • Foreign transaction fee

    None

  • Credit needed

    Fair / New to Credit

*See rates and fees, terms apply.

Bank of America® Travel Rewards for Students credit card

  • Rewards

    Unlimited 1.5 points for every $1 spent on all purchases

  • Welcome bonus

    25,000 bonus points after you spend at least $1,000 in purchases in the first 90 days of account opening, which can be redeemed for a $250 statement credit toward qualifying travel purchases

  • Annual fee

    $0

  • Intro APR

    0% APR for the first 15 billing cycles on purchases

  • Regular APR

    15.49% to 25.49% variable

  • Balance transfer fee

    Either $10 or 3%, whichever is greater

  • Foreign transaction fee

    None

  • Credit needed

    Good/Excellent

Terms apply.

Bottom line

Although you may not be able to use some personal loans to cover the costs of tuition, consider exhausting your other funding options first, like federal student aid and private student loans. The terms are often much more beneficial for students and you can feel more confident about setting up a reasonable repayment plan..

For rates and fees of the Discover it® Student Cash Back card, click here.

Information about the Bank of America® Travel Rewards for Students has been collected independently by Select and has not been reviewed or provided by the issuer prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
Plenty of rewards and benefits including 4X points per dollar for dining at restaurants worldwide
Enjoy an intro APR on purchases plus, Discover will match all the cash back you've earned at the end of your first year.