Should You Get a Personal Loan to Pay Off Your Student Loan Debt?
The numbers can be discouraging.
It takes most four-year degree holders an average of 21 years to pay off their student loans. With the average monthly payment nearly 55% higher than it was a decade ago, it’s not surprising that you might feel like you want to do anything to get the student loan debt monkey off your back.
Is a personal loan to do just that a good option?
To help you answer the should-I-or-shouldn’t-I question, here are some truths worth noting about personal loans.
How do personal loans work?
Personal loans share some similarities to your student loans.
You apply for a loan from a financial institution. Your credit score and other factors help determine the amount of money you’ll be able to get, as well as the interest rate.
Loans can be fixed or flexible (variable). Like a student loan, a personal loan impacts your credit score—so if you’re responsible and make on-time payments, a personal loan can help build your credit.
Are personal loans a good idea?
For sure, there are advantages to using a personal loan to payoff student loan debt.
But, the truth is, some things that are attractive about a personal loan are also available with student loan refinancing. And, there are some things that should give you pause before pursuing a personal loan to pay off student loan debt.
If you have several student loans, you can consolidate that debt into a personal loan with one monthly payment. Ideally, by doing so you could refinance that debt to a lower interest rate and shell out less money every month.
A loved one may have done you a big favor by cosigning for your student loan. If you qualify for a personal loan on your own, you can release a cosigner on your student loans.
However, you can do both of those things with student loan refinancing as well.
The one plus of a personal loan is that if you declare bankruptcy and your petition is granted, you are no longer be required to pay back your loan. However, declaring bankruptcy usually won’t remove student loans.
Prepare to give up tax breaks
One important silver lining in student loan debt is that the interest is currently deductible come tax time. You can deduct up to $2,500 a year if your modified adjusted gross income is up to $80,000 for a single person, or $160,000 if you’re married filing jointly.
You won’t have this luxury with a personal loan, as that interest is not deductible.
Let’s face it, at least Uncle Sam gives you some wiggle room.
Federal student loans offer flexible repayment options, like those that tie your monthly payment to your income, others that temporarily postpone or lower your payments, and better still, having a portion of your loan forgiven if you work in public service.
Such perks are not offered with personal loans.