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What are the Differences Between a Personal Loan vs a Student Loan?

Understanding the differences between a personal loan and a student loan can help borrowers making smarter decisions with their debt.

Written By: Michael P. Lux, Esq.

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Student loans and personal loans might seem similar at first glance, but there are many key differences that all borrowers should understand.

In some cases, a personal loan may be marketed to students making it appear to be a student loan. Borrowers who understand the differences between the two loan types can find better interest rates and avoid repayment headaches.

Student Loans vs Personal Loans Basics

Both personal loans and student loans are usually considered unsecured loans.

An unsecured loan means that there isn’t any asset or collateral attached to the debt. If you fail to make your student loan payments, your lender will not repossess your diploma or the knowledge gained at school. With secured loans, failure to pay means you could lose your house or your car, depending upon the loan.

At the most basic level, a student loan is just a personal loan with some extra rules attached.

The Special Rules for Student Debt

Student loans are treated differently than personal loans in the following ways:

Loan Uses – A personal loan can be used for anything. Students may use student loans for a wide range of educational expenses, but nothing further.

Repayment – With most personal loans, repayment begins immediately. Student loan repayment usually begins after a student finishes school, though some borrowers opt for loans that start repayment from day one.

Bankruptcy – In the United States, most debt is treated the same in bankruptcy courts. However, student loans have special rules that make student debt very difficult to discharge in bankruptcy court.

Interest rates – Student loans often have lower interest rates than personal loans. Several factors influence the interest rates, including the fact that lenders know borrowers are unlikely to erase the debt in bankruptcy. The reduced risk to the lender can mean lower interest rates for the borrower.

How Federal Student Loans Work

Within the category of student loans, there are two main types: federal and private.

At the most basic level, a federal loan is a student loan with some extra benefits.

Two significant features separate federal loans from private student loans:

Combining these two features, federal student loan borrowers have protection against unemployment and underemployment. Personal loans and private loans do not provide this protection.

Deciding Between Loan Types

If you are evaluating options to pay for school, the order of preference should look like this:

  1. Federal Student Loans – Between the forgiveness programs and income-driven repayment plans, borrowers should opt for federal loans even if it means a slightly higher interest rate.
  2. Private Student Loans – Most students will find that private loans are easier to obtain and have better interest rates than personal loans.
  3. Personal Loans – Of the three options, personal loans will typically have the highest interest rates and the most strict repayment options. Borrowers seriously considering this option might want to revisit their plan to pay for college.

Personal Loans vs Student Loans in Refinancing

When refinancing student debt, the distinction between a personal loan and a student loan is crucial.

Some lenders advertise student loan refinancing but use personal loans for the refinance process. This is arguably good for borrowers because it means the debt is dischargeable in bankruptcy. However, it also means borrowers lose out on the student loan interest deduction.

In most cases, however, a traditional student loan refinance creates a new student loan.

At present, the following lenders offer the best refinance rates on a traditional student loan refinance:

RankLenderLowest RateSherpa Review
T-1ELFI5.28%ELFI Review
T-1Splash Financial5.28%*Splash Financial Review
3Laurel Road5.49%Laurel Road Review
About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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