Federal student loans come from the government and offer perks like fixed interest rates and income-driven repayment plans, all set by law. Personal loans are issued by banks and other financial institutions with terms set by the lender, typically making them more expensive.
When it comes to paying for college, starting with federal loans is usually the most cost-effective option. However, if your federal loans aren’t enough, you still have options, from private student loans to scholarships and grants. While personal loans are a great resource for many large purchases, college tuition is not one of them.
Read on to understand the key differences between federal student loans and personal loans, including how they work and the purposes they’re best suited for.
What Are Student Loans?
A federal student loan is government-provided financial aid that covers educational expenses and requires repayment with interest. To apply, you must complete the FAFSA annually to assess your financial need. There is no credit check required for federal student loans.
Some federal student loans provide flexible repayment options, such as income-driven repayment plans that adjust payments according to post-college earnings, and forgiveness programs tied to specific occupations. Borrowers are free to modify their repayment plan after obtaining the loan.
There are several different federal student loan options, including:
• Federal Direct Subsidized Loans: These loans are for undergraduates in need of financial assistance. The amount depends on college costs and family income, as determined by the FAFSA. The government usually covers interest while you’re in school.
• Federal Direct Unsubsidized Loans: These are for undergraduates and graduate students. The amount you receive is determined by the cost of attending your school and not your financial need. Interest starts accruing immediately, and you can choose to pay it while in school or add it to your total repayment.
• Parent PLUS Loans (Direct Parent Loans for Undergraduate Students): Allow parents to borrow on behalf of their undergraduate children. You must complete a separate application from other federal loans to qualify for these.
• Grad PLUS Loans: Allow graduate and professional students to borrow money for education expenses.
What Are Personal Loans?
Personal loans are offered by banks and other individual lenders and can be used for just about anything. Common purposes include consolidating high-interest debt, home improvement, moving, family planning (think IVF or adoption costs), and major car repairs. Generally, a personal loan cannot be used for a down payment on a home, business expenses, investing, or college expenses. That’s right: Most lenders don’t allow borrowers to use personal loans to pay tuition and fees, or to pay down student loans. If you need funding for college outside of federal loans, it’s best to look into private student loans.
Personal loan lenders may offer variable or fixed interest rates, along with repayment periods typically ranging from one to seven years. To qualify for a personal loan, lenders review your financial history and credit score. It’s important to note that each lender has different terms and conditions, so it’s essential to understand the annual percentage rate (APR) and repayment terms before committing to a specific offer.
Student Loans vs Personal Loans: Key Differences
Purpose aside, here’s a breakdown of the key differences between student loans and personal loans.
Interest Rates
In general, federal student loans have fixed interest rates, meaning your rate remains the same throughout the entire loan term. For example, the average rate for Direct Subsidized and Unsubsidized Loans for undergraduates for the 2024-25 school year is 6.53%.
On the other hand, personal loans can have variable or fixed rates, and are often higher than federal student loan rates. Depending on the borrower’s creditworthiness, repayment term, principal amount, and the lender, personal loan rates vary widely, ranging from 7% to 36%.
Loan Forgiveness
With federal student loans, you may qualify for additional benefits, such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness (TLF). These programs can forgive your loan balance after a specific period or upon meeting certain criteria.
Personal loans, however, do not offer any loan forgiveness programs. Nonetheless, lenders may provide options to prevent default if you encounter difficulty making payments due to hardship.
Repayment Terms
Federal student loans provide several repayment plans ranging from 10 to 25 years, including options that allow you to lower your payments based on your income. Repayment can also be deferred while you’re enrolled at least half-time and immediately after graduation.
Personal loan lenders also offer different repayment terms, typically between five and 20 years, giving you the power to choose what works best for you.
Credit Requirements
Federal student loans are part of an overall financial aid package offered to students. To apply for these loans, you’ll need to fill out the FAFSA each year, typically between October and July. Federal loan approval is often based on financial need, and no credit check is required.
When applying for a personal loan, you’ll complete an application and undergo a credit check. Each lender sets its own criteria for approval, often requiring a credit score of at least 670. If you don’t meet the credit requirements independently, many private lenders allow you to apply with a cosigner. Having a cosigner with a strong credit history can improve your chances of approval.
Deferment and Forbearance Options
If you’re dealing with a short-term financial challenge, you might qualify for a deferment or forbearance on your federal student loans. During deferment, you can pause your payments temporarily. It’s important to note that subsidized loans won’t accrue interest, but unsubsidized loans will. This means any unpaid interest adds to your loan balance, increasing your debt. For forbearance, if you can’t make payments, interest continues to build on your loan balance.
Personal loans may also offer deferment and forbearance options, but each lender has different rules. Before taking out a personal loan, it’s important to understand these options in case you face financial difficulties.
When to Choose Student Loans
It’s a trick question to compare personal loans vs student loans for college expenses, since student loans are the only option. But even if personal loans were an alternative for college expenses, federal student loans make more sense due to their typically lower interest rate and additional borrower protections.
Those protections include income-driven repayment plans, loan forgiveness programs, and deferral and forbearance options, which can be really helpful if you hit a rough patch financially.
When to Choose Personal Loans
Personal loans are a good option if you have a major purchase coming up and want to avoid putting it on a high-interest credit card. Just be sure to compare personal loan options carefully to avoid piling up debt. To find the right loan and repayment choice, look for the one with the lowest overall cost by considering the loan amount, interest rate, term, and fees.
The Takeaway
When deciding between federal student loans vs. personal loans for funding college, personal loans are simply off the table due to lender restrictions. This shouldn’t pose a problem, though, because federal student loans offer a better deal for college students anyway, with fixed interest rates, income-based repayment plans, and forgiveness options. In the event that federal student loans don’t cover your total cost of attendance, consider a private student loan to bridge the gap.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
FAQ
Can I use both student and personal loans?
Most lenders don’t allow personal loans to be used for college expenses. However, if federal student loans don’t cover your full cost of attendance, you can apply for a private student loan to bridge the gap.
Do personal loans have borrowing limits for college?
Trick question! Personal loans can be used for just about anything, from home improvement to moving costs. However, there are a few exclusions, and college costs are one of them. Fortunately, private student loans exist for just that purpose, with borrowing limits up to your cost of attendance.
Are personal loan interest rates higher than student loans?
Personal loan interest rates are usually higher than federal student loan rates and private student loan rates.
Photo credit: iStock/Drazen Zigic
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
SOIS-Q224-1926103-V1