You cannot consolidate private student loans or personal debts, such as credit cards, with a federal direct consolidation loan. Only federal student loans are eligible, including direct federal loans, federal direct PLUS loans, Stafford loans, and Perkins loans. You can repay student loans with a personal loan if the lender allows it. Lenders determine how personal loan funds can be used, and this is usually described in the loan agreement.
Rather than taking out a personal loan, refinancing your existing education loans is often a more attractive option. With a student loan refinance, you get a new student loan to pay off your current federal and private student debt. Then, you'll pay off the debt under a new privately refinanced loan with a different interest rate and repayment period. If the consolidation of credit cards or other debts results in a lower payment, this also gives you more cash flow each month.
DeGisi noted that you can apply for a personal loan and use the money to pay off your existing debt, replacing your current loans with a new, unique one. There are also plenty of options available when it comes to finding a lender to refinance your student loans. For example, investing the difference can give you a higher return than paying off your debt more quickly if you manage to obtain an interest rate much lower than 9.2% of the average rate of return on the stock market over the past 10 years, according to data from Goldman Sachs. Before moving forward with a personal loan or refinance loan to pay off student debt, it's smart to explore other ways to manage the payment.
Therefore, the idea of using a lower-interest personal loan to pay off a student loan may seem like an opportunity to save on interest. If your credit history is spotty and you can't qualify for the options listed above, you might consider enrolling in a debt management plan. Read your loan agreement before you sign it to make sure that you are clear about whether you have a fixed or variable interest rate. Unlike a direct federal consolidation loan, which is issued by the U.S.
Department of Education, a bank or credit union issues a private student loan refinance loan. This means that you won't be able to qualify for any federal loan repayment program, such as an income-based repayment plan, grace periods for repayment, and public service loan forgiveness (PSLF), and you won't have access to the current forbearance period. As with refinancing a student loan, use a marketplace like Credible to compare lenders' offers and find the best rate and terms of a personal loan. Many lenders include text in their loan agreements that prohibits borrowers from using a personal loan to pay for educational expenses and student debts, as well as other purposes, such as business costs or illegal activities.
This causes a temporary drop in your credit rating that could affect your ability to apply for more loans. For a select number of borrowers, it might be beneficial to use personal loans to pay off student loans. It doesn't allow you to be strategic when it comes to paying off each individual debt, which could prolong the payment of all your debt. And while some private lenders refinance student loans with better rates, this is generally because the new loan is still classified as a student loan.
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