Curve

Personal loans for students: Are they a good idea?

Peter Warden
The Mortgage Reports editor

What are personal loans for students?

Let’s save you some time. If you’re exploring options for mainstream student loans to cover tuition, fees, housing and so on, you’re reading the wrong article. Personal loans for students are different from private or federal student loans.

These personal loans are smaller amounts you may be able to borrow to supplement your proper student loans. Maybe you’re facing a major expense or have run up big credit card balances and want to consolidate them within a single loan. These can provide an immediate cash injection, often within 24 hours of your applying.

But don’t get too excited yet. It’s usually hard for a typical student to get approved for one. And the costs can be high.

Indeed, to get a good deal, you may need to find a cosigner. And cosigning can create its own problems, as we’ll find out.

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Why you might be interested in a personal loan as a student

Today, life at college can feel as much a test of your financial stamina as your intelligence and academic talent. The College Board reckons that “published in-state tuition and fees at public four-year institutions increased at an average rate of 3.1% per year beyond inflation” during the decade leading up to 2019.

“Beyond inflation” are the key words here. It means tuition rises faster than other goods, and probably faster than incomes. In real terms, it’s getting increasingly expensive to attend college. Small wonder so many students struggle with their personal finances and need to top up their resources from time to time.

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Obstacles to getting personal loans for students

There are plenty who are atypical, but let’s assume you’re a typical student. You’re young and straight out of high school or another learning institution. You haven’t yet had a permanent, full-time job so you haven’t had the income to borrow much.

That’s lethal for your credit score. Because that score’s based on your past borrowing. So, if you haven’t borrowed in the recent past, you may not have a score at all. Or, if you’ve only borrowed a little, you may have a low (bad) score, because you’ll have what the lending industry calls a “thin file.”

The only thing lenders like less than lending to people with no or “bad” credit is lending to people with no steady, established income stream. And that’s you, too. So, in lenders’ eyes, you’re about as far from an ideal borrower as you can get.

Your options when you have thin credit or no credit

There are a few lenders that specialize in providing personal loans for students. For example, Boro offers these specialist products. And it says you can have the funds in your account quickly, often on the same business day on which you apply.

But that’s where the good news ends, certainly for typical students. Boro’s interest rates start at 15.9% annual percentage rate (APR) and go up to 36.00% APR. And you can borrow only $1,000-$3,000 over 12-24 months.

Let’s look at an example of the real cost of one of these loans.

Suppose you take a $2,000 loan. If you spread the payments over a year, you’ll pay each month anything between $180 and $200, depending on the rate you qualify for. Choose a two-year term, and those monthly payments will fall to $99 – $118. But you’ll end up paying a total of $2,350 – $2,830

Hmmm. That’s not cheap. And you have to ask yourself how easy it will be for you to find $100-$200 each and every month.

Play your cards right — or play piggyback

You may have an alternative: a student credit card. For example, the Discover it® student card had at the time of writing APRs ranging from 15.24% – 24.24% variable, which competes with Boro’s loan. Better yet, you pay that rate only on the amount you’ve actually borrowed (your balance) each month. And you earn cashback rewards.

The Capital One® Journey® student card has a 26.99% variable APR. And it too offers cashback rewards.

Don’t expect a high initial credit limit with either card. Those come later when you’ve proved yourself to be a good borrower. And, of course, even though these cards are designed for students, not every application is successful.

If you don’t want plastic or need more money, you may have another option: to piggyback on someone else’s good credit score. That involves having someone cosign your loan. But that has its own pros and cons.

Cosigning — The pluses and the minuses

Many student loans are cosigned by parents or occasionally other relations or friends. So what’s wrong with getting them to cosign applications for personal loans for students? After all, more lenders are likely to consider your application if it’s backed by someone with great credit. And you may well be offered a lower interest rate.

Maybe nothing’s wrong with that. But, before you approach a potential cosigner, ask yourself some questions:

  1. Why do I need this personal loan? Is it because my spending (no matter how modest) is unsustainable? If so, you can be pretty sure you’ll need more borrowing soon. And the chances of your defaulting on your loan are high
  2. Do I recognize the risks I’m asking my cosigner to shoulder? These are potentially lifechanging, which means they can put even the most loving relationship under strain

Lifechanging? Really? Absolutely.

Cosigners’ risks

With some loan agreements, you default on your loan if you skip even one payment. And then the sky falls in.

The entire balance, including late and other fees, typically falls due at once. In other words, you have to repay the whole debt in one go. But the lender knows you have no money. So it usually goes after the cosigner.

Just as bad, the default appears on the cosigner’s credit report as well as yours.

And that hits her credit score — hard. So the next time she wants a mortgage, other loan or credit card, she’ll pay a much higher interest rate. In bad cases (say when a new mortgage is involved), you could cause losses running into five figures. Do you really want to put your mom, dad, grandparents or close friend through that?

Alternatively …

A safer way might be to ask that person to take out a personal loan in his own name and to lend you the proceeds in the form of a private, person-to-person loan. That way, he controls the personal loan payments. And, if you’re late paying him, he can cover those till you do.

The upside of this is that it’s likely he’ll qualify for a much lower rate than you will. So the loan should be cheaper. The downside is that you won’t be building your own credit score.

Take care

Of course, for many, personal loans for students are their only choices. They don’t have friends or relations willing to cosign or make private loans. And cards may not immediately give them the money they need. If you’re in that situation, think carefully before you make your application. In particular, ask yourself whether you can realistically afford the payments.

You don’t want the most memorable lesson you take away from college to be the misery of living with bad credit.

Apply for a student personal loan

Personal loans aren’t always the best choice for students, but they can help in a pinch.

Shop multiple lenders at once and get a quote fast.

Check My Rate for a Personal Loan up to $100k* (Jul 15th, 2019)

*TheMortgageReports and/or our partners are currently unable to service CA & NV.