Using a Personal Loan for Medical Expenses Without Losing Benefits

Quick overview

A personal loan can be a useful tool to pay unexpected medical bills, maintain liquidity, and avoid tapping retirement accounts. However, loan proceeds are treated differently for taxes and for public benefit programs. Loans are not taxable income (IRS), yet they can temporarily increase your countable resources and, depending on the benefit program, could affect eligibility for Medicaid, Supplemental Security Income (SSI), SNAP, or housing assistance. (See IRS Pub. 502; SSA and HealthCare.gov guidance.)

In my practice advising clients on medical debt, I’ve seen good outcomes when borrowers plan ahead, coordinate with benefits counselors, and document how the funds are used. I’ll walk through how personal loans interact with common programs, practical steps to protect benefits, alternatives to consider, and sample calculations so you can make an informed choice.

How loans are treated for taxes and public benefits

• Taxes: Loan proceeds are not taxable income (they’re a liability you must repay). You do not report the principal of a personal loan as income on your federal tax return. However, interest you pay on a personal loan used for medical expenses is generally not tax-deductible as medical interest. Only qualified medical expenses you pay during the year may be deductible if you itemize and exceed the medical expense threshold (see IRS Publication 502). (IRS: medical deductions and loan treatment.)

• Means-tested benefits: Benefit programs use different definitions of income and resources. A loan increases your cash on hand (a resource) even though it isn’t income; that increase can push you over asset limits for programs that have them (e.g., Medicaid and SSI). Some programs base eligibility on Modified Adjusted Gross Income (MAGI) — loans do not change MAGI — while others check countable resources or have state-by-state asset tests. (See Social Security Administration and HealthCare.gov.)

Key authoritative sources:

• IRS Publication 502, Medical and Dental Expenses (for tax treatment): https://www.irs.gov/pub/irs-pdf/p502.pdf
• Social Security Administration, SSI resources and eligibility: https://www.ssa.gov/benefits/ssi/ (SSI resource limits are $2,000 individual / $3,000 couple as of 2025.)
• HealthCare.gov, Medicaid and CHIP eligibility basics: https://www.healthcare.gov/medicaid-chip/getting-medicaid-chip/
• Consumer Financial Protection Bureau, medical debt and loans: https://www.consumerfinance.gov/

Program-by-program effects (practical guidance)

• Medicaid: Medicaid eligibility rules vary by state. Many Medicaid programs check countable assets for certain eligibility categories (especially long-term care). Because a loan increases your bank balance, it can temporarily make you ineligible if the resulting assets exceed the program’s limit. That said, if you immediately use the loan to pay medical providers, those funds are gone from your account and may not be counted at the next eligibility review. Always verify with your state Medicaid office before borrowing. (HealthCare.gov)

• Supplemental Security Income (SSI): SSI has strict resource limits. A loan that increases your cash on hand may count as a resource and jeopardize SSI eligibility if not spent quickly on exempt items (there are rules for how resources are counted). Contact your local SSA office or benefits counselor before taking a loan if you receive or are applying for SSI. (SSA guidance.)

• Affordable Care Act premium tax credits (Marketplace subsidies): Eligibility for premium tax credits uses MAGI, which focuses on taxable income. Since loan proceeds are not taxable income, they generally won’t affect eligibility for subsidies. However, any interest or other income earned from holding the funds could matter. (HealthCare.gov)

• SNAP and other assistance programs: SNAP eligibility rules differ by state; some states don’t apply asset tests for certain groups. Because SNAP looks at income and sometimes resources, a big loan could matter in jurisdictions that still impose asset limits. Check with your local benefits office. (USDA/FNS.)

• Housing assistance (Section 8) and state programs: Many programs look at countable assets or periodic certification income. Loans can show up on bank statements and could be treated as countable assets during recertification.

Practical steps to protect benefits when using a personal loan

1. Talk to a benefits specialist first. Before borrowing, call your caseworker, local legal aid, or a benefits counselor. They can explain how a loan would be treated in your state and program.

2. Consider direct-pay arrangements. If possible, have the lender or family member pay the provider directly, or set up the loan funds to be paid directly to the hospital or clinic. Direct payment avoids temporarily inflating your bank balance.

3. Use the money right away on medical expenses. If your goal is to keep countable assets low, deposit and spend the money promptly on medical bills. Keep itemized receipts and explanation-of-benefits (EOBs).

4. Keep careful documentation. Save the loan agreement, bank deposit/withdrawal records, itemized medical bills, provider statements, and receipts. If a benefits worker questions your account activity, documentation proves the funds were used for medical care.

5. Time your application and recertification. If you’re close to a recertification review date for benefits, delay borrowing until after recertification or resolve benefits issues first.

6. Avoid using retirement or gifting funds to manipulate eligibility. Transferring money to qualify or disqualify for benefits can trigger penalties (e.g., Medicaid long-term care look-back rules) and legal trouble.

7. Compare all financing options. Ask providers about charity care, sliding-scale discounts, payment plans, or low- or no-interest medical financing. Often hospitals and clinics offer hardship programs you should apply for first.

8. Check alternatives for interest cost. Personal loans typically carry higher interest than home equity lines or 0% medical credit products. If you have good credit, a fixed-rate personal loan with a clear repayment term may be preferable to revolving credit with variable APR.

Alternatives and trade-offs

• Hospital/clinic payment plans: Often interest-free or low-interest and designed not to affect benefits; apply for charity care or hardship discounts first.

• Medical credit cards (CareCredit, etc.): Can be useful for elective care with promotional 0% interest, but watch for deferred-interest traps and high post-promo APRs.

• Debt consolidation/personal loans: Consolidating multiple medical bills into a single installment loan can make budgeting easier but may increase total interest paid.

• Negotiation and debt settlement: Negotiate discounts with providers before borrowing. Many hospitals will negotiate large bills or accept lump-sum discounts.

Example: real numbers to illustrate impact

Scenario: $15,000 hospital bill. You take a $15,000 personal loan at 10% APR for 36 months. Monthly payment ≈ $485 and total interest ≈ $1,472 over three years. Using the loan to pay the bill clears the provider balance and avoids collections, but you now have a monthly loan payment.

If you had Medicaid with a strict asset test and you deposited the $15,000 into your checking account, you could temporarily exceed countable resource limits. Instead, either request the lender disburse directly to the hospital or deposit and immediately pay the provider, then document the payment.

In my work, clients who arranged direct payments to providers and kept an itemized trail avoided benefit interruptions while stopping collection activity and protecting credit.

Checklist before you borrow

• Confirm program rules with your benefits office or counselor.
• Ask the provider about financial assistance, payment plans, and discounts.
• Request direct disbursement to the medical provider if possible.
• Compare APRs, fees, and repayment terms from multiple lenders.
• Estimate monthly payment and ensure it fits your budget.
• Keep full documentation of payments and medical statements.
• Consult a tax advisor about deductibility of medical expenses and the tax impact.

When a loan can hurt more than help

Borrowing to pay medical bills can backfire if:

• You can’t afford monthly loan payments and risk default.
• Loan interest and fees exceed negotiated discounts from providers.
• You unknowingly make yourself ineligible for critical benefits because you increased countable assets.
• You use the loan for non-medical purposes and accidentally create taxable or benefit-reportable events.

Final takeaways

Personal loans are not automatically disqualifying for benefits, but they carry traps. The key steps are: check your specific program rules, prefer direct payments to providers, document everything, and exhaust provider-level assistance first. If you receive means-tested benefits (especially SSI or Medicaid with asset tests), coordinate with a benefits counselor before taking on new funds.

Professional disclaimer: This article is educational only and does not replace legal or financial advice for your situation. Consult a benefits counselor, tax advisor, or attorney for action tailored to your circumstances.

Further reading

• For more on consolidating medical bills, see Using a Personal Loan to Consolidate Medical Bills: Step-by-Step (FinHelp) — https://finhelp.io/glossary/using-a-personal-loan-to-consolidate-medical-bills-step-by-step/
• For how medical debt affects credit, see The Impact of Medical Debt on Credit Scores and How to Manage It — https://finhelp.io/glossary/the-impact-of-medical-debt-on-credit-scores-and-how-to-manage-it/
• For details on how collections are reported, see How Medical Collections Are Reported on Credit Reports — https://finhelp.io/glossary/how-medical-collections-are-reported-on-credit-reports/

Authoritative sources cited in text:

• IRS Publication 502: https://www.irs.gov/pub/irs-pdf/p502.pdf
• Social Security Administration (SSI eligibility): https://www.ssa.gov/benefits/ssi/
• HealthCare.gov (Medicaid & Marketplace basics): https://www.healthcare.gov/medicaid-chip/getting-medicaid-chip/
• Consumer Financial Protection Bureau: https://www.consumerfinance.gov/

In my practice, the best outcomes came from early communication with providers and benefits offices, and from choosing financing only after exhausting charity care and low-cost payment plans. That approach reduces risk to both your benefits and your credit.