The Pros and Cons of Student Loans: Are They Right for You?

In the 2022-23 academic year, the average total cost of attending a four-year college was $30,884, according to the National Center for Education Statistics. Considering the steep cost of higher education, student loans may seem like a prudent way for students to afford school. But borrowing money to pay for college has both benefits and drawbacks with long-term effects.

If you're trying to decide if student loans are right for you and how much you can afford to borrow, here's what you need to know about the pros and cons of taking out student loans for your education.

Current private student loan rates

Pros of student loans

There are a number of reasons why a student may choose to take out student loans for college.

Economic access

To start, loans offer students access to higher education that may otherwise be unaffordable. If the median total cost of attending college is more than $30,000 for a single year, a student who attends four years of schooling may be looking at a total cost exceeding $120,000 for their entire education. Student loans can put those costs in reach for the average borrower.

Check Out: How To Take Out a Student Loan

Builds credit

College students who begin their schooling in their late teens may also find that graduating from college with some student loans gives them an opportunity to build their credit history by making on-time payments during the repayment period.

Flexible repayment options

College students who take out federal student loans will also get to enjoy the perks of the federal student loan program. This includes flexible repayment options, among other benefits.

Federal borrowers may choose between several repayment options:

• Standard Repayment Plan: With this option, borrowers make fixed monthly payments for a period of 10 years.
• Graduated Repayment Plan: Under this 10-year plan, repayment starts with lower monthly payments that rise over time.
• Extended Repayment Plan: Borrowers have either fixed or graduated payments for a period of 25 years.
• Income-driven repayment (IDR) plans: These plans set your monthly payments based on your income and family size.

Payment relief is available

Federal student loan borrowers who experience certain types of financial or personal hardships may apply for a pause in payments via deferment or forbearance. This gives borrowers the breathing room they need to get back on their feet without defaulting on their federal student loans.

Just remember that interest will likely accrue during your payment pause. Not all types of federal loans accrue interest during a deferment period, but all federal loans accrue interest during a forbearance period.

Potential loan forgiveness

One other important potential perk of federal student loans is the opportunity for loan forgiveness. The most common type of federal loan forgiveness is the Public Service Loan Forgiveness (PSLF) program, which is available to borrowers employed by the government or not-for-profit organizations. After making 120 qualifying monthly payments while employed full-time with a qualifying organization, any remaining balance is forgiven.

Federal student loan borrowers on an income-driven repayment plan are also eligible for loan forgiveness after 10 to 25 years of on-time payments (depending on the plan). Any balance remaining after the completion of the repayment term is forgiven.

Cons of student loans

Student loans do have some important drawbacks that students should consider before they borrow. Understanding the disadvantages of student loans can help you make the best financial decisions.

Interest accrual

Student loans charge interest on the principal amount you borrow, and the majority of student loans accrue interest while you're in school. Unless you have a subsidized federal student loan (where the government pays the accrued interest on your behalf while you're in school) or you pay interest on your loans while you're getting your education, your loan balance when you graduate will be more than you originally borrowed.

Long-term cost of borrowing

While most student loans generally charge simple interest rather than compound interest, unpaid accrued interest may be added to your principal balance after certain events in a process called capitalization. Like compounding, capitalization increases your principal balance, and future interest is charged based on the new, higher principal balance.

This means that for both private and federal student loans, the lifetime cost of the loan may be much higher than the amount you originally borrow.

Potential for high monthly payments

Your monthly payment may be more than you can afford to pay after you graduate from college, especially if you don't consider your income potential when you take out the loans. That's why Andrew Paulson, a certified student loan professional (CSLP) and lead consultant for StudentLoanAdvice.com, recommends that students think through both the cost of their intended degree and the likely starting salary they can expect once they have graduated.

“Research the expected return on investment (ROI) for your chosen field of study and institution,” Paulson says. “Look at average starting salaries and job placement rates for graduates in your major and compare that to the total cost of attendance for your degree.”

Calculating your potential monthly payment before you borrow can help you avoid taking on more loans than you can afford.

Default risk

If you do borrow more than you can easily afford to repay, you may also risk defaulting on your loans if you miss your payments. Not only will a default show up on your credit report, which can affect your ability to borrow money in the future, but you may also be subject to wage garnishment, withholding of your tax refunds, and you may be liable for the costs associated with debt collection.

Limited borrower protections

While federal student loans offer some guaranteed borrower protections, such as flexible repayment plans, deferment and forbearance options, and possible loan forgiveness, these are typically not available to private student loan borrowers. This means private borrowers have fewer options for remaining in good standing on their student loans in the event of a financial hardship.

Additionally, Paulson cautions federal student loan borrowers from relying too heavily on federal student loan borrower protections.

“Federal student loans are issued by the federal government and are subject to change from legislation. You should never rely on the government to pay off your loans or forgive them,” he says. “Always have a plan of attack to pay down your loans.”

Federal vs. private student loans: Pros and cons

Students can choose between federal and private student loans, each of which has its own benefits and drawbacks. Here are some important factors to consider when choosing between federal and private student loans:

Interest rates

Federal student loans have fixed interest rates that are the same for every borrower within a specific time frame. Private loans may have fixed or variable interest rates, and the rate you receive will depend on your individual financial situation. This means borrowers don't need to have a good credit score or minimum income to qualify for a federal loan or to receive the best available interest rate.

However, federal interest rates are set by federal law and are based on economic conditions. For the 2024-25 academic year, federal interest rates range from 6.53% to 9.08%, depending on the type of federal student loan. This may be a higher rate than a well-qualified borrower might be eligible for on a private student loan.

Read More: Fixed- vs. Variable-Rate Student Loans: How To Choose the Best Option

Repayment flexibility

Federal student loans offer a number of repayment options. Additionally, they offer forbearance and deferment options to borrowers facing economic hardship. This makes federal loan repayment much more flexible than private loan repayment.

Typically, private loans offer fewer repayment options, and it's often much harder to pause payments due to financial hardship.

Protections and benefits

Borrowers can access more benefits and protections with federal student loans. These include the opportunity for loan forgiveness and the ability to choose an income-driven repayment plan.

How to minimize the downsides of student loans

Just because there are some important drawbacks to taking out student loans doesn't mean they should be avoided altogether. Instead, plan on using the following strategies to minimize the disadvantages of student loans:

• Exhaust grant, scholarship, and work-study options first: Student loans are not the only way to pay for college. Grants and scholarships are types of financial aid that you don't have to repay, making them a better option than loans. The federal work-study program gives you an opportunity to work a part-time job on or off campus if you have financial need, and you can use the money you earn to offset your educational expenses. Exhaust these options before turning to loans.
• Only borrow what you need: Just because you qualify for a larger loan than you need doesn't mean you should take the extra money.
• Make interest-only payments in school: Whether you have federal or private loans, making interest payments before you graduate can prevent your balance from increasing while you're in school.
• Choose the right repayment option: Federal student loan borrowers can choose from a number of repayment plans. Finding the one that will fit best in your post-graduation budget can help you minimize the overall cost of your loan.

Learn More: 12 Strategies To Pay Off Student Loans Faster