Understanding the Pros and Cons of Student Loans

Quick Answer

Student loans can be a relatively easy and inexpensive way to finance your college education. But if you borrow too much, they can become a serious financial burden, and they may not be enough to cover all of your expenses.

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Student loans can help you finance your college education without paying much interest. If you're not careful, however, your student loan debt could eventually balloon and become a serious financial problem.

Before you take out student loans, it's crucial that you understand both the benefits and drawbacks, along with some alternatives, to ensure that you're making the right decision for you.

Pros and Cons of Student Loans
Pros Cons
Can help you afford a cost-prohibitive education Student loan payments can become financially crippling
Accessible to college students with no or limited credit histories Default can lead to very serious consequences
Lower interest rates than other financing options They may not be enough to cover all of your expenses

Pros of Student Loans

There are a lot of good reasons to use student loans to pay for college. Here are some of the main benefits.

Can Help You Afford a Cost-Prohibitive Education

The cost of attending college has increased significantly over the past few decades, with tuition more than doubling since the 1991-92 school year, according to CollegeBoard, even with an adjustment for inflation.

While there are other ways to pay for college, student loans can help you bridge the gap and cover some of your major expenses, so you don't have to worry as much about coming up with the full cost of attendance on your own.

Accessible to College Students With No or Limited Credit Histories

Most federal student loans don't require a credit check when you apply, making them easy to obtain for college students with limited credit or no credit history at all. While most private student loan companies may require a cosigner, there are some that don't.

Having this access to financing for school can make a huge difference for college students who may struggle to obtain other forms of financing.

Lower Interest Rates Than Other Financing Options

For the 2022-23 school year, federal student loans come with a 4.99% interest rate for undergraduate students and either 6.54% or 7.54% for graduate and professional students.

If you were to try to obtain financing in other ways without an established credit history and solid income, you'd likely have a hard time getting approved for a single-digit interest rate.

Cons of Student Loans

While there are some clear advantages to using student loans to help fund your education, there are also some serious pitfalls to keep in mind.

Student Loan Payments Can Become Financially Crippling

The typical monthly payment for student loan borrowers is between $200 and $299, according to a Federal Reserve report. If you borrow a lot to pay for school, you could end up with an even higher monthly payment.

For many student loan borrowers, this may mean putting off other major financial goals, such as buying a house, saving for retirement or building an emergency fund. For others, it could seriously impact their ability to cover necessary expenses.

While there are options for federal student loan borrowers to defer repayment and reduce monthly payments, the debt can still become a significant financial burden.

Default Can Lead to Serious Consequences

If you default on your student loan payments, it can have a devastating impact on your credit score, making it harder to obtain other forms of credit when you need them. Additionally, debt collectors may add expensive fees, increasing the amount you owe.

To make matters worse, it's extremely difficult to get rid of student loans when you're struggling financially, even through bankruptcy.

They May Not Be Enough to Cover All Your Expenses

Most federal student loans have an annual limit for how much you can borrow, and some private lenders may also have one. Depending on the cost of tuition, fees, supplies, room and board and other expenses, you may still need to look for other sources of income to complete your degree.

Alternatives to Student Loans

Although student loans can be helpful, it's best to try to limit your reliance on them to fund your college education. Here are some other potential ways you can pay for school:

  • Savings: If you or your parents have saved up money for college, either through a 529 plan or some other way, you can use those funds to cover some of your expenses.
  • Income: Some college students get financial assistance from their parents through regular income or allowances. Additionally, you may consider taking on a part-time or even full-time job while you're in school or during the summer months to take care of some of your expenses.
  • Grants: Depending on your and your parents' financial situation, you may qualify for grants that help you pay for school. And unlike student loan funds, grant money doesn't need to be repaid. Be sure to file the Free Application for Federal Student Aid and look into grants available from your state or college.
  • Scholarships: Your college may offer scholarships on the basis of financial need or merit, such as academic scholarships or athletic scholarships. Contact your school's financial aid office to learn about your options. Additionally, you can use scholarship databases like Scholarships.com and Fastweb to search through millions of opportunities from private companies and organizations.
  • Tuition assistance: Some employers may offer to help you pay for tuition if you've worked with the company long enough. You may also get help paying for college if you join a branch of the armed forces.

Regardless of how you approach paying for college, you may also consider attending a less expensive school to limit your costs. For example, many students choose to attend community college to take advantage of lower tuition costs for their general and elective courses. Then, they'll transfer to a four-year university to start a specific program for their degree.

Alternatively, you can expand your selection of universities to include ones with lower tuition costs. In many cases, higher tuition doesn't necessarily mean a better education.

Take Steps to Build Your Credit While You're in School

While you don't necessarily need an established credit history to obtain federal student loans, it can help you get a headstart once you graduate if you work to build your credit history while you're in school.

With Experian Go™, you can get the tools and resources you need to establish your credit history from scratch for free. You'll also get free access to your credit score and Experian credit report, making it easier to track your progress over time.

Building credit is a lifelong pursuit, but getting an early start while you're still a college student can make it easier to obtain inexpensive financing when you're ready to start your career and build your post-graduation life.