As college tuition has outpaced inflation, more and more students can’t afford to pay for college out of pocket. And even after qualifying for scholarships, grants and work-study, many need to take out student loans to cover the rest. Before you borrow thousands of dollars, read about the pros and cons of student loans to see what you need to know:
Pros of Student Loans
Student loans sometimes get a bad rap, but they’re like any other kind of financial tool. If you use them well, they can open doors and lead to amazing things. Here are a few advantages of student loans:
Necessary for many students
For millions of students, taking out student loans is the only way to get the financing they need for a college education. With tuition prices outpacing inflation, many families cannot afford to save for a college education. Even for students who apply for scholarships and grants, it can be challenging to cover 100% of tuition costs on those types of funding alone. Student loans allow people to get an education and earn more money than they would if they skipped college.
Available for most people
Another major advantage of student loans is that they’re readily available. To be eligible for federal student loans, you need to fill out the Free Application for Federal Student Aid (FAFSA). There’s no fee to fill this out, and there’s a department to help parents and students with questions during the process. Getting a private loan can be even more straightforward. To get a private student loan, you need to fill out an application and meet some basic income and credit score requirements. These requirements vary by lender. Both private and federal student loans are available for vocational, undergraduate, graduate and professional school.
Can earn more money with a college degree
While it’s important to weigh the up-front pros and cons of student loans, it’s also important to understand their impact over time. Having a college degree often means that you’ll have a higher expected income during your lifetime. In many cases, the benefits outweigh the costs, especially if the amount of money you expect to make with a degree exceeds the total student loans you’ve taken out.
Can let you finish college faster
Taking out student loans can help you get your degree faster than if you tried to pay your way through school only by working. Many students would have to work for years to save enough money to pay for college. Taking out loans lets them get their educations faster so they can graduate and look for a higher-paying job.
Multiple repayment options
One advantage of federal student loans is that they offer several different repayment options, including Income-Driven Repayment (IDR) plans. These plans calculate your monthly payment as a percentage of your income. Some borrowers will even qualify for federal or state-based loan forgiveness programs depending on their loan types and professions.
Cons of Student Loans
Student loans can be dangerous if you don’t treat them as a significant form of debt. Here are a few of the main drawbacks of student loans:
Can be unaffordable
Because federal student loans don’t take your major and projected income into account, some students may graduate with loans they can’t afford to repay. This can lead to late payments and default. There’s also little financial education beforehand to help students understand how much money they’ll owe every month. Parents who take out Parent PLUS or private student loans may also struggle to repay their loans, affecting their ability to retire and save for other goals. There’s no limit on the amount parents can borrow, so many families end up with loans they can’t afford to repay. There are few forgiveness options available for parents, which further compounds this problem.
Consequences can be harmful
When you weigh the pros and cons of student loans, be sure to consider the consequences of not paying them back. If you default on a federal student loan, your wages, tax returns and federal benefits may be garnished. Borrowers who default on student loans often owe extra fees and penalties on top of their balances. This can extend the repayment process and increase the monthly payments.
Can make it hard to finance large purchases
Having high monthly student loan bills can make buying a home, starting a business or having a family harder. When you apply for a loan, most lenders look at your debt-to-income (DTI) ratio, which is your monthly debt payments divided by your monthly gross income. The more you owe, the higher your DTI will be. And if the DTI exceeds the lender’s rules, you could be disqualified from the loan.
Refinance your student loans
After you graduate, you may be able to refinance your student loans for a lower monthly payment, which can free up room in your budget. For example, let’s say you owe $50,000 with a 10-year term and 10% interest rate. If you refinance to a 5% loan with a 10-year term, you’ll pay $15,650 less in total interest. Your new payment will be $130 less each month. Borrowers can refinance their student loans as often as they want. If you improve your credit score or get a raise at work, you may be eligible for a lower interest rate. There’s no fee associated with refinancing student loans, and the process usually takes a couple of weeks from start to finish. Contact ELFI today to be connected with a personal loan advisor who can guide you through the refinance process.*
Bottom Line
It’s important to understand the pros and cons of student loans to make the best financial decision for your situation. Before you take out federal loans, you should be aware of what the monthly payments will be and if you can afford those on your post-graduation salary. A general rule of thumb is not to borrow more than what you’ll make in your first year out of college. You can look up salary information on sites like Payscale.com or Glassdoor.com. If the total sum of your loans will exceed your annual income, figure out how to reduce your student loan burden. This may include working as a Resident Advisor (RA), finding a part-time job or applying for scholarships. Consider getting your prerequisite courses at a community college first before transferring to a four-year university. Community colleges generally charge much less than four-year universities and can be an excellent way to save money.
