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The Pros and Cons of Student Loans

Forbes reports that the average student loan debt is $1.75 trillion, so It’s important to consider the pros and cons of student loans before borrowing.

Do you have concerns about the long-term value of student loans? You are only able to choose what is ideal for your particular scenario after weighing the benefits and drawbacks.

If you are applying to universities and thinking about taking out student loans to help pay for your education, consider the following student loan perks and drawbacks before making a decision.

Pros and Cons of Student Loans

Pros of Student LoansCons of Student Loans
Student loans enable you to pay for collegeStudent debts may be costly
The availability of student loans might make the difference between attending your favorite university and an adequate one.If you can’t make payments, it’s very hard to get rid of student debts.
Student loans can be utilized for purposes other than tuition, housing, and board.Missing payments on your student loans might ruin your credit.
Repaying your college debts will help you establish credit.

Pros and Cons of Federal Student Loans

The federal government offers student loans with numerous perks and under terms and conditions that are mandated by law.

Forbes estimates that federal student loans account for around 92% of all student debt. 

Benefits of Federal Student Loans

  • Interest rates are fixed for all federal student loans: In other words, your rate won’t change throughout the loan; the only way your payments will alter is if you choose to enroll in a different repayment option.
  • No credit check is expected for the majority of federal student loans.
  • A variety of help and repayment alternatives are available for federal student loans: These options include graduated repayment plans and income-driven repayment (IDR). If you’re having trouble making your loan payments, you may be able to temporarily defer them through deferment or forbearance. 
  • There are several student loan forgiveness programs, which may result in loan discharge or forgiveness. The Public Service Loan Forgiveness program, for instance, may be available to you if you work for a government agency or nonprofit and have made the required payments for 10 years. Or, if you enroll in an IDR plan, depending on the plan, any outstanding balance may be waived after 20 or 25 years. 
  • You could qualify for a loan up to the tuition fees for your school: The maximum amount you might borrow with a Direct PLUS Loan (after subtracting any other financial help you’ve received) is the cost of attending your school.

Drawbacks of Federal Student Loans

  • You must pay your loans even if you did not graduate: You’re responsible for paying back the loan whether you finish your program or not.
  • Repaying federal student debts could take years: the normal repayment period is 10 years. However, if you select a different repayment strategy or combine them, you might have to pay them back over a period of up to 25 or 30 years.
  • When you don’t make payments, interest may capitalize: Forbearance and deferment periods may result in interest still accruing on your federal loan, depending on the type you have. This unpaid interest can subsequently be capitalized, which is the process of adding it to your principal sum.
  • Refinancing is the sole way to change your interest rate: You can only possibly lower your interest rate by refinancing your federal student loan. You will lose out on federal safeguards, such as IDR plans.
  • The majority of federal loans go into default after 270 days of missed payments. Negative Effects can come from defaulting, including the whole amount of the debt being due immediately, significant credit damage, and loss of eligibility for federal assistance like deferment and forbearance.

You must submit the Free Application for Federal Student Aid (FAFSA) before the due date in order to be considered for federal student loans.

Pros and Cons of Private Student Loans

A private student loan can supplement federal loans but shouldn’t take the place of them when it comes to funding higher education in the United States.

Private lenders (such as Ascent*) provide student loans, including online lenders, banks, and credit unions. Applying for a private student loan will require you to submit to a credit check, unlike most federal student loans.

Consider the following benefits and drawbacks:

Benefits of Private Student Loans

  • After using all available federal student loans, you can use private student loans to close any remaining financial gaps. Private student loans, like federal loans, can be used to pay for a variety of educational costs, including tuition, books, and room and board.
  • There isn’t a set date for applying for a private student loan, unlike federal student loans, which have deadlines.
  • Lower interest rates: You may be eligible for a private loan with a lower interest rate than a government loan if you have excellent credit or a cosigner with excellent credit.
  • Greater loan amounts: Unlike the federal educational loans, certain lenders allow you to borrow up to the cost of attendance for your school.

Drawbacks of Private Student Loans

  • Despite not having graduated, you must still pay back your loans: Private student debts must be repaid, just like government loans, even if you didn’t finish school.
  • Repaying a private student debt could take years: You may have anywhere from 5 to 20 years to do so. Even while a longer term could result in a lower monthly payment. Choose the shortest period you can manage to avoid paying as much interest as you can.
  • You’ll often need strong or excellent credit to qualify for a private student loan: a good credit score is typically considered to be 700 or higher. This means that you’ll have fewer possibilities if you have low or no credit.
  • No opportunities for federal assistance or forgiveness: There are no federal protections for private student loans. The lender has the discretion to offer any perks or possibilities for assistance. Furthermore, federal loan forgiveness programs are not available to borrowers of private student loans.
  • The majority of private student loans will go into default after 120 days of missed payments: Similar to defaulting on a federal loan, failing on a private loan could have significant consequences. Your lenders may decide to sue you in an effort to recover their losses, for instance, or they may send your loans to a collections agency. 

Consider applying with a cosigner who has good credit if you have bad credit or no credit and are having trouble getting approved for a private student loan. This will increase your chances of private student loans approval.

Federal Student Loans vs Private Student Loans: Which One Should You Take?

Take federal student loans first. If you are an undergraduate student, use up any federal student loans. These loans are provided by the federal government and have interest rates that are lower than those offered by private lenders. Additionally, you are able to apply for them without a cosigner, and unlike private loans, they have repayment safety nets.

Federal Student LoansPrivate Student Loans
Interest ratesThe interest rate is fixed and typically lower than private loans—much lower than certain credit card interest rates. Depending on your situation, the interest rates on private student loans may be higher or lower than those on federal loans. These rates might be variable or fixed.
Credit checkFederal student loans are available without a credit check (except for PLUS loans).A cosigner or proven credit history are frequently required for private student loans.
Tax benefitsTax deductions for interest may be available.Tax deductions for interest may be available.
Repayment plansThere are a number of repayment options, one of which lets you base your monthly payment on your income.You should contact your lender to learn about your repayment choices.
Loan forgivenessIf you are employed by the government, you could be qualified to have a portion of your debt erased. Some student loans from state agencies may be forgiven under specific conditions, despite the fact that many private lenders do not provide loan forgiveness schemes.

Pros and Cons of Student Loan Forgiveness

The Public Service Loan Forgiveness program was established by the US government as part of the College Cost Reduction and Access Act of 2007 to allow professionals who are heavily indebted a method to pay off their federal student loan debt by working full-time in public service.

Here are some of the major benefits and drawbacks:

Benefits of Student Loan Forgiveness

  • Student debt forgiveness is the empathic answer to a crisis that has been building for decades.
  • Student debt forgiveness is the last chance for democrats to win the midterms: Forgiving student loan debt before the midterm elections might help Biden bring out younger supporters for his party, which will be critical if Democrats are not to be overwhelmed by a red wave.
  • An Incomplete solution is better than no solution: Biden acknowledges in The Atlantic that easing student loan holders’ debt with a stroke of his pen may not be the finest type of stimulus available. It also wouldn’t improve the enormous student loan issue facing the nation or streamline the way higher education is funded. 

Drawbacks of Student Loan Forgiveness

  • It is unfair to forgive debt from those who have already made their payments. Forgiving student debts would be a surprise for graduates, but so would having your mortgages and credit card debt canceled as well. 
  • Student loan forgiveness will further worsen the already-bad inflation: In November 2020, student loan forgiveness seemed like a nice idea but that moment has gone.

Frequently Asked Questions