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Good vs Bad Student Loan Debt

Are Student Loans Good or Bad Debt?
Jennifer Calonia
Jennifer CaloniaUpdated August 16, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’re doing financial aid planning for college, you might be confused about whether student loans are good or bad. After all, if student loans are good debt, why is student loan forgiveness such a hot topic right now? The truth is, student loan debt can be good or bad. The 2022 Trends in College Pricing and Student Aid report by the CollegeBoard revealed that the average tuition and fees for an in-state, full-time student attending a four-year public institution for the 2022-23 academic year is $10,940. That’s just for one year, and it doesn’t include books, housing, and personal expenses. Many students don’t have the money set aside to pay for school out of pocket, and it could take them years to save up enough. That’s where student loans may help. But if you’re wondering, is it bad to take out student loans?, you need to understand good vs. bad debt. Read on to learn more.Recommended: Average Student Loan Debt in the United States 2023-2024

What Is Good Debt?

Good debt is money you’re borrowing today that lets you increase your income or net worth in the future. Whatever you’re using the borrowed money for, it is expected to appreciate in value or allow you to bring in a higher income that you’d have without it. Examples of good debt include mortgage loans and business loans.Additionally, good debt has features that offer positive benefits, like charging low interest rates. 

What Is Bad Debt?

Bad debt is borrowing money toward a purchase that depreciates in value or doesn’t contribute positively to your future net worth. Examples of bad debt include credit card debt (especially if the interest rate is high), payday loans, and other high-interest consumer loansRacking up too much bad debt can make it challenging to stay on top of your payments.

Are Student Loans Good or Bad Debt?

Are student loans bad? Student loans can be good or bad debt, depending on your specific situation. Being able to pay for school tuition to earn a degree is why people might refer to student loans as good debt. From this perspective, the debt is used as an investment tool to increase your income in the job market. However, a degree alone can’t guarantee that the student loan debt you took on will result in a high-paying job. There’s no safeguard against unemployment, a reality that can make paying the back loan difficult, if your lender doesn’t offer repayment relief options.Ultimately, when your education debt outpaces your ability to earn income to repay it, student loans can go from good debt to bad debt. The type of student loan debt you borrow is another distinction to consider. For example, the difference between federal vs private student loans matters. Federal loans are typically considered the better option of the two, since they provide fixed, low rates and many federal protections and programs that private student loans don’t offer. Private loans, however, can bridge the gap between federal loans plus grants and scholarships and the remaining cost of attendance.

Examples of Bad Student Loan Debt

When is student loan debt bad? Although the definition of a bad student loan depends on your situation, generally, these are some examples:
  • High-interest student loans 
  • Variable-rate student loans
  • Student loan debt that exceeds a profession’s top salary

Examples of Good Student Loan Debt

  • Fixed-rate federal student loans
  • Student loans that are eligible for loan forgiveness (assuming you work toward it)
  • Student debt that’s lower than your career’s top salary

Pros and Cons of Taking Out Student Loans

The main benefit of student loans is they give you the opportunity to pay for school without having to wait to save up for your education. This can mean getting into the job market sooner than later, and working a higher-earning job earlier in your career. Student loans also generally charge lower interest rates compared to some other types of borrowing, such as using a credit card, which is an advantage. They offer other perks, like helping young borrowers establish their credit. People with federal student loans also have benefits like deferment and forbearance options, and repayment plans that could make payments manageable, based on your income and family size. But there are downsides to borrowing student loans for your education. Depending on your situation, loans might not cover all of your college expenses so you may need to find other supplemental financial aid. And once you start paying back the loans, it can take years, sometimes decades, to repay it all. How much student loan debt you have affects your budget after college, which can be stressful when you enter the job market. Finally, student loans may make it necessary to delay long-term goals like buying a home, investing in your retirement, starting a business, or even starting a family.
Helps you pay for collegeMay not cover all college costs
Doesn’t always require strong creditRepaying student loans often takes years
Lower interest ratesBeing in debt can be stressful
Builds a credit historyPaying loan debt might delay other life milestones
Federal loans offer benefits and protections

Tips for Paying Down Your Student Loan Debt

Wanting to get out of student loan debt quickly is understandable, and some private loan borrowers may go to great lengths to pay down their debt, such as paying off student debt with a credit card. However, this is a risky approach and isn’t generally advised.If you have student loan debt and want to pay it off sooner than later, consider these repayment strategies:
  • Make interest payments while in school. While you’re enrolled in school, your loan payments are automatically deferred. However, if you could make interest-only payments toward your loans during this time, you’ll avoid capitalized interest (which is paying interest on your interest) when you start making full payments after graduation.
  • Stay on the standard repayment plan. This plan is designed to allow you to repay your loan in the shortest amount of time (10 years) with the least amount of interest. However, it requires you to make the highest monthly payment among the other available repayment plans, so you'll need to be able to afford it.
  • Student loan refinance. Refinancing replaces one or more of your existing student loans with a new student loan. The new refinanced loan will have a different rate, ideally lower, and new repayment terms. Although refinancing student loans is possible for federal loans as well as private ones, be cautious when doing so. When you refinance a federal student loan it becomes a private loan, and you are then ineligible for federal borrower protections and programs, like loan forgiveness and flexible repayment options.
If you’re a student loan borrower and you’re struggling with paying your monthly payment on a standard repayment plan, ask your servicer about an income-driven repayment (IDR) planPresident Biden has announced the creation of the Saving on a Valuable Education (SAVE) Plan, which replaces the existing Revised Pay As You Earn (REPAYE) Plan. Borrowers on the REPAYE Plan will automatically get the benefits of the new SAVE Plan.The SAVE Plan, like other income-driven repayment plans, calculates your monthly payment amount based on your income and family size. According to the White House, the SAVE Plan provides the lowest monthly payments of any IDR plan available to nearly all student borrowers.

The Takeaway

Student loan debt can be positive when it allows you to enroll in school to work for your degree, which, ideally, will lead to a well-paying job. However, student debt can turn into a bad situation if you borrow more than you need, or you’re unable to repay the loans later on. If you're paying down your student loans, and want to explore your refinancing options, compare your choices with Lantern. By entering a few details into our online form, you’ll see all of the student loan refinance options you qualify for in just minutes.

Frequently Asked Questions

Why is it bad to have student loan debt?
Can student loans be a good thing?
Is student loan debt considered "good debt"?
Photo credit: iStock/damircudic

About the Author

Jennifer Calonia

Jennifer Calonia

Jennifer Calonia is a Los Angeles-based finance writer who has covered the gamut, including student loans, credit card rewards, consumer loans, and debt. Her work has been featured in outlets like Bankrate, NerdWallet, Business Insider, Yahoo Finance, and U.S. News.
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