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Taking out student loans is a big commitment, and you don’t want to jump in without understanding both the benefits and downsides. On one hand, loans can be an investment in your future — but on the other, repaying them is a long-term financial commitment that might impact your ability to reach other milestones after leaving school, like buying a house or starting a family.
- Overall pros and cons of student loans
- Pros and cons of federal loans
- Pros and cons of private loans
General pros and cons of student loans
Student loans are designed to help you pay for college, but they typically must be repaid after graduation. As a result, it’s a good idea to first exhaust options for grants and scholarships that don’t need to be repaid. Once you have used up all of these free sources of funds, it can make sense to apply for loans if you can’t afford college without them.
When you borrow for school, there are different types of student loans to consider, including federal loans from the Department of Education and private loans provided by banks, credit unions, and online lenders.
Each kind of student debt has pros and cons to consider, although there are some general benefits and downsides to student loans that apply to all types of borrowing.
Here are some of the overall pros and cons of all kinds of educational debt.
Pros:
- Covers your tuition and other expenses. Student loans can cover your tuition up to the school-certified cost of attendance, as well as a variety of education expenses such as books, transportation, and room and board.
- You likely won’t need to make payments while in school. Many lenders do not require you to start payments until six months after you graduate. However, you can still make interest payments while in school. It’s not required, but it’s certainly encouraged to get you ahead on paying off your student loans.
- Loans are accessible regardless of financial situation. Federal student loans usually don’t require proof of income or a good credit score, while private lenders typically allow borrowers to meet these requirements with a cosigner.
- More affordable. Student loans can be more affordable than other kinds of debt, such as credit cards.
- Tax deductible. Two tax credits can help offset your expenses: the American opportunity credit and the lifetime learning credit.
Cons:
- Extended debt burden. Adding an educational loan could make it more difficult to pay off your debt in the long term.
- May delay your other financial goals. You may be making progress on other financial goals, such as paying off other types of debt or saving for a house.
- Must repay even if you don’t graduate. Even if you don’t earn your degree, you are still responsible for repaying your loan. This applies to both federal and private loans.
- Could take years to repay: Federal student loans have a standard 10-year repayment plan, but you can opt for some plans with repayment periods as long as 30 years. Loan repayment terms can vary for private loans, but it’s common to have repayment periods between 5 and 20 years, so you may be paying off debt for a while (although, as with federal loans, you generally have the option to pay off student loans early without penalty).
- Default leads to major consequences. If you default on your loans, this could have devastating financial consequences such as seizure of your tax return or other federal benefits, wage garnishment, or liens on your property. Most private student loans will enter default after missing payments for 120 days. Like defaulting on a federal loan, defaulting on private loans could lead to major consequences. For example, your loans could be sent to a collections agency, or your lender could sue you in an attempt to recoup their losses.
Related: Learn more about getting a private student loan on Credible.com
| Lender | Fixed Rates From (APR) | Variable Rates From (APR) |
|---|---|---|
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 4.48%+10 | 6.15%+10 |
|
||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 4.43%+1 | 5.81%+ |
|
||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
|
5.05%+2,3
| 5.59%+2,3 |
|
||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 4.43%+ | 5.37%+ |
|
||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 6.25%+7 | 8.12%+7 |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 4.6%+8 | 7.64%+8 |
|
||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 5.35%+ | N/A |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 4.50%9 - 15.49%9 | 6.37%9 - 16.70%9 |
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Lowest APRs reflect autopay, loyalty, and interest-only repayment discounts where available. Prequalified rates are not an offer of credit. | 10Ascent Disclosures | 1Citizens Bank Disclosures | 2,3College Ave Disclosures | 11Custom Choice Disclosures | 7EDvestinU Disclosures | 8INvestEd Disclosures | 9Sallie Mae Disclosures |
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Pros and cons of federal student loans
Federal student loans come from the Department of Education and you should generally exhaust eligibility for them before taking out private loans. That’s because these government loans provide many benefits that loans from private lenders don’t offer.
Keep in mind that some aid is given on a first-come, first-served basis — so it’s a good idea to submit the FAFSA as early as possible, especially if you have high financial need. FAFSA typically opens each year on Oct. 1, but for the 2023-2024 school year, they will open in December 2023.
Before you take out a federal student loan, here are some advantages and disadvantages to consider:
Advantages of federal student loans
- Fixed rates: All federal student loans come with fixed interest rates. This means your rate will stay the same throughout the life of the loan, and your payments will change only if you sign up for a different repayment plan.
- Less chance of a credit check: Most federal student loans are available regardless of credit. PLUS loans are the exception, and you cannot qualify for them with adverse credit. If you are applying for a loan with no credit requirement, though, you won’t have to undergo a credit check.
- Multiple repayment options: Federal student loans offer many repayment options, including a standard payment plan, a graduated plan that allows payments to go up over time, and income-driven plans that cap payments at a percentage of income and forgive any remaining balance after a certain number of years.
- Potential loan forgiveness or discharge: Some of your federal student loans may be forgiven if you participate in a federal program. For example, if you work for a government or nonprofit organization and make qualifying payments for 10 years, you could qualify for Public Service Loan Forgiveness. Or if you sign up for an income-driven repayment (IDR) plan, you could have any remaining balance forgiven after 20 or 25 years, depending on the plan. Additionally, federal student loans can be discharged in certain cases, such as if your school closes while you’re enrolled.
- Might be able to borrow up to your school’s cost of attendance: If you take out a Direct PLUS Loan, you might be able to borrow up to your school’s cost of attendance (minus any other financial aid you’ve received). Keep in mind that unlike most other federal student loans, PLUS Loans require a credit check.
Learn More: How to Apply to College and When You Should Apply
Drawbacks of federal student loans
- Must repay your loans even if you don’t graduate: Except in very rare circumstances, such as if your school shuts down, you must repay your federal student loans even if you don’t earn a degree.
- Interest could capitalize when you’re not making payments: For most federal loans (except Direct Subsidized Loans), interest starts accruing from the time the funds are distributed. This means you will accrue interest while in school if you don’t make payments on your loans. This interest is added onto your loan balance in a process called capitalization. When this occurs, you end up paying interest on the unpaid interest that’s added to your balance.
- Can only change your interest rate through refinancing: You cannot modify your student loan interest rate unless you refinance your federal loans into a private loan. However, doing so will cost you access to federal benefits and protections — such as IDR plans and student loan forgiveness programs.
Why to prioritize federal student loans over private
When you are borrowing for school, it makes sense to prioritize federal over private loans for many reasons. Along with the federal borrower benefits mentioned above, you will typically also benefit from lower interest rates.
The table below shows some of the key differences between federal vs. private loans.
| Federal student loans | Private student loans | |
|---|---|---|
| Interest rates | 5.50% to 8.05% (depending on loan type) | Fixed rates from (APR):
4.43%+
Variable rates from (APR): 5.37%+ (Private lenders on Credible) |
| Fees | 1.057% to 4.228% (depending on loan type) | Varies by loan Generally no origination fees |
| Limits | $31,000 for dependent undergrads $57,500 for independent undergrads $20,500 for graduates (unsubsidized) | Can vary, but typically covers the cost of attendance |
| Offers subsidized loans | Yes | No |
| Loan forgiveness | Yes | No |
| Terms | Standard Repayment Plans: 10 years Consolidation and IDR plans: 10 to 30 years | 5 to 20 years (varies by lender) |
| Repayment Protections | Generous options for deferment, forbearance, and income-driven repayment plans | Limited options for deferment and forbearance |
| Option to change repayment plan or defer payments | Yes | No |
| Requires FAFSA | Yes | No |
| Requires cosigner | Typically no (unless applying for a PLUS loan with adverse credit) | No (but might increase chances of qualifying) |
| Requires credit check | Only for PLUS loans | Yes |
When considering federal versus private student loans it may be tempting to take out private student loans first, as the starting rate on variable rate private loans may be lower than the federal student loan rate.
While it seems that the private loan costs you less, there is a risk to variable rate loans. Your rate can change over time and your monthly payments and total borrowing costs could rise. Not everyone qualifies for the lowest interest rates on private loans, either, while everyone gets the same rate on federal loans regardless of their financial credentials.
Pros and cons of private student loans
Private lenders — including online lenders as well as traditional banks and credit unions — offer private student loans. Unlike with most federal student loans, you’ll have to undergo a credit check to apply for a private student loan.
Before you take out a private student loan, here are some advantages and disadvantages to consider:
Benefits of private student loans
- Can be used to fill financial gaps: While some federal student loans have lifetime and annual limits, most private loan lenders allow you to borrow up to the school-certified cost of attendance and either have no lifetime limits or very high ones. This means private loans are ideal to fill financial gaps when federal aid doesn’t cover everything. Like federal loans, private student loans can be used to cover a wide variety of education expenses, such as tuition, textbooks, and room and board.
- No application deadline: There are no strict deadlines for applying for private loans. If you decide to apply to college late or determine later in the year you need more money, private student loans could help.
- Lower interest rates: If you have excellent credit or a cosigner with excellent credit, you might qualify for a lower interest rate on a private loan than you’d get on a federal loan.
- Larger loan amounts: You can typically borrow more money on a private student loan than with federal student loans.
Drawbacks of private student loans
- Could be difficult to apply for a private loan. If you don’t have good to excellent credit, it may be difficult to secure a loan from a private lender.
- Fewer options for poor or no credit: You’ll generally need good or excellent credit to qualify for a private student loan — a good credit score is usually considered to be 700 or higher. Some lenders offer student loans for bad credit, but these loans usually come with higher interest rates compared to good credit loans.
- No federal benefits or forgiveness options: There are no forgiveness options for private loans and, unlike with federal loans, you don’t benefit from borrowing protections like the ability to change your payment plan as needed or cap payments at a percentage of your income.
Even if you don’t need a cosigner to qualify, having one could get you a lower interest rate than you’d get on your own.
If a private student loan seems like the right choice for you, remember to take the time to shop around and compare your options from as many lenders as you can. This way, you’ll have an easier time finding the optimal loan for your situation.
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Taylor Medine has contributed to the reporting of this article.