Getting into college is a huge accomplishment, but the next step is figuring out how to pay for tuition. There are options available to help students pay for higher education, including student loans.
Student loans work similarly to other loans in that they can be borrowed by students to help them pay for college, but will need to be repaid. Students can evaluate both federal and private student loans.
Other types of aid, such as scholarships and grants, don’t need to be repaid. Even for those who are offered scholarships and grants or have been saving up for college since they were little kids, student loans may be a necessary option to cover the full costs of tuition and fees — but is college debt worth it?
College Costs Vary By School
It’s no secret that the cost to attend college is on the rise, meaning more and more students are incurring debt as a means to afford a college education. Americans have accumulated over $1.7 trillion in student loan debt, according to the Federal Reserve.
Importantly, tuition and fees can vary dramatically from college to college. According to Educationdata.org, the average college tuition and fees at a private four year university for the 2023-2024 school year was $38,768. For the same school year, the average cost at a public four-year institution with in-state tuition was $9,377, while out-of-state tuition was $27,091.
Recommended: Breaking Down the Average Cost of College Tuition
Factoring in Financial Aid
Financial aid is another factor that can complicate the college cost calculations. Some schools may have a high sticker price, but offer a variety of need- and merit-based aid options to students, which can potentially lower the actual cost of attendance.
Colleges and universities will frequently publish what percentage of their students receive financial aid and will sometimes also publish the average award amount. This can be helpful information for students applying to colleges.
When deciding where to attend college, evaluating the financial aid package is an important step. For example, while the sticker price for College A is more expensive than College B, the financial aid package at College A may make it a more affordable option.
For many people, a quality education can be an invaluable investment, regardless of the price tag. In many cases, having a good education may help college graduates on the path to unparallelled career opportunities that, in turn, can lead to greater financial achievements and security, allowing them to pay off their loans and get out of debt more quickly.
All things taken into consideration, there may certainly be situations where taking out student loans to pay for college may be a poor financial decision — particularly if you aren’t interested in what you’re studying.
But if you’re passionate about your major and you finish your degree, a strategically and thoughtfully chosen loan with a decent interest rate may very well be worthwhile.
Not All Majors Have the Same Income Potential
Another consideration when evaluating whether borrowing student loans is worth it is to factor in the earning potential based on your selected major, keeping in mind that not all majors offer the same income potential.
For example, undergraduate degrees in applied mathematics, physics, and biomedical engineering all net recent grads a median salary over $72,000. Other majors, such as dance or drama, don’t offer as much consistent earning potential to graduates.
Do some research on the future earning potential for the major and field you hope to pursue. This can be helpful in understanding how much you’d realistically stand to earn, and therefore, how long it may take to pay back student loans. Resources like the Payscale College Salary Report or the Bureau of Labor Statistics are two places to start.
How Much Should I Borrow for College?
The Consumer Financial Protection Bureau suggests that students should limit what they borrow to what their potential career will reasonably allow them to repay. As a rough guideline, they suggest that students avoid borrowing anything more than they’d reasonably stand to earn in their first year out of college.
It’s also important to note that just because your financial aid package may include a certain amount in student loans, students are not required to borrow the maximum. Consider reviewing other sources of financial aid like scholarships and grants. It can also be worth setting up an annual budget with anticipated costs for tuition, fees, room and board, and other expenses so you have an idea of how much you may actually want or need to borrow to pay for school.
College Graduates May Have More Financial Stability
In the long-term, college graduates may have more financial stability. Research suggests that college graduates have both a higher median income than those without a college degree and earn more over their lifetimes.
Another factor, based on unemployment rates, is that people with a college degree tend to have greater career stability than those without a college degree.
This isn’t always true, however. As some recent studies suggest, certain career paths that don’t require a degree — such as construction inspectors or cardiovascular technicians — also offer significant earning potential.
Here’s What You Might Consider if You Choose to Take Out Student Loans
There are a number of factors to consider when deciding what loan will best suit your particular needs, so it’s important to do your research beforehand.
Things like whether the loan is federal or private, what the current interest rates are, and how long it will take to pay off the loan could all contribute to how much student loan debt you ultimately find yourself in and could be good determinants to think about before taking out a loan.
Federal Loans vs Private Loans
There are two main types of student loans — federal loans and private loans. Federal loans are borrowed directly from the government, whereas private loans are borrowed from private lenders like banks, credit unions, and other financial institutions.
While the two loans can be similar in nature, there are some important distinctions. Because federal loans are made by the government directly, the terms and conditions are set by law and can have perks like fixed interest rates and income-driven repayment plans that may not always be offered with private loans.
Private loans are less standardized, since the terms and conditions are set by the lenders themselves and can change from lender to lender. For example, some may offer lower interest rates than federal loans or extra fees, so it’s important to understand specific terms and conditions set by a private lender. Note that private student loans are generally only considered after all other sources of funding have been reviewed, because they may lack the borrower protections and benefits — like income-driven repayment plans or deferment options — offered to federal loan borrowers.
If you’ve exhausted your federal loan options and are considering taking out private loans to help pay for your education, SoFi Private Student Loans may be an option to consider, as they have no fees, offer competitive rates and flexible repayment plans, and have a simple online application process that has been optimized for mobile.
Understanding Interest Rates
Sometimes people fail to consider the interest rate on the student loan and how it will affect the life of the loan and, ultimately, the amount of money they will end up owing. The Federal Student Aid Office of the Department of Education explains that interest is calculated as a percentage of the unpaid principal amount (total sum of money borrowed plus any interest that has been capitalized).
Capitalization is when the amount of your unpaid interest is added to the principal balance of a loan, and interest is calculated using this new amount, causing more and more interest to accrue and increasing the amount of money you owe on the loan.
Recommended: Understanding Capitalized Interest on Student Loans
You might have interest capitalization if, as one common example, you decide not to make interest payments on an unsubsidized federal loan, thus allowing all that interest to be added back onto the principal amount of your loan.
For all new federal loans, interest rates are set by the government and are fixed, but with private loans, it’s up to the lender to set the rate and terms and you to choose what might work for you from the rates you qualify for. If you are interested in borrowing private student loans, do your research and shop around so you can find the loan that best meets your needs.
How Long Will it Take to Repay Your Loan?
Paying more money sooner can drastically reduce the amount of time it takes you to pay off a loan, but that may not always be a feasible option, so it’s important to consider the implications of different kinds of repayment plans when you take out a loan.
While the standard term to repay a federal student loan will likely last 10 years, depending on your income, familial status, and other factors that may affect your finances, you may need more or less time to pay back the money.
There are a number of different options that may determine the amount of time you take to pay off your loan.
While some federal repayment plans are based on a general, anticipated salary trajectory, others can take your specific income into consideration to make payments affordable, regardless of your circumstances.
Student loans can help open up doors to higher education for students, but borrowing responsibly is important. When deciding if student loans are worth it for you, and how much you’ll borrow, consider factors including your choice of major, future career path and earning potential, and the cost of the school you hope to attend after factoring in financial aid.
SoFi’s Private Student Loans may help undergraduates, graduates, and parents pay for a college education on their own terms. SoFi recommends exhausting all federal loan options first, but if you think you may need to take out a private loan, SoFi offers competitive rates with no fees, flexible repayment options, and a mobile-first experience.
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