If you’re thinking about taking out student loans to pay for college, you’re in good company: Nearly two-thirds of college graduates leave school with debt. Like most loans, student loans charge interest, which is the cost of borrowing money from a lender. Whether you take out federal or private student loans, you’ll end up paying back more than your original borrowed.
Is it worth it?
The answer depends on your degree, major, and the type and size of your debt. Read on to learn more about whether the current cost of college is worth it, different ways to pay for school, and when it makes sense to take out student loans.
College Costs Vary By School
It’s no secret that college costs have gone up over the years, causing more students to take on debt as a means to afford a college education. Indeed, student debt has more than doubled over the last two decades. As of March 2023, about 44 million U.S. borrowers collectively owed more than $1.7 trillion in federal and private student loans.
But not all schools cost the same amount. In fact, some colleges cost considerably less than others. According to Educationdata.org, the average cost of attendance for a student living on campus at a public four-year in-state college is $26,027 per year; out-of-state students pay $27,091 per year. The average cost of attending a private, nonprofit university, by contrast, is $55,840 per year.
💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.
Factoring in Financial Aid
Financial aid is another factor that affects the cost of going to college. Some schools may have a high sticker price but offer a variety of need- and merit-based aid options to students, which can 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 apply and attend school, keep in mind that 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 in the end.
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 computer and information science and software engineering net recent grads a median salary over $127,000. Other majors, such as dance or drama, generally don’t offer as much consistent earning potential to graduates.
It’s a good idea to 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?
A general rule of thumb is that students should limit what they borrow to what their potential career will reasonably allow them to repay. As a rough guideline, you may want to avoid borrowing anything more than you will likely be able to earn in your first year out of college.
Keep in mind that just because your financial aid package may include a certain amount in federal student loans, you are not required to borrow the maximum. Consider reviewing other sources of financial aid like private 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 type of student 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 are important considerations 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 serve the same purpose, there are some important distinctions. Because federal loans are made by the government directly, the terms and conditions are set by law. These loans also come with certain perks and protections, such as low fixed interest rates and income-driven repayment plans, that may not be offered with private loans.
Private loans are less standardized, since the terms and conditions are set by the lenders themselves. For example, some may offer higher interest rates than federal loans, and interest rates may be fixed or variable. It’s important to understand specific terms and conditions set by a private lender. Since private student loans may lack the borrower protections and benefits offered by federal loans, you generally want to tap financial aid and federal student loans first, then consider filling in any gaps with private student loans.
Understanding Interest Rates
Sometimes people fail to consider the interest rate on the student loan and how it will affect the amount of money they will end up owing.
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 unpaid interest is added to the principal balance of a loan, and interest is calculated using this new, higher amount. You might have interest capitalization if, for example, you decide not to make interest payments on an unsubsidized federal loan or private student loan while you are in school. This unpaid interest will be added to your loan balance and interest will be charged on this new, higher balance.
For all federal student loans, interest rates are set by the government and are fixed, which means they won’t change over the life of the loan. With private student loans, it’s up to the lender to set the rate and terms. Generally students (or their parent cosigners) who have strong credit qualify for the best rates. If you are interested in borrowing private student loans, it’s a good idea to do some research and shop around so you can find the loan that best meets your needs.
💡 Quick Tip: Federal student loans carry an origination or processing fee (1.057% for Direct Subsidized and Unsubsidized loans first disbursed from Oct. 1, 2020, through Oct. 1, 2024). The fee is subtracted from your loan amount, which is why the amount disbursed is less than the amount you borrowed. That said, some private student loan lenders don’t charge an origination fee.
How Long Will it Take to Repay Your Loan?
Paying more money sooner can significantly reduce the amount of time it takes you to pay off a loan (as well as lower the cost). But that may not always be a feasible option. It’s important to consider the implications of different kinds of repayment plans when you take out a loan.
The standard term to repay a federal student loan is 10 years. However, depending on your income and other factors, you may need more or less time to pay back the money. The federal government offers a choice of payment plans, including fixed payment plans and plans that base your payment on your income. Private lenders also typically offer a choice of repayment options.
When choosing your loan term, keep in mind that a longer repayment term will lead to lower payments but a higher overall cost, since you’ll be paying interest for a longer period of time.
The Takeaway
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 should borrow — you’ll want to consider multiple 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.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
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Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
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