Are Student Loans Bad Debt?

Q: Are student loans considered bad debt? Or do student loans make sense for some students?

A: Student loans are not always a bad option, but you need to be careful about accepting any loan.

You need to be especially careful with student loans because it is easy to borrow too much, and student loans cannot be discharged in bankruptcy. So whatever you borrow, you need to be able to repay.

The general rule with loans is this: It is better to take a loan for something that increases in value over time than for something that decreases in value over time.

So for example, a home mortgage makes sense because the value of the house will increase over time. This is what people call 'good debt' because you are buying an asset. An asset is something that can earn you money over time.

On the other hand, an expensive car loan is bad because the value of the car quickly decreases over time. This is what people call 'bad debt' because you are buying a liability. A liability is something that will never earn money over time, it only costs money.

So before you borrow one penny, you need to ask yourself what your education will be worth over time. You need to plan for what your career will be after you graduate from school. For example, a law, medical, business, or engineering degree will almost always earn more than a psychology, history, or communications degree. So plan accordingly and avoid debt whenever you can.

How Do I Pick the Right Student Loan?

If you must take out a student loan, you need to start by completing the FAFSA form at

Most students will need help from a parent to complete the FAFSA, but this is the only way to get access to low-cost federal student aid.

1. There are three types of federal student aid:

Grants: This is financial aid that does not have to be repaid (unless, for example, you withdraw from school and owe a refund).

Work-Study: This program allows you to earn money for your education. This aid does not have to be repaid.

Federal Loans: These loans allow you to borrow money for your education. You must repay all loans, with interest. Federal loans come with fixed interest rates and are usually the cheapest form of student loans.

2. Beyond federal aid, there are also private student loans:

Private Student Loans: These loans are usually offered by banks to help you pay your education costs. Unlike federal student loans, private loans come with variable interest rates that can change monthly or quarterly. To qualify, most students need to apply with a creditworthy cosigner (such as a parent).

To save money, students should make use of all of their federal student aid options before considering a private student loan.

3. So here are all the student loan options to consider:

Federal Perkins Loans (Best Choice Option)
- Low fixed rate
- Receive up to $5,500 a year
- No payments until after school

Perkins Loans are made through participating schools to undergraduate, graduate and professional degree students. They are offered to students who demonstrate financial need and are enrolled full-time or part-time. These loans must be repaid to your school.

Federal Stafford Loans (Best Choice Option)
- Low fixed rate
- Receive up to $8,500 your first year
- No payments until after school

Stafford Loans are for undergraduate, graduate and professional degree students. You must be enrolled as at least a half-time student to be eligible for a Stafford Loan. There are two types of Stafford Loans: subsidized and unsubsidized. You must have financial need to receive a subsidized Stafford Loan. The U.S. Department of Education will pay (subsidize) the interest that accrues on subsidized Stafford Loans during certain periods. Financial need is not a requirement to obtain an unsubsidized Stafford Loan. You are responsible for paying the interest that accrues on unsubsidized Stafford Loans.

Federal PLUS Loans for Parents (Good Choice Option)
- A federal loan that parents can use for a child
- Low fixed rate
- Receive up to total cost of education

The PLUS Loan can be a good option if a parent is willing to help you pay for school. PLUS Loans are loans parents can obtain to help pay the cost of education for their dependent undergraduate children. Some parents prefer the PLUS Loan to home equity loans because they do not have to put their home at risk. It is also a better option for parents who may be considering taking money out of a retirement account for education purposes. In addition, graduate and professional degree students may obtain Graduate PLUS Loans to help pay for their own education.

Private Student Loans (Good Choice Option for Borrowers with Great Credit)
- Must have good credit or cosigner to qualify
- Comes with a variable or fixed interest rate
- Can usually cover all education costs
- Payments can be delayed until after school
- Choose a private loan where the school certifies
  the loan and receives the funds for you.

Private student loans from banks can be a good option after you have maximized all of your federal student aid options first. Because private student loans are typically more expensive than federal student loans, it is not recommended that you use a private loan to cover all of your education costs. If you must take out a private student loan, use those funds to cover your extra or left-over expenses. Also, if possible, it is a good idea to make interest payments on your private loan while you are still in school. If you do not, you may be surprised by the amount of interest that has accrued while you were in school. If you are a graduate or professional degree student, consider the Graduate PLUS Loan before taking out a private student loan.

Last word of advice: Check out your free money options before considering any student loan.

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