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Are student loans good or bad debt?

It all depends on how you use them to invest in your future.

Updated

student analyzing her student debt
While many personal finance experts refer to student loans as good debt, this can be misleading. Like other types of debt, they have the potential to both build and hurt your credit score.

What’s the difference between good and bad debt?

Generally, it depends on whether taking on that debt is a good investment. Good debt typically earns or saves you money in the future. For example, taking out a low-interest loan to pay off high-interest credit card debt might be considered good debt because you’ll save money on interest.

Bad debt is debt that isn’t worth the cost. For example, borrowing for a trip you could have saved up for could be considered bad debt since you’ll pay a lot more than you needed to and get nothing in return.

Why are student loans sometimes considered good debt?

Student loans are often considered good debt because they make it easy to reap the benefits — namely building your credit and investing in your future — without the cost or risk that comes with other types of debt.

Here are a few reasons why many experts consider student loans good debt:

  • Investment in your future. Many high-paying, stable jobs require a college degree — which you might need a student loan to pay for. This means you’re taking on debt so you can make money in the future.
  • Low interest rates. With average rates around 5% or 6%, student loans usually have lower APRs than other loans and credit cards. This means you can build your credit at a lower cost.
  • Few or no fees. While federal loans come with an origination fee, private student loans generally don’t. Usually there’s no penalty to pay them off early, either. And some lenders like SoFi don’t even charge late fees.
  • Repayment flexibility. Student loans come with more options to help you avoid missing repayments than any other type of loan.
  • Forgiveness programs. You can apply to have some or all of your student loans forgiven without impacting your credit score. This is nearly impossible with other types of debt.
  • Rehabilitation options. Federal student loans come with multiple ways to get out of default that are a lot less damaging to your credit score than bankruptcy.

How can I get the most benefit from student loans?

You can make sure your student loans remain a positive investment a few different ways:

  • Don’t borrow more than you need. Apply for scholarships and grants first. The less debt you take on, the less you’ll have to pay in interest and fees to reap the same rewards.
  • Major in a high-paying field. The more you earn from your degree, the higher the return on your education.
  • Pay them off as fast as possible. The quicker you repay your student loans, the more you’ll save in interest.

You don’t have to follow all three of these steps to benefit from student loans. If you go into a low-paying filed like public service or the arts, paying off your student loans according to your repayment plan can still build your credit. It just might cost you more than if you decided to work in finance.

How can student loans hurt my credit?

Student loans come with less risk than most other types of credit — but that doesn’t mean there’s no risk at all. Here are a few ways they can negatively impact your credit score:

  • Missing repayments. On-time repayments make up 35% of your credit score. Becoming delinquent costs you points.
  • Defaulting on your loans. A default can stay on your credit report for up to seven years, which hurts your score and makes it difficult to qualify for loans and credit cards in the future.
  • Borrowing too much. How much you borrow affects your credit utilization ratio, which makes up 30% of your credit score. If you have lots of student debt and no other types of available credit — like a credit card with no balance — it can lower your score.

How can I avoid becoming delinquent or defaulting?

Here are a few ways to avoid falling behind on your student loan repayments:

  • Sign up for a repayment plan or term that fits your budget. Use the repayment estimator on StudentLoans.gov or our monthly repayment calculator to find a repayment plan and loan term that comes with a monthly cost you can easily afford along with other expenses.
  • Switch plans when necessary. When your financial situation changes, review your repayment options. If you have federal loans, you can switch to another repayment plan that better suits your needs. With private loans, you might want to consider refinancing.
  • Apply for deferment and forbearance. These options let you stop repayments temporarily if you’re facing a temporary setback, like losing your job or returning to school.
  • Know the terms and conditions of your loan. Federal loans become delinquent 90 days after missing a repayment and default after 270 days. These terms vary with private loans. Knowing these numbers can help you avoid hurting your credit if you miss a repayment.
  • Get in touch ASAP if you’re struggling. Reach out to your servicer before you miss a repayment to discuss your options. Even with private loans, they might be willing to adjust your rate or terms if your financial situation has changed.

Compare student loan refinancing offers

Data indicated here is updated regularly
Name Product Min. Credit Score Max. Loan Amount APR
SoFi Student Loan Refinancing Variable Rate (with Autopay)
650
Full balance of your qualified education loans
2.25% to 6.09%
A leader in student loan refinancing, SoFi can help you refinance your loans and pay them off sooner.
Purefy Student Loan Refinancing (Variable Rate)
620
$300,000
2.27% to 7.49%
Refinance all types of student loans — including federal and parent PLUS loans.
Credible Student Loan Refinancing
Good to excellent credit
None
1.99% to 9.24%
Get prequalified offers from top student loan refinancing providers in one place.
Splash Financial Student Loan Refinancing
650
None
1.89% to 6.66%
Save on your student loans with this market-leading newcomer.
Education Loan Finance Student Loan Refinancing
680
None
2.39% to 6.01%
Lower your student debt costs with manageable payments, affordable rates and flexible terms.
Earnest Student Loan Refinancing
650
$500,000
1.99% to 5.34%
Get a tailored interest rate and repayment plan with no hidden fees.
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Compare up to 4 providers

Bottom line

Student loans might come with a higher return on investment than other types of debt, thanks to low rates — and the fact that you need a college degree for many jobs. But they can still hurt your personal finances if you miss repayments.

If you’re struggling to make repayments, compare refinancing offers to extend your loan term or potentially qualify for a lower rate.

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