Why Are Student Loans Considered Good Debt?

Some loans are better for your finances than others. “Good debt” includes funding that puts you in a better financial situation in the long run, while “bad debt” leads to credit problems. Student loans are typically considered good debt because a higher education can lead to the career or income you want.

Understanding Good Debt

Good debt can include any debt that pays off in the long run, although the potential benefits that can come from good debt will vary. For example, a mortgage used to buy a home is typically considered good debt, since the property itself is an asset that can appreciate in value over time. Small business loans can also be considered good debt when the funds are used to launch a new company or increase profits for an existing business.

You can determine if the debt you’re considering will be good or bad for your financial situation based on whether you can repay it and how it will help you. Some debt may be good for one borrower but damaging for another. For example, a mortgage for a home you cannot afford would not be good debt, nor would a business loan in which you misspent the loan funds.

Student Loans as Good Debt

Student loans are a type of funding that’s used to pay for a higher education at a college, university, trade school, or other institution. The reasons student loans are generally considered good debt can include:

• Higher future earning potential: Data from the U.S. Bureau of Labor Statistics shows that educational attainment leads to higher earnings. For example, people with a bachelor’s degree earned an average of $1,432 per week in 2022, compared to weekly earnings of $853 for those with a high school diploma.
• Lower interest rates: Federal student loans especially come with competitive fixed interest rates that are much lower than other types of debt charge. For example, according to the Federal Reserve, the average credit card interest rate was 22.75% in Q3 of 2023, compared to 5.50% for direct subsidized loans and direct unsubsidized loans.
• Flexible repayment plans: Federal student loans can be paid off using several different repayment plans that last anywhere from 10 to 30 years. There are even income-driven repayment (IDR) plans, which require payments for 20 to 25 years before forgiving remaining loan balances.
• Potential for tax deductions: Student loan interest may be tax deductible if you meet certain requirements, whereas most other types of debt do not have any tax benefits.
• Potential for loan forgiveness: In addition to IDR plans for federal student loans that lead to loan forgiveness, there are additional forgiveness plans for federal student loans, including Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. Private student loan forgiveness is much less common, typically only possible if the borrower becomes permanently disabled or dies.

Risks and Drawbacks of Student Loans

Student loan debt is typically considered good debt for many reasons, but there are potential downsides as well. They include:

• Choosing the wrong degree: While many college degrees can pay off in a big way, some college degrees actually have a negative return on investment (ROI) when you factor in the costs of a higher education. For example, a 2022 study from FREOPP showed that 14% of advanced degrees and 40% of master’s degrees had a negative financial return that year.
• Unemployment and underemployment after graduation: While unemployment rates are higher for people with lower levels of education, borrowing money with student loans and being unemployed or underemployed can lead to serious credit issues. If you cannot afford to repay your loans, you can severely damage your credit.
• Financial stress caused by debt repayment: Student loans require monthly payments for years, and your loan obligations can keep you from reaching other financial goals. This is especially true when you borrow a large amount of money and/or you have a high income that prevents you from benefiting from an IDR plan.
• Slim chance at bankruptcy: Also note that, if you get into financial trouble and have student loans, these loans are nearly impossible to discharge via bankruptcy.

Tips and Strategies for Managing Student Loan Debt

How you manage debt can also impact whether your student loans will be worth it. These tips can help you use debt to your advantage.

• Plan and budget for student loan repayment: Never borrow for a higher education without having a plan for how much you intend to borrow and understanding what you would owe with different repayment plans. You can use the Loan Simulator from Federal Student Aid to get an idea of what your monthly payment would be based on how much you borrow for school and how long you want to spend paying the money back.
• Explore income-driven repayment plans: Be sure to research IDR plans, particularly the new Saving on a Valuable Education (SAVE) plan, which only requires you to pay 5% of your discretionary income toward undergraduate student loans each month. An IDR plan may result in a lower monthly payment, and borrowers could see their remaining loan balances forgiven after 20 to 25 years.
• Look into loan forgiveness programs: If you plan to work in public service or teaching, you should also look into loan forgiveness programs like PSLF and Teacher Loan Forgiveness, respectively.
• Build credit through responsible loan repayment: Making on-time payments on your student loans can help you build credit over time, which can help you later in life. For example, good credit can mean qualifying for loans with better interest rates and terms in the future, such as the mortgage you might need to purchase a home.

The Bottom Line

Student loan debt can be good debt when it helps you get where you need to be, either by advancing in your chosen profession, helping you earn more money, or both. Just remember that not all college degrees lead to success, and you should always strive to borrow as little as you can.