It wasn’t that long ago that student loans were almost always a great idea. College was affordable, and any college degree meant excellent employment opportunities.
Sadly, those days are over.
Student loans remain a helpful tool for funding a college education, but getting a student loan isn’t always worth it. In a world with deceptive for-profit colleges, shady lenders, and a challenging job market, students must make careful borrowing decisions.
Asking yourself these four questions should help identify whether or not a student loan is a good idea.
Am I going to graduate college?
A college degree doesn’t guarantee a job, but not having a degree makes it much harder to get a job.
If a reasonable-sized student loan — more on what is reasonable in a bit — is necessary to graduate, a student loan might be a necessary evil.
Additionally, any student loan borrower needs to carefully consider their path to graduation. Many of the worst student loan hardships happen to borrowers who don’t graduate college. Getting debt but no degree is a toxic combination.
Nobody goes to college expecting to drop out, but it happens every year. If the main appeal of college is getting out of town or partying, student debt is likely a big mistake.
Will I find a job after school?
Some degrees are highly marketable. If you have a computer science degree from a top college, your job prospects are likely excellent. Borrowing student loans to pay for this degree is probably a reasonable choice.
Other degrees don’t necessarily mean employment. You might enjoy film studies and aspire to become a movie director, but steady work is far from guaranteed.
The deeper you go into debt, the more critical it is to have a marketable degree.
Sherpa Tip: Take a close look at both your school and your area of study. Some schools have a terrible reputation for helping their graduates find jobs. Other schools have a good reputation, but some programs within that school do far worse than others.
The Department of Education’s College Scorecard is an excellent resource for evaluating colleges and fields of study.
Will I be able to afford my debt?
This is the question that many borrowers fail to ask.
Attending a good school and picking the right major is not enough. Ultimately, the value of the degree needs to exceed the cost of the debt.
What does this look like?
Suppose you are majoring in education with plans to become a teacher. Education is your passion, there is a need for good teachers, and you can’t pay for college without student loans. In this circumstance, some debt is undoubtedly justified.
However, it is critical that you can afford the debt you incur. In the United States, we do a lousy job paying teachers what they deserve. Thus, if you plan on being a teacher, you can’t attend an expensive private school and take out a ton of student loans. You won’t be able to make ends meet.
Sherpa Tip: Don’t plan on student loan forgiveness.
Many teachers may qualify for Public Service Loan Forgiveness. However, the PSLF program only applies to federal student loans. Due to strict undergraduate borrowing limits, many borrowers need private loans to pay for their degrees. Private loans don’t have a forgiveness option.
Even if you have loans that might one day qualify for forgiveness, it will take at least a decade to reach forgiveness. Worst of all, many borrowers who expect to qualify to find out they are not eligible.
Treat forgiveness as an insurance policy in case your Plan A and Plan B don’t work out.
Are my student loan terms and interest rate worth it?
Finally, if it is worth it to get a student loan, you must find the right student loan.
For the overwhelming majority of borrowers, the best student loan option is a federal student loan. Federal loans have the best repayment terms and options. They also have many important borrower protections and perks. I usually advise people to get federal student loans even if it means a higher interest rate than a private loan.
If federal loans are insufficient to pay for school, private loans might become necessary. This is where student debt becomes a high-stakes financial decision.
If you conclude that additional borrowing is a good idea, make sure to understand the terms and conditions of the loan. Take a couple of hours to shop around and find the lowest interest rate possible. Tools like Credible can help you check rates with many lenders simultaneously to find the best rate available.