Student loan repayment can be a pain, but there are a few good reasons why student loans are good debt.
There’s a lot of talk about student loan debt and how it’s inherently bad for the new batch of youngsters entering the workforce. But there is a silver lining to student loans that many people forget about — that it can help build your credit history. In addition, the fact that you get something from your student loans is a large factor in why student loans are good.
Is Student Loan Debt Good Debt?
When it comes to borrowing money, student loans are similar to mortgages in that they are usually considered “good debt.” Both are large amounts of money that take a long time to pay back. By paying it back each month, you show the lender your ability to repay a loan and prove your creditworthiness, which can in turn increase your credit score.
In addition, you “get” something from good debt. In the case of a mortgage, you get a house and the value of that house generally increases over time. With student loans, you get a college education, which increases your lifetime earning potential. This is why these two types of debt are good debt, rather than bad debt.
Bad debt includes things like credit cards, personal loans, and even auto loans. In the last case, you “get” something from the debt. However, since the value of a vehicle immediately depreciates once you leave the lot and continues to do so with each passing year, auto loans are still considered “bad debt.”
It’s worth noting that bad debt doesn’t necessarily mean that it’s a type of debt that you should avoid at all costs. You can use bad debt with good results. But because it doesn’t deliver anything of lasting value, it’s negative instead of positive.
A good credit score allows you to take on more and higher amounts of “good debts” that continue the cycle of good credit, as long as you are consistently paying off the debts.
Does Paying Student Loans Build Credit?
While making payments on your student loan debts can be painful, it actually can be helpful in the long run. Many students don’t start out college with credit cards but do have student loans. These loans give you the opportunity to build up a credit history with the credit bureaus, which shows lenders that you are a responsible borrower.
Borrowers often hit snags when it comes time to repayment, which leads to a bevy of issues regarding credit and loans.
A Brief History of Student Loan Debt
Let’s look at a brief history of student loans in the U.S.
The concept of student loans originated in the 13th Century at Oxford, where students would put valuables in a chest in exchange for schooling. Harvard is credited with creating the first true “student loan” in America, offering students zero-interest loans if they couldn’t afford to pay to attend school. Other schools eventually followed suit, offering private loans through the school.
- 1838: Harvard issues its first zero-interest loans to needy students. They did not need any form of collateral in order to borrow money to attend. Prior to this, Harvard benefactors paid the tuition of needy students who in exchange prayed for them.
- 1944: It wasn’t until almost 100 years later that the U.S. government got involved in doling out money for school. Following World War II, young soldiers were coming back and needed to become working members of society. President Franklin D. Roosevelt signed the G.I. Bill that gave soldiers up to $500 per year to help pay for school and living costs.
- 1958: President Dwight D. Eisenhower signed the National Defense Education Act to keep up with Russia’s space program. It gave money to students who studied in fields pertaining to the nation’s defense, specifically in areas like math and foreign language. As a result of this law, millions of more students began attending college. It created National Defense Student Loans, which eventually became Perkins Loans. The Perkins Loan program expired on Sept. 30, 2017.
- 1965: The Higher Education Act basically took the NDEA and expanded it to all students, regardless of their major.
- 1972: Pell Grants were created under the Basic Educational Opportunity Grant. Named after Sen. Clairborne Pell, it gives students up to $5,920 a year without any need for repayment.
- 1992: FAFSA, or the Free Application for Federal Student Aid, was created in an amendment to the Higher Education Act. It also created Stafford loans, which are unsubsidized loans for students.
Are Student Loans a Good Idea?
Taking out a student loan can be a great idea if you need income in order to attend school. However, it’s important to understand what kind of loan you will be getting. There are different options when it comes to student loans:
- Federal student loans. These are the loans offered by the government. The amounts are based on the annual cost to attend after including parents’ contributions and other aid. These loans can be subsidized or unsubsidized. You do not have to start repaying on a student loan until after you graduate.
- Private student loans. These are loans offered privately by banks and other lenders. These loans tend to have higher interest rates than federal loans, and you usually have to pay on them right away, as soon as you receive your loan payment.
Federal student loans tend to have lower, fixed interest rates, which can make repayment easier. Depending on your career path, there are options in which you can seek loan forgiveness. A federal student loan can be forgiven under the Public Service Loan Program and the Teacher Loan Forgiveness Program. It varies as to how much is forgiven.
The Cost of Student Loans
Student loans are extremely helpful when seeking a college education, but repayment can cause many students and recent graduates stress. In cases where repaying a loan becomes difficult, students can work with their lenders to refinance or consolidate their loans. This means putting all their loans together in one bunch and receiving a lower interest rate or better terms. Refinancing a student loan is easier when you have better credit.
If you want to know more about the importance of good credit or paying off your student loan debts, visit debt.com.
What’s the difference between subsidized and unsubsidized loans?
Federal student loans come in two “flavors”: subsidized and unsubsidized. Subsidized loans are loans where the interest does not start to accrue until after you graduate from college. With unsubsidized loans, the interest accrues once the loan is disbursed, meaning that while you don’t have to start paying it back right away, each month you have the loan, interest payments are being added into that initial lump sum.
