When it comes down to a discussion of when and when not to incur debt, there are a mix of opinions. Most people will agree that in general, debt is bad. Some debt, however, can be good-for example, that which is incurred for a long-lasting, useful purpose (as opposed to incurring debt for short-term, frivolous purchases).
Borrowing money in order to purchase a home or to finance college tuition is generally considered “good debt,” since most people consider their homes to be their largest investments, and that their college education will help them over the lifetime of their careers.
And while most people cannot afford to purchase their homes in cash, college tuition is a different story. A college education continues to be important in our country and can be expensive (depending upon the school where the education is obtained). In cases where you cannot otherwise afford to pay for college, it makes sense to apply for a student loan.
Here are five good reasons to do that.
- You and/or your parents cannot afford to pay the college tuition upfront. A student loan is a way to leverage your resources. Since you do not have the funds upfront to pay for the tuition, you obtain a loan that can be paid back after you complete your degree or stop taking courses.
- Payments can be deferred until after you graduate and begin working. Depending on the type of student loan you obtain (i.e. a subsidized versus unsubsidized student loan), in addition to principal, interest payments may be deferred until after you graduate, leave school, or drop below half-time enrollment. This allows you to further leverage your financial resources, and gives you time to further prepare for repayment of the loan.
- Interest rates are usually cheaper than on personal or other types of loans. If you have funds saved for college, but have other higher-interest debt, it may be better to use your saved funds to pay off high-interest debt and take out a student loan, which offers lower rates. In addition, to this advantage, student loans also offer additional advantages, such as a longer repayment period and tax benefits.
- Interest on student loans can be tax-deductible. As mentioned in the point above, obtaining a student loan does offer some tax benefits. If you are going to incur debt, why not incur the debt that helps you on your tax bill? Student loans offer this advantage; although there are some limitations as to how much can actually be deducted. Check the IRS website (www.irs.gov) for additional information on limitations.
- At the end of the day, you are able to obtain an education that will better prepare you for a future career. When faced with the choice of obtaining a student loan or not getting a college education, I would choose to get the student loan every time. There are many more advantages to furthering one’s education as opposed to not doing so just to avoid incurring debt.
With all this said, it is still very important to remember that too much debt-no matter how long repayment or interest is deferred-is bad.
When obtaining student loans, there is always a risk that you won’t begin working right after you graduate to begin immediate repayment of the debt. To be prudent, make sure you don’t borrow more than you can afford to pay back within a reasonable amount of time, and always, always shop around for the best rates.