How Paying Off Student Loans Works

Good Debt or Bad Debt?

Financial experts vary in their assessment of student loans when compared to other debt.

Bob Schumann, a financial planner, says student loan debt is good. Schumann's reasoning is that you can deduct the loan interest, the loan rates stay low and the debt "paves the way for you to make more money throughout your lifetime" [source: Anderson].

Mary Hunt, founder and publisher of the popular Cheapskate Monthly newsletter, argues that the debt is unsecured with "no escape route." Hunt reminds borrowers that there's no guarantee that the education will result in a job, and you're obligated to pay the debt regardless of the results.

Whether or not the debt is good or bad, student loan debt does affect your credit. A high credit rating allows you to borrow more at lower interest rates. To keep your credit rating high, make your scheduled payments on your student loans and look for deferment or forbearance options if you have trouble making payments.

School loan debt is also a risky business for the university itself. Students who default on their loans to for-profit institutions put those schools at risk of being shut out of the federal loan and grant programs. In 2007, 21 percent of students who started repayment to for-profit schools defaulted on their loans, while only 10 percent of students in four-year public schools defaulted on their loans. With 70 percent of their revenue coming from grants and loans, for-profit schools could suffer a financial blow if their enrolled students are denied financial aid because of their graduates' defaults [source: Marketplace].

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