Chapter 5
Paying for College and Comparing Debt Choices
Student debt is one of the largest financial commitments most people make before they fully understand personal finance. The loan type, interest rate, and repayment structure you choose can shape your financial life for a decade or more after graduation.
Key takeaways
- Government-backed loans almost always have better terms than private loans — exhaust them first.
- Interest capitalises (compounds onto the principal) during deferral — it grows while you study.
- Income-contingent repayment plans cap payments as a share of your income.
- Extra payments applied directly to principal significantly reduce total interest paid.
Government loans vs private loans
Government student loans carry fixed or regulated interest rates and come with protections private loans do not: income-contingent repayment plans, deferment in hardship, and sometimes partial forgiveness programmes for public sector roles. Private loans — from banks or financial institutions — typically offer fewer protections, may have variable rates, and give lenders more latitude in case of repayment difficulty. The general principle: use all available government borrowing capacity before considering private alternatives.
| Feature | Government loans | Private loans |
|---|---|---|
| Interest rate | Fixed or regulated | Variable or fixed, lender-set |
| Income-based repayment | Usually available | Rarely available |
| Hardship deferment | Standard feature | At lender discretion |
| Partial forgiveness programmes | Exist in some countries | Not available |
| Credit check required | Often not required | Always required |
How interest capitalisation works
Capitalisation is the process by which unpaid interest is added to your loan principal, creating a larger balance on which future interest then accrues. This is compound interest working against you. On most unsubsidised loans, interest begins accumulating from the day funds are disbursed — not from graduation. A €20,000 loan at 6% where no payments are made during four years of study will have a balance closer to €25,300 by graduation, before a single repayment is made.
One practical way to reduce capitalisation: make small interest-only payments during study, even if not required. Even €30–€50 per month during a four-year degree can prevent a significant increase in the principal balance at graduation.
Repayment plan options
Standard repayment plans spread the balance over a fixed term (typically 10–25 years), resulting in the lowest total interest paid but the highest monthly payment. Income-contingent or income-driven plans cap your monthly payment as a percentage of your disposable income, with any remaining balance forgiven after 20–25 years. Income-based plans make sense when your income is low relative to your debt and you value manageable monthly cash flow; standard plans make sense when you can afford the payment and want to minimise total interest paid over the life of the loan.
The opportunity cost of student debt
One useful lens for evaluating student debt decisions is opportunity cost: money spent servicing loan interest is money that cannot compound through investment. For decisions about early repayment vs investing, see the debt vs investing page, which addresses this trade-off directly.