Student Loans: When Borrowing for College Pays Off
Reading time: 10 minutes
Last month I was having coffee with a classmate when she showed me her account statements: 28,000 euros in debt after four years of taking out a student loan, current interest rate 4.36 percent per year. She asked me: was that the right decision? The honest answer: it depends. I looked at the numbers and today I'll show you concretely when a student loan really makes sense and when you're better off looking for alternatives.
A student loan sounds tempting when the rent is due and your account is empty. But this decision has long-term consequences. Using real worked examples, I'll explain which situations justify a loan and when you're better off relying on other financing options.
The realistic costs of a student loan
The KfW student loan, with 734,000 contracts since 2006, is the best-known one in Germany. As of April 2024, the effective annual interest rate is 4.36 percent. That means: if you draw 650 euros per month over four years, you will have received 31,200 euros in the end. Through the interest during the payout phase and the grace period, your debt adds up to roughly 35,400 euros.
With repayment over ten years, you then pay back around 365 euros per month. In total, the 31,200 euros of borrowed money turn into roughly 43,800 euros of repayment. So you pay back 12,600 euros more than you received. You need to be clear about that number before you decide to take out a student loan.
For comparison: a working-student job with 16 hours per week at 14 euros brings you roughly 896 euros gross per month, of which about 720 euros is left net. No debt, no interest. The only question is: can you fit those 16 hours around your studies? If you're unsure how many hours are allowed alongside BAföG (German state student aid), check out my article on working students and BAföG hour rules.
Four situations in which a student loan makes sense
I'm not fundamentally against student loans. There are concrete scenarios in which they are the better choice.
An intensive master's program with a heavy workload
If you're doing a master's in medicine, law or architecture, 50 to 60 hours a week of university work is normal. My classmate from the example studies human medicine in Hamburg. Between lectures, internships and exam prep, she has five hours per week at most left for a part-time job. At 14 euros an hour, that would bring in just 280 euros a month. Here, taking out a student loan makes financial sense because the alternative generates hardly any income.
A semester abroad without Erasmus funding
A semester in Sydney or Tokyo quickly costs 8,000 to 12,000 euros extra. If you don't get an Erasmus scholarship and your parents can't pay, a short-term education loan makes more sense than cancelling your semester abroad. According to the German Academic Exchange Service (DAAD), a semester abroad raises your starting salary by 8 percent on average. On an annual salary of 45,000 euros, that is 3,600 euros more per year, which pays off handsomely over a career.
The final stretch with a full-time bachelor's thesis
Many bachelor's theses, especially in the natural sciences or engineering, require lab time or intensive research. If you need three to six months full-time for your thesis and can't manage a part-time job alongside it, a short-term loan bridges this phase sensibly. Better to borrow 2,600 euros for four months than to delay your thesis and study a whole semester longer.
A second degree with no BAföG entitlement
With a second degree, BAföG falls away. If you want to study medicine after your bachelor's in business administration, you face a choice: work full-time and study part-time, or use a student loan. Here a targeted loan can shorten your study time drastically. You'll find more details on financing in my post on financing a second degree without BAföG.
When you should definitely not take out a student loan
The wrong reasons are just as important as the right ones. I see these three situations again and again, and every time I advise against it.
First: when you actually have time for a part-time job but just don't feel like it. A bachelor's program with 25 to 30 hours a week of study effort easily leaves room for 10 to 15 hours of work. Even a mini-job with 12 hours at 13 euros brings in 624 euros a month. Over three years that is 22,464 euros without debt, instead of with 12,600 euros in interest costs.
Second: for lifestyle expenses like an expensive apartment or vacations. I know students who take 800 euros a month from the loan but live in a 550-euro shared flat in Glockenbachviertel instead of one for 380 euros in Pasing. That 170-euro difference costs an extra 2,800 euros in interest over four years. Take a look at my tips on planning your budget properly before you go into debt for a nicer apartment.
Third: when you haven't yet looked at all the other options. BAföG, housing benefit, scholarships, parental support according to the Düsseldorf Table. A student loan should always be the last option, not the first.
Student loan comparison: KfW vs. private lenders
If you decide on a loan, the differences between lenders are enormous. As of 2024, the KfW student loan offers a maximum of 650 euros per month, regardless of your parents' income. Repayment begins 18 months after the last installment at the earliest, 23 months at the latest. The interest rate is adjusted every six months and has ranged between 0.44 percent and 4.36 percent in recent years.
Private lenders such as DKB or Deutsche Bank often demand collateral or guarantors. Interest rates are sometimes 6 to 8 percent. In return, the monthly amounts are more flexible. Some offer up to 1,000 euros per month. According to a comparison by Stiftung Warentest from March 2024, the KfW loan performs better than private alternatives in 9 of 10 categories.
The federal education loan (Bildungskredit) is different again: a maximum total of 7,200 euros, low-interest at currently 1.01 percent, but only for advanced phases of study from the fifth semester on. It is suited to bridging a gap, not to financing your entire degree.
Planning your student loan repayment properly
Most people underestimate how long repayment runs. With 35,000 euros of debt and a 365-euro monthly installment, you pay for 120 months, that is, ten years. That means: if you finish your bachelor's at 24, you're debt-free at 34. Right in the phase where others start a family or finance a home.
With KfW you can choose your installment between 20 euros and 1,500 euros per month. The higher the installment, the less interest you pay overall. If you repay 600 euros a month after starting your career instead of 365 euros, you save about 2,400 euros in interest and finish 4 years earlier.
Important: plan with a grace period. After your studies you often need three to six months until you start your first job and the first paycheck arrives. KfW gives you a maximum of 23 months of grace, but interest keeps running during that time. Every month of delay costs you extra money.
Pros and cons of the KfW student loan in detail
I'll summarize the hard facts so you can make an informed decision.
The advantages
- Independence from your parents' income, no credit check for students under 45
- Flexible monthly payout between 100 and 650 euros, adjustable every six months
- Up to 23 months of grace period after your studies before repayment begins
- Option of extra repayments with no early-repayment penalty
- Currently lower interest than with private student loans
The disadvantages
The interest rates are variable and can rise. Someone who took out a loan at 0.68 percent in 2021 now pays 4.36 percent. On 30,000 euros of remaining debt, that is about 1,100 euros more in interest per year. You bear the interest-rate risk entirely yourself.
The maximum funding period is 14 semesters. If you study longer, you have to find other sources of funding. And you shouldn't underestimate the psychological burden: having five-figure debts in your mid-20s puts many people under pressure. I know graduates who chose their first job not out of interest but purely for the salary, to pay off the loan faster.
Alternative financing options, honestly assessed
Before you finally decide to take out a student loan, check these alternatives concretely.
Scholarships are not just for straight-A candidates. The Deutschlandstipendium supports 28,000 students with 300 euros a month, and half of them have a grade average between 1.5 and 2.5 (on the German scale, where 1.0 is best). The application deadline is usually in July for the winter semester. Small foundations such as the Hans-Böckler-Stiftung or the Avicenna-Studienwerk also offer hundreds of places.
You can apply for housing benefit (Wohngeld) as a student if you don't receive BAföG or are otherwise not eligible for it. In Munich, with 400 euros of rent, that is about 180 euros a month in assistance. Over three years that is 6,480 euros given to you rather than lent.
Part-time jobs bring not just money but also work experience. A working-student job in marketing with 16 hours pays 15 to 18 euros per hour in larger cities. That is 1,000 to 1,150 euros per month. Even if it means studying a semester longer, you often come out ahead financially compared with a student loan.
For some people, sugar dating is also an option, one that often brings in more per month than a student loan pays out, though with its own considerations. I've written a detailed guide on it in case the topic interests you.
Which student loan is the best for you?
The answer depends on your specific situation. If you're looking for a flexible loan, independent of your parents, with moderate interest, the KfW student loan 2024 is the best choice. For short-term bridging under 7,200 euros, the federal education loan at 1.01 percent interest is cheaper.
Private loans only pay off in special cases, for example if you're over 45 and would have to pass a credit check at KfW that you wouldn't pass. In that case, offers from DKB with a guarantor can be an option.
Always calculate the total costs before signing. Use the KfW online repayment calculator and play through different scenarios. What does the loan cost you at 300 euros per month over two years? What at 600 euros over four years? How does the total change if interest rates rise to 6 percent?
Also ask yourself: how secure is my career entry? A medical degree leads with 95 percent probability to a job with an annual salary of at least 50,000 euros. A humanities degree without a clear career goal has significantly less certain prospects. The less certain your income after your studies, the more careful you should be with debt.
Frequently asked questions about student loans
Can I repay a student loan early? Yes, with KfW you can make extra repayments at any time without an early-repayment penalty. That saves you interest and shortens the term.
What happens if I drop out of my studies? The payout stops immediately. You have to repay the amounts already received plus accrued interest. Repayment begins no later than 23 months after the last payout.
Can I get a student loan for part-time study? The KfW student loan is only available to full-time students. For part-time study you have to turn to private lenders or the education loan, which also supports part-time study.
Do I have to pay tax on a student loan? No, a loan is not income and is therefore tax-free. Even in the repayment phase you cannot deduct the interest from your taxes, since education costs for a first degree are only deductible to a limited extent.
Can I get BAföG and a student loan at the same time? Yes, that is possible. However, the student loan is counted as income and can reduce your BAföG entitlement. Calculate carefully beforehand whether the combination is worthwhile.
Conclusion: a student loan as a last resort, not the first choice
After everything I've observed over the last few years, my advice to you: take out a student loan only if you really have no other realistic option. If your studies are so time-intensive that a part-time job is impossible. If a semester abroad or a final phase requires money at short notice. Or if you have to finance a second degree without BAföG.
In all other cases the long-term costs are too high. 12,000 euros of interest on 30,000 euros of borrowed money means you pay back 40 percent more than you received. Ten years of repayment means that until your mid-30s you hand over several hundred euros every month, while others make a down payment on a house or save for retirement.
If you decide on a loan, choose the KfW student loan at currently 4.36 percent interest. Take only as much as you really need. Plan on a monthly repayment of at least 400 euros to minimize the interest burden. And from day one, work out a plan for how you'll get into repayment quickly after your studies.
By the way, my classmate with the 28,000 euros of debt has started her first job as a resident physician. She now pays back 700 euros a month and will be debt-free in four years. For her, the loan was the right choice, because medicine would not have been possible without it. But she also told me: if I had to decide again, I would have combined the last two semesters with a mini-job to have at least 5,000 euros less debt. I wish you that same honesty in your own decision.