Should I Take a Student Loan or Pay Cash Out of Pocket?

By Josefin Gatsby on 02/21/2024.
Reviewed by Michelle Clardie .
It’s no secret that college in the US is expensive. Even after scholarships and financial aid programs, American parents and college students paid an average of $25,313 toward annual college costs, including tuition, fees, and room and board. Whether you’re going to school yourself, or you’re looking at options for your children, you have a difficult financial decision to make: should you take a student loan or pay cash out of pocket?

To answer this question, we’re going to start by assuming that both options are available to you. You have the cash available to pay now, and you can qualify for a student loan if you opt for that route. Given those assumptions, which is the better option: paying out of pocket or taking a student loan?

The Case for Paying Cash for College

Many financial “experts” say you should always pay with cash when possible. They apply this rule to all debts, including credit cards, auto loans, home loans, and yes, student loans. The idea is to keep your debt to the absolute minimum and to work to pay off any necessary loans as quickly as possible so you can live “debt-free.”   

On the surface, this makes sense. Loans charge interest, and interest expenses can add up. 

Let’s say you take out a $100,000 loan with a 6% interest rate to cover tuition plus room and board for a four-year university. With a 10-year repayment plan, you’d be looking at over $33,225 in interest. Yikes!

By paying cash, you eliminate interest charges. But that’s not the whole story. There’s more to the question of student loans vs. paying out of pocket than just saving on interest.

The Case for Taking Student Loans

If you’re paying cash for your own education, or that of your child(ren), you’re going to be investing a large sum of money upfront. Paying out of pocket means sacrificing other financial goals, such as investing. And this is a bigger problem than most students and parents realize.

Take a moment to consider the opportunity cost of paying cash for college. Your money is sent off to the university, and you’re unable to invest it for the future. But what if you took a student loan and invested your cash instead of using it to pay for school out of pocket?

Let’s say you invest the $100,000 you would have spent on education in a passive real estate syndication project (these are projects that pool funds from multiple investors and are professionally managed by a real estate sponsor). 

Real estate syndication can be extremely lucrative. Projects managed by Gatsby Investment, for example, have returned average annualized yields of 23% since 2017! Over the next 10 years, at 23% per year, compounded annually, your $100,000 would turn into $792,595.

This means that even after you pay off the $100,000 student loan plus the $33,225 interest, you would have made $659,370 by investing your money rather than paying cash for college.  

Break the Pattern of Paying Cash and Missing Opportunities

Many Americans never get to the point where they can start investing. They buy a car, buy a home, pay for daycare, and pay for higher education for the kids. People who are constantly paying for things in cash never find the funds to invest. And, once retirement is in sight, they realize they don’t have the money needed to retire.

By making investing a priority, you can break this pattern.

Leverage low interest debts (like home mortgages and student loans) to pay for high-value assets. Then, invest in projects with strong returns, which will fully cover your debts plus interest, and put money back in your pocket! 

Investment opportunities