It’s no secret that student loans are confusing. Most students go to college after signing document after document, not quite knowing what loan they have taken.
Because nobody Indeed learns anything about student loans in high school, a whole bunch of myths have arisen about how student loans work.
If you are fortunate enough to read this before taking out student loans, take action today to make sure you are not fooling yourself by listening to these myths.
If you’re already in debt, well, most of us are here with you. Studying these myths now can help you understand how best to move forward.
Myth # 1: Lenders won’t let me borrow more than I can repay
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An 18-year-old college student is probably very excited. The idea of college has been imposed on you throughout your school life. It seems that clever move to do, but it is also one of the most expensive the moves you make.
With no other experience with debt, it’s easy to assume that lenders won’t let you borrow more money than you could reasonably pay back. You’re wrong…
When you take out loans, particularly private student loans, lenders have one main concept in mind: profit.
If you take on huge amounts of student loan debt but end up with a job that pays what you could get without a college degree, you could be in big financial trouble.
For this reason, you need to do some serious research and figure out the numbers well before you take on your student loan debt.
More details: How student loans work
Myth # 2: you must consolidate federal student loan debt after graduation
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When you graduate from college, you may have several student loans that you need to repay in the near future. Wouldn’t it be easier to combine them into one loan and make a one-off payment every month?
In theory, this sounds good, and it is quite possible. But, this may not always be the best solution. Consolidating student loan debt is not as easy as it sounds.
More details: Student Loan Consolidation and Refinancing Guide
The interest rate on your loan is made up of the weighted average of the debt to be consolidated. This means that you will not get a lower interest rate through consolidation. In fact, you can pay more interest if the maturity of the original loan is extended.
In certain circumstances, you may even lose profit by teaming up. This may include loan cancellation payments, principal discounts, or interest rate discounts.
Myth # 3: Refinancing student loans is always smart.
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Refinancing your student loan debt can save you money on interest payments if you can secure a lower interest rate and a similar maturity. However, refinancing can have many unintended consequences.
First, refinancing student loan debt means that your new student loans will be private student loans. Private student loans do not have nearly the same flexible repayment options and other benefits that a federal student loan offers.
In particular, you cannot use programs such as income-based repayment and forgiveness of public service loans with private student loan debt (more on that in a minute).
Another consideration is how future legislative changes might affect your loans. During the COVID-19 pandemic, repayment of federal student loan debt was suspended and a 0% interest rate was temporarily granted. Private student loan lenders were not it is required to offer the same program.
If you have federal student loans, seriously consider whether the loss of flexibility on federal student loans is worth paying less interest. If you are not going to save a significant amount of money, you may be better off leaving your federal student loan debt as it is.
More details: Reduce Student Loan Debt: A Guide to Forgiveness, Dismissal and Refinancing Programs
Myth # 4: bankruptcy can help most people get out of student loan debt.
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While many types of debt are easy to get rid of in bankruptcy, student loan debt not one of them. In fact, getting rid of student loan debt in bankruptcy can be very difficult due to current laws (you can read more in our article: Why are student loans not canceled upon filing for bankruptcy?).
However, there is a way to pay off your student loan debt if you have to file for bankruptcy. To do this, you must meet the unreasonable hardship exception. To do this, you need to pass three basic tests.
- First, you don’t have to maintain a minimum standard of living if you have to repay the loan. This does not mean living comfortably. This means living a very simple life.
- Next, you must prove that you are in trouble this will continue for a significant portion of the time during which you will repay the loan. A short-term job loss is not enough to pay off student loan debt.
- Finally, you must make a good faith effort to pay off your loans before filing for bankruptcy. You can’t stop paying for years and hope it goes away.
If you succeed in passing these tests, your debt may be fully repaid, partially repaid, or you may receive a lower interest rate.
However, don’t count on it as getting out of your student loan debt!
Myth 5: student loan forgiveness is easy
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Getting student loan forgiveness is possible in several federal student loan programs, but it is not available for private student loans.
The process to the point where you can even get your student loan debt forgiven is long. And if you make mistakes along the way, you can completely compromise your efforts to get forgiveness.
In particular, two popular options for forgiveness are available: government loan forgiveness and income-based repayment forgiveness…
Utility Loan Forgiveness
Government service loan forgiveness is only available for direct loans and requires you to work for certain types of organizations. Once you have made 120 qualifying monthly payments using the applicable repayment plan and working full-time for a suitable employer, you can complete the forgiveness form.
These conditions can be onerous and out of your control. If your employer fired you and you can’t find another suitable employer, your forgiveness plan may disappear.
Forgiveness Payments Based on Income
Another option is to forgive income-based payments. These plans require you to make payments between 20 and 25 years depending on your circumstances. After completing payments, the loan balance is forgiven if you have not repaid the debt in monthly installments.
As you can see, it is important to understand exactly how your forgiveness program works. Make sure you diligently document your actions every step of the way so that you can prove you qualify when the time comes to petition for forgiveness.
More details: Income Based Payout: Is It Worth It?
Summary
Student loan myths can lead you to financial misery. Whenever you are thinking about getting a student loan or making changes to your student loan debt, make sure you understand how this will affect your future.
It can take time to learn how loans work, but it’s worth it. That way, you know exactly what you’re getting into and can make the smartest decisions about your debt.
In some cases, this can mean refinancing or consolidating student loan debt. In other cases, this may mean inaction. The main thing is to make the right decision, even if it gets boring and takes time.