It’s no secret that student loans are confusing. Most students get to college after signing document after document, not really understanding what kind of loan they took out.
Because no one really learns anything about student loans in high school, a whole bunch of myths have popped up about how student loans work.
If you’re lucky enough to be reading this before you take out student loans, take action today to make sure you don’t get in over your head by listening to these myths.
If you’re already in debt, well, most of us are right there with you. Learning about these myths now can help you figure out the best way to move forward.
Myth #1: lenders won’t let me borrow more than I can pay back
As an 18-year-old getting ready to go to college, you’re probably pretty excited. You’ve had the idea of college pushed on you your entire school life. It seems like the smart move to make, but it’s also one of the more expensive moves you’ll 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’d be wrong.
When you’re taking out loans – private student loans, in particular – lenders have one main concept in mind: profit.
If you take out massive amounts of student loan debt but end up with a job that pays as much as you could have gotten without a college degree, you could be in big financial trouble.
For this reason, you need to do some serious investigation and number crunching long before you take out student loan debt.
Read more: How Student Loans Work
Myth #2: you should consolidate federal student loan debt when you graduate
When you graduate from college, you may have several student loans you need to make payments on in the near future. Wouldn’t it be easier to consolidate them into one loan and make a single payment each month?
In theory, this sounds good, and it’s entirely possible to do. But, it may not always be the best decision. Consolidating student loan debt isn’t as simple as it sounds.
The interest rate on your loan is made up of a weighted average of the debt you consolidate. This means you won’t be getting a lower interest rate by consolidating. In fact, you may actually pay more interest if the repayment period of the original loans is extended.
In certain circumstances, you can even lose benefits by consolidating. These could include loan cancellation benefits, principal rebates, or interest rate discounts.
Myth #3: refinancing your student loans is always the smart thing to do
Refinancing student loan debt could save you money on interest payments if you’re able to secure a lower interest rate and a similar repayment term. Refinancing could have many unintended consequences, though.
First, refinancing student loan debt means your new student loans will be private student loans. Private student loans don’t have nearly the same flexible repayment options and other benefits that federal student loan debt offers.
In particular, you can’t use programs like income-based repayment and public service loan forgiveness with private student loan debt (more on that in a minute).
Another consideration is how future law changes may impact your loans. During the COVID-19 pandemic, federal student loan debt repayment was paused and temporarily given a 0% interest rate. Private student loan lenders weren’t required to offer this same program.
If you have federal student loans, seriously consider whether losing the federal student loan debt flexibility options is worth paying less in interest. If you don’t stand to save a significant amount of money, you may be better off keeping your federal student loan debt as is.
Myth # 4: bankruptcy can help most people get out of student loan debt
While it’s easy to get rid of many types of debt in bankruptcy, student loan debt isn’t one of them. In fact, it can be very difficult to get rid of student loan debt in bankruptcy due to the current laws (you can read more in our article: Why Are Student Loans Not Cancelled When You Declare Bankruptcy?).
That said, there is a way you can attempt to get your student loan debt discharged if you have to declare bankruptcy. To do so, you must meet the undue hardship exception. This requires you to meet three main tests.
- First, you must not be able to maintain a minimal standard of living if you’re forced to repay the loan. This doesn’t mean living comfortably. It means living a very basic lifestyle.
- Next, you must prove that you’re facing a hardship that will continue for a significant part of the time you’ll be repaying your loan. A short-term job loss isn’t enough to get your student loan debt discharged.
- Finally, you have to have made good faith efforts to repay your loans prior to filing bankruptcy. You can’t quit making payments for years and hope it gets wiped out.
If you manage to pass these tests, your debt may be fully discharged, partially discharged or you may receive a lower interest rate.
Don’t count on this as your way out of student loan debt, though!
Myth # 5: student loan forgiveness is easy
Getting student loan forgiveness is a possibility in a couple of federal student loan programs, but it isn’t available on private student loans.
The process for getting to the point where you could even have your student loan debt forgiven is a long one. And if you make mistakes along the way, you could jeopardize your effort to receive forgiveness altogether.
In particular, there are two popular forgiveness options available: public service loan forgiveness and income-based repayment forgiveness.
Public service loan forgiveness
Public service loan forgiveness is only available for direct loans and requires you to work for certain types of organizations. After making 120 qualifying monthly payments using a qualifying repayment plan and working full-time for a qualifying employer, you can fill out a form for forgiveness.
These conditions can be burdensome and can be out of your control. If you get let go by your employer and can’t find another qualifying employer, your forgiveness plan may disappear.
Income-based repayment forgiveness
Another option is income-based repayment forgiveness. These plans require you to make 20 to 25 years of payments depending on your circumstances. Once the payments are complete, the remaining loan balance is forgiven if you haven’t paid the debt off with the monthly payments.
As you can see, it’s essential you realize precisely how your forgiveness program works. Make sure you diligently document your actions every step of the way so you can prove you qualify when the time comes to submit your request for forgiveness.
Read more: Income-Based Repayment: Should You Do It?
Student loan myths can set you up for financial misery. Whenever you’re considering taking out student loans or making changes to your student loan debt, make sure you understand how they impact your future.
It can take time to research how the loans work, but it’s worth the effort. This way, you know exactly what you’re getting into and you can make the smartest decisions about your debt.
In some cases, this could mean refinancing or consolidating your student loan debt. In others, it may mean doing nothing. The important thing is making the right decision, even if it is boring and takes time.