Students and parents beware. What you hear about student loans - from friends, family, or even the media - isn't always true. We have outlined some common student loan myths and the truth behind them.
Myth #1: It doesn't matter how much I borrow - my loans will be forgiven.
According to a survey by LendEDU, more than half of student loan borrowers in the class of 2017 believed that their student loans would be forgiven. But as LendEDU notes, "There simply aren't enough public service and non-profit jobs that would qualify for forgiveness as compared to the jobs that don't qualify" for this to be true.
"What's concerning about this apparent lack of understanding of student loan forgiveness is that borrowers may slack off on making payments or actively trying to pay down their debt if they think it will eventually just be wiped away. This can lead to a higher total loan cost, or even worse, default." according to LendEDU.
Our take? Always be a responsible borrower. Enroll in an income-driven repayment program if it helps to make ends meet or if you are working for a non-profit organization, but don't count on loan forgiveness until you have done your research and submitted an application and are certain you meet the qualifications.
Myth #2: Interest doesn't accrue while I'm in school. The amount I borrowed will be my starting balance at graduation.
Student Loan Hero reports that 52% of surveyed student loan borrowers think that you don't need to worry about accruing interest on unsubsidized student loans while still in school. While interest doesn't accrue on subsidized Direct Student Loans, interest does accrue on unsubsidized loans and pretty much all-non-federal student loans. Federal subsidized loans are awarded based on financial need so not all student are eligible. They also have annual caps which means a lot of students have unsubsidized federal and non-federal loans too, all of which accrue interest.
So how much interest accrues? That depends on your loan type and interest rate. For example, if you have a $15,000 loan at an interest rate of 5%, you will accrue about $750 for each year you are in school while you aren't making payments. If your loan is deferred for 3 years, that means by the time you enter repayment, you will have accrued $2,250 in interest which will be added to your principal balance. You will then have a starting repayment balance of $17,250 on which interest will accrue and your monthly payments will be calculated on.
This is why it is always wise to use summer and part-time job earnings to at least pay the interest accrual on your loan each month while you are in school. On the example above, that would amount to about $63 a month.
Myth #3: The more money I have, the less likely I am to qualify for a private loan.
All too often, loan applicants try to hide how much money they earn or have in their bank accounts. They reason that if they have money, the lender will think they don't need the loan and deny their application. On the contrary, families should always be upfront about their income and savings.
Most lenders are asking for this information to ensure that you have the means to pay back the loan, not that you actually need it. They will also often look at your debt-to-income ratio and/or free cash flow. If you down-play your income, you may look like you are too strapped for cash to handle an additional loan payment and you may be denied or you may appear less credit-worthy and potentially pay a higher interest rate on your loan.
Bottom line, always be honest about your earnings when applying for a student or parent education loan.
Myth #4: You don't need to pay your loans during school.
It is true that you don't need to make payments on Federal Direct Subsidized and Unsubsidized student loans while you are enrolled. Many state-based and private student loan lenders also offer in school deferment. However, there may be a limit on the amount of time you can defer your non-federal loans while you are in school so pay close attention to the fine print.
Many lenders also offer student loans that go into repayment immediately. These loans typically have lower interest rates than deferred loans, but you must be prepared with a plan to make payments while in school. Earnings from a part time job might be just want you need. Paying now - rather than later - is always a good option for your wallet (see Myth #2, above). If you don't have the money to pay now, be careful to only apply for options labeled as "deferred."
Myth #5: Income-driven repayment is always the best plan.
Income-driven repayment is a great way to to help you meet your monthly payment obligations while minimizing financial distress and may be necessary if you are working in the public sector and/or wish to qualify for loan forgiveness. The catch is that income-driven repayment often also has the effect of prolonging your repayment term, which in turn means you accrue interest for a longer period of time, potentially making your loan more expensive. Unless you need it or are certain you will qualify for forgiveness (see Myth #1, above), opt to stay on a standard repayment term. A little short term pain is worth the long term gain.
Myth #6: Lenders are just loan sharks and don't have anything but profit in mind.
We will be the first to admit it, there are bad eggs in almost every industry and there are certainly student loan lenders out there who have profit as their first priority. But there is also a network of non-profit student loan providers nationwide (like RISLA) that tend to offer competitive interest rates, lots of repayment flexibility, and have your best interests in mind when developing programs and services.
Student loan providers, particularly the federal government or state-based non-profit organizations, actually offer a tremendous amount of repayment flexibility in comparison to what you will have access to with most debts.
Non-profit student loan providers aren't trying to trap you for life. They are taking a bet on you, helping you improve your ability to access the higher education you want, and often have a mission to help you transition from college to adulthood successfully.
If you have trouble paying your student debt, give your lender a call. It isn't likely that your debt will be wiped away like it never happened, but you will typically have many more options as to how you handle your repayment obligations than you would on an auto loan, credit card debt, or a mortgage.
Remember, borrowing is a choice, and a decision you should make responsibly with the understanding that will have to make payments, with interest, until you have paid back your loan. When it comes time to repay your student debt, remind yourself how lucky you are to have some flexibility with your student loan, because it is likely the only debt you'll ever have that offers any.
Myth #7: I'll never pay off my loans.
Slow and steady wins the races. As you review your bills in the early days, and only see a small portion of your payments being applied to your principal balance, you may get (very) discouraged. But for each payment you make, a little bit more will go towards principal. You'll be surprised how quickly time passes after college once you enter the working world. Keep your eyes on the prize and pay as much as possible towards your debt each month and you will be student debt-free before you know it. Remember, you may have to make some sacrifices along the way to become debt-free sooner, but you will thank yourself once you are.
Myth #8: I'll get rid of my student loans by filing for bankruptcy.
Student loans are not dischargeable through bankruptcy except for extremely rare cases. Don't over-borrow with the assumption you can file for bankruptcy if you can't afford your payments. Once your proceedings are done, your payments will resume and you'll still have to pay off your balance with interest. Make the responsible choice and don't over-borrow.
Myth #9: Consolidation and refinancing are the same thing.
Consolidation is the act of combining several loans into a single loan and most often refers to the Federal Direct Consolidation Loan Program, although you will find some private lenders referring to their refinancing program as a "consolidation" loan.
With federal loan consolidation, you keep any existing benefits on your outstanding federal student loans, gain access to some income-driven repayment options you may not have access to if you have a federal education loan made under the Federal Family Education Loan Program (FFELP), and often extend your repayment term in the process.
Consolidating your loans with the federal government does not reduce your interest rate but will fix the rate on any variable rate loans you may have (few people do these days since it has been years since they were offered). Consolidation simplifies your life, but since it is increasing the length of time you pay, it may increase the total amount of finance charges you pay over the life of the loan. You cannot consolidate private student loans under the Federal Direct Consolidation Loan Program.
Refinancing, on the other hand, is taking on a new loan through a private or state-based lender that is used to pay off the balances of your existing student loan debt, either federal or non-federal (private). There are a range of refinancing loan terms available - typically between 5 and 20 years. A shorter term usually has two benefits: 1) a lower interest rate, and 2) you will be done paying off your loan sooner. But it isn't affordable for everyone since it often results in a higher monthly payment amount.
Refinance loans also have a whole new set of interest rates and benefits. You may be able to reduce your interest rate by refinancing, but make sure you understand the benefits you are giving up on your existing loans. For example, once you refinance, you will not be able to apply for federal Public Service Loan Forgiveness, take advantage of extended federal student loan deferment and forbearance options, or apply for a federal income-driven repayment plan. If you don't think you'll use or need these benefits, than it might be worth it to refinance to realize big savings. But if you do think the benefits will be useful to you, it may be best to leave your federal student loans as they are (or consolidate them through the federal program) and only refinance any private student loans you have in your name.
Myth #10: If I can't pay, avoidance is the best answer.
Your lender wants to work with you, really. It is in no one's best interest to send you to a collections agency or take you to court. If you can't pay, you need to call your servicer - bottom line. Explain your situation and see what they have to offer you. But also keep in mind that you need to take responsibility for your loan and you may have to make some sacrifices on your end to pay back your debt as agreed.
We wish this were the short list, but truth is, there are so many more student loan myths out there. The key to making wise decisions is to do your research, stay informed, remember to be inquisitive about what you read and hear, and to use your resources.
Now that you know some of the big truths about student loans, think you need one for school? RISLA's low fixed rate options can help. Explore them here.