Misinformation can be dangerous, especially when it comes to paying off student loan debt. To help you weed out the bad advice from the good, here are five common student loan myths to watch out for.
By recognizing these misconceptions, you’ll be able to avoid making mistakes with your loans and manage your finances the right way.
6 student loan myths that mislead borrowers
1. You should borrow as much as you can
2. You don’t need to worry about paying student loans in school
3. Income-driven repayment plans will lower your student loan costs
4. Refinancing your student loans is always a good idea
5. You need to pay for student loan counseling
6. You’ll never pay off your student debt
A big mistake a lot of borrowers make is blindly taking out student loans without considering the impact this debt will have on their future finances or career choices. Even if you can take out a lot of student loans, that doesn’t mean you should.
When you receive your financial aid award letter, for instance, you’ll see how much you’re eligible to borrow in federal student loans. But you’re not obligated to accept the full amount, especially if you can lower costs by applying for scholarships or choosing a school with a lower price tag.
What’s more, most private lenders will let you borrow up to the cost of attendance of your school, minus any other financial aid already received. But again, you shouldn’t necessarily borrow the maximum amount if it’s going to be burdensome in the future.
Before signing any paperwork, use student loan calculators to estimate your future monthly payments, as well as the amount you’ll spend on interest. And consider what job you’ll pursue after graduation that will enable you to make payments on your debt.
If the payments seem extremely high, consider ways to reduce your student loan borrowing. And if you find you borrowed more than you need for the semester, consider returning the unused loan money so you don’t have to pay interest on it in the future.
This isn’t technically a student loan myth, since you don’t need to make payments on your student loans while you’re enrolled in school or for six months after you graduate. This period of deferred payments is called a grace period.
But even though payments aren’t required, it’s smart to consider making in-school payments. You don’t necessarily need to pay your full student loan bills, but you could make small payments of $25 per month or interest-only payments as a student.
This way, you’ll cut down on accrued interest, making your student loan balance more manageable after you graduate. If you can afford in-school payments, perhaps by working a part-time job, you’ll make student loan repayment easier in the years to come.
Income-driven repayment plans, such as income-based repayment and Pay As You Earn, adjust your monthly payments based on your income while extending your loan terms to 20 or 25 years. They can be a big help if you’re struggling to keep up with payments and need to lower them so you don’t fall behind.
But while income-driven repayment plans typically make your loans more affordable from month to month, they actually increase your costs of borrowing over the long run. That’s because they extend your loan terms to 20 or 25 years.
Since you’re in debt longer, your loans have a lot more time for interest to accrue. Let’s say, for instance, you’re paying off a $30,000 loan at a 5.05% interest rate. Over 10 years, you’d pay $8,272 in interest. But over 20 years, your interest costs would be $17,716. And after 25 years, you’d pay $22,876 in total interest.
Even though income-driven repayment plans give you some breathing room here and now, they can make your loan more expensive overall. That said, you will get your loans forgiven if you have a remaining balance at the end of your 20- or 25-year term.
Another one of the student loan myths to be aware of is the idea that refinancing student loans is a good idea in every situation. Student loan refinancing can be a great way to negotiate a lower interest rate, change your payment schedule or make your loans easier to manage.
But while refinancing private student loans is usually beneficial, you’ll want to be careful about refinancing federal student loans. When federal student loans go through the refinancing process, they’re converted into private student loans and are no longer eligible for federal repayment plans, such as income-driven repayment, or programs, such as Public Service Loan Forgiveness.
If you’re relying on federal protections now or think you’ll need them in the future, it’s probably not a good idea to refinance your federal student loans with a private lender. Think through the pros and cons of refinancing to make the best decision for your student debt.
Another student loan myth is the idea that you need to pay a counselor to get your student loans under control. While there are some reputable student loan counseling services that cost money, you can figure out how to manage your student loans on your own for free.
For example, you don’t need to pay anyone to consolidate your loans or apply for an income-driven repayment plan. And you should never pay a fee in exchange for loan forgiveness, as legitimate student loan forgiveness programs are free.
If you’re feeling totally overwhelmed by your debt, a counselor may be able to help you get it under control. But they don’t know any secret information you can’t find on your own, so make sure it’s truly useful before paying anyone for advice on your student loans.
Student loans can be extremely stressful, and it might feel like you’ll never pay off your debt. But don’t despair.
That mountain of debt you have after graduating college might seem insurmountable, but you have options. Some of these options include income-driven plans, refinancing and direct loan consolidation.
Some borrowers also find ways to decrease their spending or increase their income to pay off debt ahead of schedule. For example, this couple in their early 30s paid off over $80,000 in student loans by teaming up together and working hard at it for three years. And this nurse practitioner was able to clear $70,000 worth of school debt in a single year.
Although you might need to make some sacrifices now, your hard work could be worth it when you make that final student loan payment.
One of the best ways to bust student loan myths is to inform yourself with reliable information. Make sure to rely on trusted resources, such as StudentAid.gov or Student Loan Hero.
If you’re applying to refinance student debt, stick with legitimate lenders that have a good reputation for customer service. If you’re still in school, reach out to your financial aid office to connect with trained experts.
In this age of technology, there are a lot of accessible tools to manage your student loan debt. So don’t fall prey to these common student loan myths. Instead, kick them to the curb and take control of your student loan situation by utilizing the best advice available to you.
Rebecca Safier contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.99% – 5.64%1||Undergrad & Graduate|
|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.28%3||Undergrad & Graduate|
|1.89% – 6.77%4||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|1.99% – 5.41%5||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews! |
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.