Student Loan Misconceptions Can Be Very Expensive, New Survey Shows

 November 20, 2019
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Student Loan Misconceptions

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Did you know that you could decline a student loan offered on a financial aid award letter? If you did, that’s great — since, unfortunately, almost 1 out of 2 college students are unaware of this fact.

On top of that, about 1 in 4 students wrongly believe they must borrow the same amount each year of school, meaning that some could be taking on more education debt than is necessary.

Such were the findings for this year’s follow-up to our 2018 survey of borrowers. Based on feedback from more than 600 current, full-time college students who have borrowed, we discovered other troubling gaps of knowledge around receiving and repaying student loans — as well the likelihood of one day receiving loan forgiveness.

Check out the full results below and see how your own understanding of student loans stacks up.

Key findings

  • Almost 46% of students surveyed incorrectly believed that if you qualify for a federal student loan, you must borrow the full dollar amount you’re offered.
  • Only 12% of students reported being “very confident” in their knowledge of education loans and how they work. In fact, nearly 1 in 5 are “not at all confident.”
  • Students surveyed may be overly optimistic about their chances of receiving debt relief in the future: About 18% are “very confident” their loans will one day be forgiven, either through legislation or via the Public Service Loan Forgiveness (PSLF) program. Another 47% are “somewhat confident” about their chances of forgiveness. This despite the fact that, as of the end of 2018, less than 1% of applicants had been awarded PSLF.
  • About half of student borrowers don’t know the interest rates for their loans, and more than 1 in 10 have no idea what types of student loans they have.

College borrowers have dangerous misconceptions about loan repayment

Despite required entrance counseling for federal loans, students’ general knowledge of loan repayment appears to come up short. Here are some common misunderstandings of the process we uncovered in the survey:

Percent of respondents Misconception Truth
46% You don’t need to worry about accruing interest on unsubsidized loans while you’re still in school. Interest doesn’t accrue on Direct subsidized loans while you’re enrolled, but it does for Direct unsubsidized loans. As a result, it’s worth considering small, in-school payments for these loans.
42% Putting student loans in forbearance means they stop accruing interest for a set amount of time. Interest accrues on all federal student loans while in forbearance.
52% By default, monthly student loan payments are determined by income. The default repayment plan for all federal student loans is a 10-year “standard” plan, which doesn’t factor in income. To tie your monthly payment amount to your earnings, you would need to enroll in income-driven repayment.
66% In the event of economic hardship, you can defer student loans until you’re able to resume repayment. While you’re able to defer student loans if you meet certain criteria, it will only be available for up to three years.

An incorrect belief can be more dangerous than a lack of knowledge. If a student thinks that electing forbearance would stop interest from accruing, for example, they might be more likely to apply for the repayment postponement in situations where it’s not completely necessary.

However, students at least seem to be self-aware, reporting low levels of confidence around student loans. As noted above, only 12% of our respondents said they were “very confident” in their understanding of education debt and how it works, while about 18% were “not at all confident.”

Lack of planning leads to lack of student loan knowledge

Among those students who are mystified by the borrowing process, a lack of participation may be at least partly to blame. Nearly 3 in 10 our student borrower respondents said they didn’t research loan options before taking on their debt, and 24% of borrowers spent less than 10 minutes reviewing their loan details and lender policies before accepting the debt.

That helps to explain why about 49% of student borrowers don’t know the interest rate for their loan, and more than 10% don’t know which kind of loan they borrowed. These are important facts for borrowers to be aware of because they affect the cost (interest rate) and options (loan type) of their repayment.

Even after borrowing student loans, 41% of respondents reported being confused about how to qualify for additional federal aid.

In truth, credit history is only a factor when applying for Parent PLUS Loans and private student loans — and while students must make progress toward their degree to qualify for aid, their grades don’t determine eligibility.

Less than 60% of the students we surveyed knew that the Free Application For Student Aid determines their status.

Students’ financial aid confusion was particularly evident in terms of understanding their annual aid packages. About 46% thought they’re required to accept the full loan amount offered by their school’s financial aid office. Another 25% believed they had no choice but to borrow the same amount annually throughout their college tenure. Neither is true.

Students overestimate chances at receiving loan forgiveness

Many college students appear unreasonably confident about their federal loan forgiveness prospects. About 65% of survey respondents were either “very” or “somewhat” sure that their loans will one day be forgiven, either through legislation or through PSLF.

Unfortunately, this doesn’t line up with the facts. In actuality, less than 1% of PSLF applicants had received relief from the Department of Education as of the end of last year, with no improvement in approval rates seen in updated data released this past June.

Slightly more than 80% of our student borrowers, however, believed PSLF applications were being approved at a much higher clip. In fact, 40% of our respondents thought the success rate was 10%, and almost 23% believed “about 14%” of applicants are approved.

Unfortunately, there’s also a mixup around eligibility for loan forgiveness. About 64% of respondents think all public service workers are eligible for relief, including those with private loans. Inn truth, PSLF only helps federal loan borrowers who work for an eligible public or nonprofit employer.

Take advantage of financial aid education resources

Learning about student loans might feel like chasing a moving target. News reports are full of changes to loan forgiveness, lawmakers and candidates’ proposals for financial aid reforms, court challenges to existing rules and more.

If you’re a current (or future) student, however, the burden is on you to understand what you owe and how to repay it or receive forgiveness. Take charge of your college financing by taking advantage of the free resources available to you. Useful moves include…

The more student loan knowledge you have, the faster you can rid yourself of college debt — or avoid it altogether.

Published in News & Policy