Survey: Majority of Student Loan Borrowers Don’t Know How Interest or Forgiveness Works

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As of 2018, the national student debt crisis has reached epic proportions; an estimated 44 million borrowers owe a collective $1.48 trillion in student loans.

But our latest survey of borrowers found misconceptions about student loans abound. More than one-half of our survey respondents, for instance, didn’t realize interest accrues on their federal unsubsidized loans while they’re in school.

And nearly 1 out of 10 borrowers are under the false impression that you don’t need to repay your loans if you can’t find a job after college.

These misunderstandings could delay your journey toward a debt-free life or even cause you to go into student loan default. Here are the biggest student loan myths our survey uncovered, followed by some tips on how to educate yourself about your student loans.

52% of borrowers think interest doesn’t accrue while they’re in school

One of the biggest factors that make student loans so hard to pay off is interest. Unless you have federal subsidized loans, your loans will accrue interest from the date they’re disbursed.

Unfortunately, 52% of student loan borrowers think you don’t need to worry about accruing interest on unsubsidized loans while you’re still in school.

“People assume that their balance won’t go up,” said Leslie Tayne, attorney and founder of Tayne Law Group, which specializes in consumer and business debt. “They don’t realize how fast interest adds up and that they could’ve been paying it while in school to offset it.”

Let’s say you borrow $9,500 in Direct Unsubsidized Loans at a 4.45% fixed interest rate for your first year of college.

If you don’t realize interest accrues, you might think you’ll owe that principal amount of $9,500 upon graduation. But over four years, your debt will have actually grown to $10,388 thanks to interest. If you take out additional loans throughout the years, you’ll owe a whole lot more after you earn your degree.

It’s important to understand how student loan interest works so you can prepare for repayment after college. As Tayne suggested, you might also start paying the interest while you’re in school to prevent your debt from growing unchecked.

Borrowers are confused about student loan interest in general

This survey revealed two other major misconceptions about how student loan interest works:

  • 47% of student loan borrowers think that if you put your federal loans into forbearance, they’ll stop accruing interest for a set amount of time.
  • 38% of student loan borrowers didn’t know that the interest rate on federal student loans is fixed.

Student loan forbearance lets you pause payments on your federal student loans if you run into economic hardship. But it doesn’t stop student loan interest from accruing.

Note that student loan deferment, unlike forbearance, usually stops interest from growing on subsidized federal loans. If you qualify, deferring your subsidized loans can offer better relief than forbearance.

Some private lenders, such as CommonBond, also offer deferment or forbearance for private student loans. But even if you pause payments, your balance will continue to grow due to accruing interest.

Federal loan interest rates, meanwhile, are fixed for both undergraduate and graduate students. Direct Loans have a fixed rate of 4.45% for undergrads and 6.00% for grad students. Even if the rates change for future borrowers, the rate you got when you took out the loan will be locked in.

Private student loans, on the other hand, typically let you choose between fixed and variable rates. Fixed rates stay the same over the life of the loan. Variable rates can fluctuate over time.

Whether you’re taking out student loans, preparing for repayment, or considering forbearance, it’s crucial to understand how student loan interest works so you can make the best choices for your finances.

53% of borrowers think student loan payments are automatically based on their income

Federal student loans are put on the Standard Repayment Plan, which offers fixed payments over a 10-year term. But 53% of student loan borrowers think that payments on the Standard Repayment Plan are based on how much you make.

This student loan myth is a dangerous one for borrowers. Knowing how much you’ll owe each month after graduation is an important way to plan ahead and stay current on your debt.

This myth could also be problematic for the 12% of borrowers who don’t realize the government can garnish your wages if you go into student loan default.

“People often think that they don’t have to pay student loans back,” said Tayne. “Failing to understand what it means to become delinquent on your student loan can hurt you financially. From possible wage garnishment to a negatively impacted credit score, struggling to pay your student loans can have major consequences.”

That being said, it’s possible to put your federal student loans on an income-driven repayment (IDR) plan. But you’ll have to apply separately for one. IDR plans include:

  • Income-Based Repayment
  • Income-Contingent Repayment
  • Pay As You Earn
  • Revised Pay As You Earn

These federal student loan repayment plans cap your monthly payments at a percentage of your income. Plus, they offer student loan forgiveness after 20 or 25 years of on-time repayment.

Borrowers can also look into the following student loan repayment plans if they need to adjust monthly dues:

  • Extended Repayment Plan: It lowers monthly payments by extending your term up to 25 years.
  • Graduated Repayment Plan: This plan offers smaller initial payments that increase over the course of 10 years.

Note that private student loans typically don’t come with all these student loan repayment options. You can usually choose student loan repayment terms between five and 15 years, but you likely won’t have access to IDR.

You’ll also lose access to IDR plans if you turn your federal student loans into a private one through student loan refinancing. You might snag a lower interest rate, but you’ll no longer have these repayment options to fall back on.

According to our survey, 40% of student loan borrowers didn’t know that you lose access to federal student loan repayment options when you refinance your debt with a private lender.

However, refinancing does give you the option to lower your payments. By choosing a longer payoff term, you’ll reduce your monthly dues. While this approach can help you gain control of your bills, it also means you’ll spend more on the loan over the long run.

For instance, let’s consider a loan of $30,000 with a 6.00% interest rate on a five-year, 10-year, and 15-year payment plan. As you can see, the longer plans give you smaller monthly payments but at greater long-term costs.

Repayment term Monthly payment Total interest Total cost of borrowing
5 years $580 $4,799 $34,799
10 years $333 $9,967 $39,967
15 years $253 $15,568 $45,568

If you’re refinancing one or more student loans for new terms, use a student loan calculator to compare your options. That way, you can strike the right balance between making your monthly payments more affordable and curbing the long-term costs of borrowing.

More than 7 out of 10 borrowers are misinformed about student loan forgiveness

Our survey also revealed that a disturbing amount of student loan borrowers (71%) believe that private student loans can be eligible for Public Service Loan Forgiveness (PSLF).

“A big misconception is people believe there’s a forgiveness program that they’ll qualify for,” said Tayne. She added that many people misunderstand the qualifications for student loan forgiveness. In truth, few borrowers ever qualify for it.

You can only earn forgiveness for federal student loans after working at an eligible nonprofit or other organization for 10 years. Borrowers that don’t understand these conditions could commit to a career that ultimately doesn’t help them pay off their private student loans fasters.

Since careers in public service don’t always pay well, you’re likely limiting your earning potential over time. Make sure you understand the terms of PSLF before making any big career moves for it.

And if you do have private student loans, consider other options for loan assistance. There are a number of student loan repayment assistance programs throughout the country that can help you pay off private student loans after a few years of qualifying work.

One-third of students aren’t sure how credit scores and cosigners come into play

Not only are borrowers confused about repayment, but they’re also unsure how the borrowing process works.

  • 34% of student loan borrowers think your credit score is the deciding factor when it comes to getting an undergraduate federal student loan.
  • 34% of student loan borrowers don’t know that most students will need a cosigner to get a private student loan.

In reality, qualifying for a federal student loan has nothing to do with your credit score. To be eligible for need-based or non-need-based loans, all you have to do is submit the Free Application for Federal Student Aid. The only exceptions to this rule are Grad PLUS and Parent PLUS Loans. These federal loans aren’t available to borrowers with an adverse credit history.

Private lenders, on the other hand, do consider your credit history before approving you for a loan. That’s why it’s no surprise that 94% of private student loans issued for the 2015-2016 school year had a cosigner, according to data firm MeasureOne.

However, both federal and private loans can drag down your credit if you miss payments or go into default.

Fortunately, most student loan borrowers (89%) understand that student loans can affect your credit score. The 11% of borrowers who don’t understand the credit impact of student loans should learn how debt repayment will affect their ability to take out other loans in the future.

Majority of borrowers only ‘somewhat confident’ about how student loans work

One of the biggest regrets among student loan borrowers is that they didn’t realize what they were getting into when they took out loans. It’s all too easy to take out student loans without having a clear understanding of how you’ll pay them back.

That uncertainty about your debt can follow you for years. This survey found that 9% of people with student loans are “not at all confident” in their knowledge of how student loans work. And 53% said they were only “somewhat confident.”

Whether you’re a new borrower or already dealing with a high balance, it’s crucial to educate yourself about student loans. Call your loan provider with any questions. Compare different student loan repayment plans to figure out which one is best for you.

You can also use student loan calculators to see exactly how interest adds up. If you’ve got a steady income and strong credit, you could also consider refinancing for lower rates or a shorter repayment term.

“The world of student loans can be murky and frustrating,” said Tayne. “The less you understand, the more likely you are to struggle paying them off. By making sense of your student loans, you can better manage your payments and maybe even pay them off sooner!”

Whatever approach you take, make sure you’ve done your research. By arming yourself with knowledge, you can win the fight against student debt.

Survey Methodology: This survey was conducted via SurveyMonkey from Jan. 25-26, 2018, with a nationally representative sample of 1,019 adults living in the United States. “Do you have student loans?” was used as a screening question, with a target answer of “yes.”

Need a student loan?

Here are our top student loan lenders of 2021!
LenderVariable APREligibility 
1.04% – 11.98%1Undergraduate, Graduate, and Parents

Visit College Ave

1.13% – 11.23%*,2Undergraduate, Graduate, and Parents

Visit SallieMae

3.80% – 9.36%3Undergraduate and Graduate

Visit CommonBond

2.20% – 6.17%4Undergraduate and Graduate

Visit EdvestinU

1.05% – 11.44%5Undergraduate and Graduate

Visit Earnest

1.82% – 11.32%6Undergraduate

Visit Ascent

N/A7Undergraduate and Graduate

Visit FundingU

1.12% – 11.23%8Undergraduate and Graduate

Visit SoFi

1.15% – 11.01%9Undergraduate and Graduate

VISIT CITIZENS

* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.

1 Important Disclosures for College Ave.

CollegeAve Disclosures

College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

Rates shown are for the College Ave Undergraduate Loan product and include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
 
This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. This informational repayment example uses typical loan terms for a first year graduate student borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7.10% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $141.66 while in the repayment period, for a total amount of payments of $16,699.21. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 7/22/2021. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.


2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

3 Important Disclosures for CommonBond.

CommonBond Disclosures

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.  If you choose to complete an application, we will conduct a hard credit pull, which may affect your credit score. 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 0.15% effective Jan 1, 2021 and may increase after consummation.


4 Important Disclosures for EdvestinU.

EdvestinU Disclosures

EDvestinU is a product of the nonprofit New Hampshire Higher Education Loan Corporation (dba The NHHEAF Network) NMLS ID#1527348.

APR range and repayment rates displayed assume a $10,000 loan disbursed in two equal disbursements. APR low assumes immediate repayment and 7 year repayment. APR high assumes deferred repayment and 15 year repayment. APR’s presented include a .50% interest rate reduction for electing to have payments automatically deducted from a bank account. The interest rate reduction for authorizing our servicer to automatically deduct monthly payments from a savings or checking account will not reduce the monthly payment, but will reduce the monthly finance charge, resulting in a lower total cost of loan. All examples are provided for educational purposes and actual terms may vary based on credit history, loan amount, applicable repayment term, and chosen repayment plan and method. Please note that the interest rate on variable rate programs may increase or decrease over time. The variable rate example assumes the same standard rate for the life of the loan. The NHHEAF Network reserves the right to modify or cancel its program at any time.  

Eligibility: Dependent and independent U.S. citizen students. Currently residents of Washington and California are not eligible for EDvestinU programs.
Students must be enrolled at least half-time at a U.S.-based Title IV, degree-granting college or university.
The borrower or cosigner (if applicable) must have a minimum adjusted gross income of $30,000.

Loan Limits: Minimum loan amount of $1,000.
Maximum loan amount is cost of education less aid received.

Repayment: Standard or graduated repayment options available during repayment; 7, 10, or 15 year term selected by the borrower.
6-month grace period available to borrowers electing a full in-school deferment. 
No prepayment penalty.
Payments may be postponed during repayment by qualifying for an economic hardship deferment.

Cosigner Release: Cosigner release allowed if an account is in current standing, after 36 months of consecutive & on-time payments with a borrower FICO >749 for EDvestinU Private Student Loans and minimum income requirement of $30,000 with no foreclosures, repossessions, wage garnishments, unpaid tax liens, unpaid judgments or other public records having an open balance exceeding $100 during the last 7 years. The borrower must not currently be involved in bankruptcy proceeding or had any bankruptcy filings during the past 10 years and cannot have any defaults on education loans.


5 Important Disclosures for Earnest.

Earnest Disclosures

  1. Rates include 0.25% Auto Pay Discount
     
  2. Explanation of Rates “With Autopay” (APD)
    Rates shown include 0.25% APR discount when client agrees to make monthly principal and interest payments by automatic electronic payment. Use of autopay is not required to receive an Earnest loan.

    Available Terms
    For Cosigned loans – 5, 7, 10, 12, 15 years. 
    Primary Only – 10, 12, 15 years

    In school deferred payment is not available in AL, AZ, CA, FL, MA, MD, MI, ND, NY, PA, and WA).


6 Important Disclosures for Ascent Student Loans.

Ascent Student Loans Disclosures

Ascent loans are funded by Bank of Lake Mills, Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: >AscentFunding.com/Ts&Cs;.

Rates are effective as of 07/01/2021 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes income-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: >AscentFunding.com/Rates.

1% Cash Back Graduation Reward subject to terms and conditions, please visit AscentFunding.com/Cashback. Cosigned Credit-Based Loan student borrowers must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest APRs are available for the most creditworthy applicants and may require a cosigner.


7 Important Disclosures for Funding U.

FundingU Disclosures

Offered terms are subject to change. Loans are made by Funding University which is a for-profit enterprise. Funding University is not affiliated with the school you are attending or any other learning institution. None of the information contained in Funding University’s website constitutes a recommendation, solicitation or offer by Funding University or its affiliates to buy or sell any securities or other financial instruments or other assets or provide any investment advice or service.


8 Important Disclosures for SoFi.

sofiDisclosures

UNDERGRADUATE LOANS: Fixed rates from 4.13% to 10.66% annual percentage rate (“APR”) (with autopay), variable rates from 1.12% to 11.23% APR (with autopay). GRADUATE LOANS: Fixed rates from 4.13% to 10.90% APR (with autopay), variable rates from 1.10% to 11.34% APR (with autopay). MBA AND LAW SCHOOL LOANS: Fixed rates from 4.08% to 10.86% APR (with autopay), variable rates from 1.05% to 11.29% APR (with autopay). PARENT LOANS: Fixed rates from 4.23% to 10.66% APR (with autopay), variable rates from 1.20% to 11.23% APR (with autopay). For variable rate loans, the variable interest rate is derived from the one-month LIBOR rate plus a margin and your APR may increase after origination if the LIBOR increases. Changes in the one-month LIBOR rate may cause your monthly payment to increase or decrease. Interest rates for variable rate loans are capped at 13.95%, unless required to be lower to comply with applicable law. Lowest rates are reserved for the most creditworthy borrowers. If approved for a loan, the interest rate offered will depend on your creditworthiness, the repayment option you select, the term and amount of the loan and other factors, and will be within the ranges of rates listed above. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Information current as of 4/1/2021. Enrolling in autopay is not required to receive a loan from SoFi. SoFi Lending Corp., licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. NMLS #1121636 (>www.nmlsconsumeraccess.org).


9 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

Undergraduate Rate Disclosure: Variable interest rates range from 1.15% – 11.01% (1.15% – 10.24 APR)Fixed interest rates range from 4.18% – 11.70% (4.18% – 10.83% APR).

Graduate Rate Disclosure: Variable interest rates range from 1.89% – 10.66% (1.89% – 10.41% APR). Fixed interest rates range from 4.64% – 11.23%% (4.64% – 10.95% APR).

Business/Law Rate Disclosure: Variable interest rates range from 1.89% – 9.22% (1.89% – 8.50% APR). Fixed interest rates range from 4.38% – 10.44% (4.38% – 9.72% APR).

Medical/Dental Rate Disclosure: Variable interest rates range from 1.89% – 8.02% (1.89% – 7.72% APR). Fixed interest rates range from 4.28% – 9.24% (4.28% – 8.94% APR).

Parent Loan Rate Disclosure: Variable interest rates range from 1.97% – 7.06% (1.97% – 7.06% APR). Fixed interest rates range from 4.94% – 8.58% (4.94% – 8.58% APR).

Bar Study Rate Disclosure: Variable interest rates range from 4.44% – 9.58% (4.44% – 9.52% APR). Fixed interest rates range from 7.39% – 12.94% (7.40% – 12.83% APR).

Medical Residency Rate Disclosure: Variable interest rates range from 3.53% – 7.03% (3.53% – 6.76% APR). Fixed interest rates range from 6.99% – 10.49% (6.98% – 10.09% APR).

Variable Rate Disclosure: Variable Rates are based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of June 1, 2021, the one-month LIBOR rate is 0.09%. Variable interest rates will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable rate is the greater of 21.00% or Prime Rate plus 9.00%. 

Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.

Lowest Rate Disclosure: Lowest rates require a 5-year repayment term, immediate repayment, a graduate degree (where applicable), and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.

Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer.  Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision on our website including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.

Eligibility Criteria: Applicants must be a U.S. citizen, permanent resident, or eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For applicants who have not attained the age of majority in their state of residence, a co-signer is required. Citizens Bank reserves the right to modify eligibility criteria at any time. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/Promissory Note, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens Bank participating school.

Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.

Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.