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.”

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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.

(1)All rates shown include the auto-pay 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.

(2)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.

(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.

Information advertised valid as of 11/4/2019. Variable interest rates may increase after consummation.


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

3 Important Disclosures for Discover.

Discover Disclosures

  1. Students who get at least a 3.0 GPA (or equivalent) qualify for a one-time cash reward on each new Discover undergraduate and graduate student loan. Reward redemption period is limited. Please visit DiscoverStudentLoans.com/Reward for any applicable reward terms and conditions.
  2. View Auto Reward Debit Reward Terms and Conditions at DiscoverStudentLoans.com/AutoDebitReward.
  3. Aggregate loan limits apply.
  4. Lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments. The interest rate ranges represent the lowest interest rate offered on the Discover Undergraduate Loan and highest interest rates offered on Discover student loans, including Undergraduate, Graduate, Health Professions, Law and MBA Loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable Margin percentage. The margin is based on your credit evaluation at the time of application and does not change. For variable interest rate loans, the 3-Month LIBOR is 2.50% as of July 1, 2019. Discover Student Loans will adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Please visit discover.com/student-loans/interest-rates for more information about interest rates.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.

4 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).

  1.  Rates are as of July 1, 2019 and include auto-pay discount. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment. Variable rates may increase after consummation.

5 Important Disclosures for Citizens.

Citizens Disclosures

Undergraduate Rate Disclosure: Variable rate, 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 November 1, 2019, the one-month LIBOR rate is 1.80%. Variable interest rates range from 2.90% – 11.16% (2.90% – 11.01% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school 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. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.

Citizens Bank Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers 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 anytime. Interest rate ranges subject to change. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, 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. 

Please Note: International Students are not eligible for the multi-year approval feature.

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3.52% – 9.50%4Undergraduate and Graduate

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.