It’s not a secret that student loans are confusing. Most students reach college after signing document after document, not necessarily being aware of what type of loan they took out.
Because no one really learns anything about student loans in senior high school, a whole bunch of myths have put their hands up about how student education loans work.
If you’re lucky enough to be reading this before you take out student loans, do something today to make sure you don’t enter over your head by hearing these myths.
If you’re already in debt, well, most of us are immediately with you. Researching these myths can now assist you to figure out the best way to move ahead.
Myth #1: lenders won’t let me borrow a lot more than I’m able to pay back
As an 18-year-old on the point of visit college, you’re probably pretty excited. You’ve had the idea of college pushed you your whole school life. It seems like the smart action to take, but it’s also among the more expensive moves you’ll make.
With no other experience with debt, it’s simple to think that lenders won’t let you borrow more money than you could reasonably pay back. You’d be wrong.
When you’re taking out loans – private student education loans, particularly – lenders have one main concept in your mind: profit.
If you are taking out massive amounts of education loan debt but end up with a job that pays around you could have gotten with no college degree, you could be in big financial trouble.
For this reason, you need to do some serious investigation and number crunching long before you are taking out student loan debt.
Myth #2: you should consolidate federal education loan debt whenever you graduate
When you finish college, you may have several student loans you have to make payments on soon. Wouldn’t it be easier to consolidate them into one loan making a single monthly payment?
In theory, this sounds good, and it’s entirely possible to do. But, it might not continually be the very best decision. Consolidating student loan debt isn’t as simple as it sounds.
The interest rate on your loan is made up of a weighted average from the debt you consolidate. This means you won’t be getting a lesser interest rate by consolidating. Actually, you might actually pay more interest when the repayment period from the original loans is extended.
In certain circumstances, you can even lose benefits by consolidating. This can include loan cancellation benefits, principal rebates, or rate of interest discounts.
Myth #3: refinancing has given is definitely the smart thing to do
Refinancing education loan debt can save you cash on interest payments if you’re in a position to secure a lesser interest rate along with a similar repayment term. Refinancing might have many unintended consequences, though.
First, refinancing student loan debt means your brand-new student loans will be private student loans. Private student loans don’t have nearly the same flexible repayment options and other benefits that federal education loan debt offers.
In particular, you can’t use programs like income-based repayment and public service loan forgiveness with private student loan debt (more about that in a moment).
Another consideration is how future law changes may impact your loans. During the COVID-19 pandemic, federal education loan debt repayment was paused and temporarily given a 0% interest rate. Private education loan lenders weren’t necessary to offer this same program.
If you have federal student loans, seriously consider whether losing the federal student loan debt flexibility options may be worth paying less in interest. If you don’t are in position to save a lot of money, you may be better off keeping the federal education loan debt as is.
Myth Number 4: bankruptcy can help many people get free from education loan debt
While it’s easy to eliminate many types of debt in bankruptcy, education loan debt isn’t one of them. Actually, it can be tough to eliminate student loan debt in bankruptcy due to the current laws (you can read more within our article: Why Are Student Loans Not Cancelled Whenever you File for bankruptcy?).
That said, there is a method for you to attempt to get your student loan debt discharged if you need to file for bankruptcy. To do so, you have to satisfy the undue hardship exception. This requires you to definitely meet three main tests.
- First, you mustn’t have the ability to conserve a minimal quality lifestyle if you’re instructed to repay the borrowed funds. This doesn’t mean living comfortably. It means living a very basic lifestyle.
- Next, you must prove that you’re facing a hardship which will go on for a significant part of times you’ll pay the loan. A short-term job loss isn’t enough to get your student loan debt discharged.
- Finally, you need made good faith efforts to settle your loans just before declaring bankruptcy. You can’t quit making payments for a long time and hope it gets destroyed.
If you have the ability to pass these tests, your financial troubles may be fully discharged, partially discharged or you may receive a lower rate of interest.
Don’t rely on this as the way to avoid it of education loan debt, though!
Myth # 5: education loan forgiveness is easy
Getting student loan forgiveness is really a possibility over a couple of federal student loan programs, however it isn’t on private student education loans.
The process to get enough where you can have your education loan debt forgiven is a long one. And if you make mistakes along the way, you could jeopardize your effort to get forgiveness altogether.
In particular, there are two popular forgiveness options available: public service loan forgiveness and income-based repayment forgiveness.
Public service loan forgiveness
Public service loan forgiveness is only available for direct loans and requires you to work for certain types of organizations. After making 120 qualifying monthly obligations utilizing a qualifying repayment plan and dealing full-time for any qualifying employer, you are able to complete an application for forgiveness.
These conditions can be burdensome and can be out of your control. When you get let go from your employer and can’t find another qualifying employer, your forgiveness plan may disappear.
Income-based repayment forgiveness
Another choice is income-based repayment forgiveness. Efforts need you to make 20 to Twenty five years of payments based on your circumstances. When the payments are complete, the rest of the loan balance is forgiven should you haven’t paid the debt off with the monthly payments.
As you can observe, it’s essential you understand precisely how your forgiveness program works. Be sure you diligently document how you behave all the way so that you can prove you qualify when it’s time to submit your request for forgiveness.
Student loan myths can pave the way for financial misery. Whenever you’re considering getting student education loans or making changes for your education loan debt, make sure you understand how they impact your future.
It may take time for you to research the way the loans work, but it’s worth the effort. This way, you realize exactly what you’re getting into and you can make the smartest decisions regarding your debt.
In some cases, this could mean refinancing or consolidating your education loan debt. In other people, it might mean doing nothing. The main thing is making the right decision, even if it’s boring and needs time to work.