10 Common Student Loan Myths – Busted

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Are you falling for any of these popular student loan myths? Know what you're getting into before you borrow, and be aware of your options after graduation.If you’re thinking about taking out student loans or already have them, chances are you’re rather well-informed with how the lending process works.

However, there are some student loan myths that seem to catch on, and there might be a few that are tripping you up.

Don’t get caught in a cycle of false information. Here are 10 student loan myths – busted.

1. It Costs Money to Change Repayment Plans

If you’re still in college, check with the university you currently attend. They’re a valuable resource to you, especially if you’re finding yourself burdened with a payment plan that doesn’t work for your budget.

If you’ve already graduated and are having difficult making your minimum payments, you can contact your lender/student loan servicer directly to change your repayment plan. It won’t cost you any money.

2. I Should Consolidate All My Loans Into One Large Loan

Some people graduate from college and promptly receive no less than five books of loan coupons. They’re all from different companies. They’re all different amounts. The due dates range from the first of the month to the last of the month, and everything in between. It’s confusing.

Fresh out of college, you might not have the resources to set up auto pay on the loans – you’re living paycheck to paycheck and don’t want to overdraft your account. Perhaps you even accidentally pay one of your loans late here or there. After all, it’s a lot to keep up with.

It seems to make sense to consolidate all your loans into one large loan, allowing you to be more in control of your finances, right?

Not so fast.

One large loan makes it hard to motivate yourself to pay down debt. If you have various balances, you can use the popular snowball method to help you gain momentum. Alternatively, you can attack the ones that have the highest interest or the highest monthly payment. When it’s one huge sum, you can’t play any tricks with yourself.

On top of that, be very careful about consolidating federal and private loans together, because you can only consolidate both into a private loan. That means you lose any of the federal loan benefits you might have had (such as access to loan forgiveness programs).

You can also consolidate just federal loans using the Direct Consolidation Loan, but you may still lose some benefits.

3. I Should Consolidate My Federal Loans Into a Private Loan With a Lower Interest Rate

As discussed in myth #2, this isn’t a good idea all the time. You might end up with a lower payment (good) and that might allow you to pay off your debt even faster (great), but you might be forgoing some of the protections and programs that are offered through the federal government.

Even if you are not currently eligible for any forgiveness options, who knows what the future holds, both in your career and also with potential legislation.

4. I Should Declare Bankruptcy so I Don’t Have to Worry About My Student Loans

This is one myth that seems to hang around, despite being a horribly bad idea. Student loans, whether private or federal, are very difficult to discharge during a bankruptcy proceeding. You can’t bank on it happening.

You’re better off working with your lenders on payment plans and deferment options if you’re having significant problems making your monthly payments.

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5. My Future Job Will Pay Enough to Cover My Payments

Oh, to be young and naive! Every year, freshmen enter expensive private colleges, borrowing every cent of their tuition. But, hey, they’re going to a great school and are destined to become an engineer, making a really solid paycheck.

Calculus I wasn’t that bad, Calculus II really stank, but Calculus III is enough to make them decide that they should be a teacher.

Likewise, a fair number of students borrow tons of money to become doctors and lawyers, only to find out that they can’t get accepted into the competitive post-graduate programs. They’re left with hefty student loan debt, but not the lucrative career they once aimed for.

Be careful if you’re using this mindset. Even if you know exactly what you want to do and are successful achieving that dream, it would be much better to graduate with a high paying job and have less student loan debt. Your income will wipe it out in no time, allowing you to spend your money on better things.

6. If I Participate in Student Loan Forgiveness, I Don’t Have to Worry About Paying Back my Loans

Student loan forgiveness programs are a fabulous option for those who qualify. However, note that only federal loans offer student loan forgiveness. If you have any private loans, you’re on the hook to pay them in full.

Even with the federal loans, you’ll need to enroll in one of the five qualifying repayment plans. Then, you’ll need to make 120 on-time, qualifying payments to erase the remainder of your debt. Do the math – that’s 10 years of repayment before receiving forgiveness on the balance of your loans.

Not only that, but in some cases, you’ll also be on the hook for paying taxes on the forgiven amount.

7. Student Loans Will Lower My Credit Score

Once upon a time, someone sat in a coffee shop, bemoaning how their student loans have ruined their credit score. Someone else overheard and ran home to tell their children that student loans will wreck your credit, so never use them.

Or, more likely, someone posted this on Facebook without context, and all their friends and family took it as gospel.

What actually happened was that the person didn’t pay their loans on time, and the loan provider reported that to the credit bureaus. And, yes, that wrecked their credit score.

Student loans actually provide a credit history for those who don’t have credit cards or other loans. If you pay on time, your credit score will benefit from the loans.

8. Student Loans Are “Good Debt”

Sometimes people refer to mortgages and student loans as “good debt”. After all, they both seem like they’re investments. Mortgages buy property, and property (over the long run) is generally a safe investment.

Similarly, student loans allow you to purchase an education and earn a higher salary than you could have earned otherwise.

That’s solid logic, so this myth is a conditional myth. If you borrow too much money for a degree that doesn’t earn enough, you’ll find that you might have been more financially secure as a high school graduate. No, your income wouldn’t be as much, but you wouldn’t be buried under a mound of student loan debt, either.

9. If I Can’t Afford to Pay, I Just Won’t Make the Payment, and I’ll Pay When I Can

There’s been quite a bit of press about avoiding student loan default. Some people have walked away with the message that student loan companies will bend over backwards to make things right. If you miss some payments, you just make it up when you can, no hard feelings.

The reality is much different. Student loans are a business, and businesses exist to make money. If you aren’t paying your loans, there is no money for the business (even if the business, in this case, is the federal government). They will come after you, and your loans will be in default.

Default is not pretty. It affects your credit score. You can be denied an apartment, and forget about trying to get a mortgage. You might even have your wages garnished.

If you cannot afford to pay your loans, contact your lender and make arrangements.

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10. I Should Borrow as Much as I Can

Yes, you can use your student loans to cover anything that helps you in your education. Many people use it to cover meal plans, expensive textbooks, and their housing needs. Those are legitimate uses of the loans, but they’re not always wise uses.

Let’s look at it this way. Say you attend a college where tuition is $5,000 a semester, with another $5,000 needed for room, board, textbooks, and fees. You get lucky and there are no tuition hikes or spikes in rent during this time, and you’re able to complete your degree in 8 semesters. You’ve borrowed $80,000 if you’ve covered everything with student loans.

Now let’s say you get a cheap apartment, split it with a friend, and work nights and weekends to cover the costs associated with room and board. You get creative and find ways to cover your textbooks, too.

You enter school without scholarships, but apply diligently for grants and scholarships for the next few years. You get $10,000 worth of aid. Now you’ve graduated with only $30,000 worth of debt.

For a 10 year repayment plan at 4% interest, the difference is a monthly payment of $303.74 versus $809.96. If you want to essentially throw away $500 a month for the next ten years, go ahead and borrow money to cover everything.

If, however, you can think of plenty of uses for that $500, then figure out ways to attend college while taking out the least amount of money possible.

Student loans are a helpful way to get an education that might seem unaffordable initially. Be informed before you borrow, take out the minimum you need, and your future self with thank you!

What things did you wish you had understood better about student loans before borrowing? Did you believe that any of these myths were true?