Student loans can be a confusing and stressful topic, and unfortunately, many myths surrounding them only add to the confusion. Believing these myths can lead to poor financial decisions or missed opportunities. In this article, we’ll debunk some of the most common Student Loan Myths and provide the facts you need to manage your student loans effectively.
1. Myth: You Don’t Have to Pay Back Your Student Loans
Some borrowers believe that student loans don’t need to be repaid, especially if they’re federal loans. However, this is false.
Fact: All Student Loans Must Be Repaid
Both federal and private student loans must be repaid, with rare exceptions like loan forgiveness. Ignoring student loan payments can result in serious consequences such as late fees, wage garnishment, and damage to your credit score.
2. Myth: You Can’t Pay Off Your Student Loans Early
Many people think there are penalties for paying off student loans early or that they must stick to the scheduled repayment plan.
Fact: You Can Pay Off Student Loans Early Without Penalties
Federal student loans and most private loans allow you to pay off your debt early without any prepayment penalties. Making extra payments, or paying more than the minimum, helps reduce the principal balance and the total interest you’ll pay over the life of the loan.
3. Myth: You Don’t Have to Make Payments While in School
Some students assume that no payments are required while they’re still enrolled, especially if they have federal loans.
Fact: Payments May Still Be Required
While Direct Subsidized Loans don’t accrue interest while you’re in school, Unsubsidized Loans and private loans do. If you don’t pay the interest on these loans while in school, the interest may capitalize, adding to the total amount owed after graduation. Making interest payments during school can reduce your overall debt.
4. Myth: Federal Loans Are Always Better Than Private Loans
There’s a common belief that federal student loans are always a better choice than private loans.
Fact: It Depends on Your Situation
Federal loans offer many benefits, such as fixed interest rates, income-driven repayment plans, and eligibility for forgiveness programs. However, private loans may offer lower interest rates for borrowers with excellent credit. For some students, especially those who exhaust federal loan options, private loans can be a good supplement.
5. Myth: You Can’t Qualify for Student Loan Forgiveness
Many borrowers think they won’t qualify for student loan forgiveness and don’t bother looking into the programs available.
Fact: Many Borrowers Qualify for Forgiveness
Federal loan forgiveness programs like Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, and forgiveness through Income-Driven Repayment (IDR) plans are available to millions of borrowers. If you work in a qualifying job or make payments under an IDR plan, you may be eligible for forgiveness. It’s essential to research your options and apply if you qualify.
6. Myth: You Can’t Refinance Federal Student Loans
Some borrowers mistakenly believe that federal student loans can’t be refinanced, leaving them stuck with high-interest rates.
Fact: Federal Loans Can Be Refinanced
You can refinance federal student loans with private lenders, which may result in lower interest rates. However, refinancing with a private lender means losing access to federal protections like income-driven repayment plans and loan forgiveness programs. It’s important to weigh the pros and cons before refinancing.
7. Myth: Filing for Bankruptcy Erases Student Loan Debt
Many people think they can discharge student loans through bankruptcy.
Fact: Student Loans Are Rarely Discharged in Bankruptcy
It is very difficult to discharge student loans through bankruptcy. Unlike credit card debt or personal loans, student loans are typically excluded unless you can prove undue hardship, which is rare and challenging to demonstrate in court.
8. Myth: Your Student Loans Will Automatically Be Forgiven After 20-25 Years
Some borrowers believe that student loans are automatically forgiven after 20 or 25 years of payments.
Fact: Forgiveness After 20-25 Years Depends on Your Repayment Plan
Only those enrolled in an income-driven repayment (IDR) plan can have their loans forgiven after 20 or 25 years of qualifying payments. It’s not automatic—you need to recertify your income annually and ensure you’re on the right repayment plan. Be proactive about applying for forgiveness when eligible.
9. Myth: Missing One Payment Won’t Hurt You
Some borrowers believe that missing one payment isn’t a big deal.
Fact: Missing Payments Can Damage Your Credit and Lead to Default
Missing even one student loan payment can harm your credit score and lead to late fees. If you continue missing payments, your loans can go into default, leading to wage garnishment, tax refund interception, and other serious consequences. Always contact your loan servicer if you’re struggling to make a payment—they may offer deferment or forbearance options.
10. Myth: Student Loans Don’t Affect Your Credit Score
Some borrowers assume student loans don’t impact their credit score, especially if they’re federal loans.
Fact: Student Loans Are a Key Part of Your Credit History
Like any loan, student loans are reported to credit bureaus and can affect your credit score. Making timely payments helps build a positive credit history, while missed or late payments can lower your score. Managing your loans responsibly can improve your credit over time.
Conclusion
Believing in Student Loan Myths can lead to confusion and poor financial decisions. Understanding the facts behind student loans will help you make informed choices, whether you’re planning repayment strategies, considering refinancing, or exploring forgiveness options. By staying informed and proactive, you can take control of your student loan debt and reduce financial stress.