At the end of March 2019, Americans owed about $1.5 trillion in student loans, which is two times what they owed a decade earlier.
Based on analysis from Pew Research Center, one-third of adults ages 18 to 29 have outstanding student loan debt. Our country’s total student loan debt has surpassed our credit card debt for the first time in history. You don’t need us to tell you that college tuition is rising at an unsustainable rate or that America’s young adults are graduating with monstrous student loan debts, it’s a topic that is well publicized.
However, there’s a lot of misinformation out there about student loan debt, and following this misinformation could cost you more money. Below, we’ve demystified five of the biggest myths concerning student loan debt.
Myth #1: Consolidating your student loans will lower your interest rate.
It’s not uncommon to leave school with a mix of federal and private student loans. You’ll likely have multiple loan servicers, due dates, and minimum payments. Keeping track of what you owe each month and when it’s due can be confusing. In cases like this, deciding to consolidate your student loans could help you manage your debt more efficiently. There are two types of student loan consolidation, federal and private. The Federal Direct Loan Consolidation program is administered through the government and only federal student loans can be included in the consolidation. Private student loan consolidation is provided by private financial institutions and can include both federal and private loans.
When you consolidate student loans in the Federal Direct Loan Consolidation program, the interest rate on your new loan is fixed and the new rate is equal to a weighted average of the interest rates of your existing loans, rounded up to the nearest one-eighth percent. This may or may not lower your rate. You can also extend your repayment term up to 30 years, which can significantly reduce your payment.
Our advice: Be sure to speak with a trusted financial advisor to weigh the pros and cons against your current situation and to see if a consolidation (federal or private) might be a beneficial option for you.
Myth #2: Student loan forgiveness is available if you can’t afford your student loans.
Federal student loans are the only loan types that qualify for student loan forgiveness. To receive it, you must enroll in an income-driven repayment plan, such as Pay As You Earn (PAYE), that caps your monthly payments based on your income.
The benefit of enrolling in this type of program is that your monthly loan payments are based on what you currently earn, not on what you owe. If you are eligible, your monthly payments on qualifying federal loans may be reduced to 10 percent of your discretionary income.
In 2015, PAYE was revised, and renamed REPAYE, in an effort to qualify about five million more borrowers for eligibility. REPAYE doesn’t just reduce monthly loan payments. It also promises to forgive student loan debt if certain requirements are met.
Myth #3: You can skip a student loan payment if you have financial hardship.
If you’re facing financial hardship, contact your student loan servicer immediately. You can’t just skip a payment without making an arrangement. They may have options, such as deferment or forbearance, where your payments may be suspended or reduced. This will help temporarily if you find yourself in financial duress. If you just skip a payment without one of these arrangements in place, it will negatively impact your credit.
Our advice: Never just skip a student loan payment, or any payment for that matter, without having an arrangement set up with your service.
Myth #4: Federal student loans have the lowest interest rate.
With federal student loans, everyone receives the same interest rate, regardless of credit. Therefore, you aren’t necessarily offered at the lowest interest rate. Private student loans are based on your individual credit profile and other factors, so interest rates differ among borrowers. If you have strong credit, you may get a lower rate from a private student loan lender.
Our advice: Always compare interest rates between federal and private student loans before taking out loans with any lender.
Myth #5: It costs extra money to pay off your student loan early.
Student loans don’t have a prepayment penalty, which means you can pay this type of debt off anytime with no fee. Something to consider before you pay it off; debt, in any form, isn’t necessarily good, but there is some debt that’s okay to keep around because you’re using it as leverage to build more wealth than you could without it. Your student loan debt could be considered “good” debt because it’s used by appreciating or income-producing assets like your education (business and real estate are also considerations in this situation).
Our advice: Create a plan, get organized, and speak with a trusted financial advisor before you make a decision.