- There are significant and important differences between federal and private student loans.
- Student loans can impact your credit score, but not always in a negative way.
- You don’t necessarily have to wait for the Biden administration to get your student loans canceled.
- Learn more about Insider’s student loan coverage here.
It’s hard to separate fact from fiction when it comes to student loans – there is a lot of conflicting information on the internet, and analyzing the details can seem like a Herculean task. We’re going to shatter ten common student loan myths and tell you the truth about your student debt.
1. A lower interest rate is always better.
While you should keep interest rates in mind when deciding to take out a student loan, they shouldn’t be the end of it. You should also consider the length of the loan, which affects how much you pay per month, and your repayment options, which can range from deferred payments to paying the full balance while you’re in school. . Federal student loans can sometimes have higher interest rates than private loans, but they offer better protections for borrowers.
2. If you cannot pay your loan repayments, you should stop paying them until you are financially able to.
If you’re struggling financially and can no longer afford your monthly student loan expenses, your only option isn’t to stop paying. If you do, your past due payments will likely have a negative impact on your credit score.
Instead, contact your federal loan officer and see if you have the option of an income-based repayment plan. Income-based repayment plans take your particular income and family size into account when calculating monthly payments, and depending on your situation, your payments can be as low as $ 0 per month.
You may also be eligible for loan forbearance from federal and private lenders. You can request forbearance from your service agent for reasons such as financial hardship, medical expenses, and job change. General loan forbearance can last up to 12 months at a time. Keep in mind that interest may continue to accrue during your inactive period.
If you currently have federal loans, you don’t need to apply for forbearance separately, as COVID-19 forbearance for federal student loans is in place until January 31, 2022.
3. Private and federal student loans are basically the same.
Private student loans do not come with the same protections and benefits for borrowers as federal student loans. With federal loans, you may be eligible for loan cancellation programs and additional repayment options.
Private student loans also require a credit check, unlike subsidized and unsubsidized direct loans. On the other hand, you may be able to get lower rates from private lenders and have the option of getting variable rate loans.
4. Student loans do not affect your credit rating.
You might think of credit cards and mortgage payments as common forms of debt that affect your credit score. However, student loans also have an impact on your credit score. Student loan managers will report your payments – or the lack thereof – to the credit bureaus, and if you fall behind on your payments, your credit score could take a hit. Make sure you understand your repayment terms and upload all relevant documents to your loan manager.
5. Having student loans means that your credit score will automatically be lower.
Your payment history is an important part of your credit score. If you make consistent and reliable payments on your loans, your student loans can actually boost your credit score because your regular payments will prove to lenders that you are a reliable borrower. A higher credit score can qualify you for better rates on personal loans, car loans, and mortgages.
6. It is not worth making payments on your student loans while you are in school, during your grace period, or during forbearance.
While you don’t have to make payments until the six-month grace period on your student loans is over, you can save money in the long run by paying off your student loans sooner because you’ll be paying less. overall interests. Private student loans and unsubsidized direct loans will start earning interest as soon as you take them out, while subsidized direct loans will only start earning interest after your grace period is over.
COVID-19 Forbearance for Federal Student Loans is in place until January 31, 2022. You can take advantage of interest-free periods and make payments that only go to your principal.
7. You can’t save and pay off your student loans at the same time.
You can set a budget that incorporates your two financial priorities, setting aside a percentage of your salary for your loan payments and a portion for your savings account. You can make lower monthly payments on your student loans if you qualify for an income-based repayment plan, which can free up money to save.
You don’t need to save hundreds of dollars a month to meet your savings goals – even $ 10 is a start. Learn more about creating a budget here.
8. Consolidating a student loan is like refinancing one.
Consolidation is the process of combining multiple loans into one, while refinancing is restructuring your current loan (s) and getting a new one with updated terms. You can only consolidate federal loans, while you can refinance private and federal loans. Consolidation won’t get you a better rate, whereas refinancing might. Learn more about the differences between refinancing and consolidation here.
9. If you need money to cover tuition, the only choice is a student loan.
You can apply for private scholarships and grants, work-study programs, or ask your college to increase your aid. However, ask your college if it will allow you to accumulate scholarships and private grants in addition to the help offered by the college. Sometimes a college will deduct any assistance you receive from a private source from the amount of the grant or scholarship assistance it gives you. Learn more about the different financial aid options here.
10. The only way for the Biden administration to forgive student loan debt is the forgiveness of your loans.
While much of the talk surrounding student loan forgiveness has centered around President Joe Biden’s campaign pledge to write off $ 10,000 in debt, if you work in the public sector you may want to consider the forgiveness program. public service loans, or PSLF. PSLF cancels the debts of graduates working in the public sector after at least 10 years of service and qualifying payments. Your specific job doesn’t matter, just that you work for a public service employer. There is no cap on the amount of money that can be forgiven.
Understanding the truth about student loans is important to help you make the best possible decisions about your debt. Do your research before you buy into common myths.
Have another student loan question you want answered? Email Ryan at [email protected] and your query may be the subject of a new article on student loans.