Yahoo Finance 5 Student Loan Myths That Could Cost You Money
What you don’t know about student loans can hurt you — or your kids — financially more than you know. Depending on who the lender is, as well, they may be more or less forthcoming about all of the important terms you need to know, such as the interest rate and when you have to begin paying back your loans.
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Always read the fine print, no matter whether you think you have a good handle on the information or not. Most importantly, never assume anything about your repayment or possible forgiveness. Always research, ask questions and read everything before you sign.
Here are some of the more common myths about student loans you should know are inaccurate before you or your kids sign your lives away.
Myth 1: Bankruptcy Wipes Out All Student Loans
No one ever wants to get to the place where you can’t pay back your debts — but bankruptcy does exist for a reason. Sometimes, hardship puts you in such a tough spot that bankruptcy is your only option. However, be warned: If you think bankruptcy will get you out of all student loans, it is much much harder than you think in most cases. Most of the time, you’re likely to only get a partial reduction.
With private student loans, it’s toughest, because there’s no government entity backing them up — they can decide to discharge or not. Though Congress did introduce a bill in the 2023-2024 session that would make it easier to discharge private student loans, it has not yet been passed.
With federal student loans, there is a possibility of having them be discharged, but proving you are financially destitute is a high hurdle. According to the U.S. Department of Education, to seek bankruptcy for a federal student loan requires initiating an “adversary proceeding” through bankruptcy court.
To be eligible, you have to prove that:
Paying the loan would make you unable to maintain even a minimal standard of living.
Your hardship will continue for a significant portion of the loan repayment period.
You did make good faith efforts to repay the loan before filing bankruptcy.
And they can still decide you don’t qualify for forgiveness. While the Biden Administration has stated it is working on a federal student loan forgiveness program, it still has several phases to go through, including the lengthy process of reviewing more than 30,000 public comments.
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Myth 2: You Can Just Defer Loans Until You’re Ready
While you are typically allowed to defer your loans — though each lender and each set of loans will have different terms — you want to ask yourself if that is the smart move. As GOBankingRates previously reported, deferring your loans means accruing more and more interest over time. One woman found herself paying over $50,000 in student loan interest alone, because she deferred and deferred until her loans had skyrocketed in interest.
The U.S. Department of Education has online resources to help you think through and calculate your loan debt and repayment plans. These are good to check out, even if yours is not a federal loan.
Additionally, finance expert Dave Ramsey recommends that you pay your loans off as quickly as possible, instead, by whatever means possible.
Myth 3: You Can Just Pay More as You Earn More
One of many repayment strategies for student loans is the “income-driven repayment plan” for federal loans only. In essence, this strategy takes into account that you may be earning less money straight out of college and more over time, thus you pay less at the beginning and more as you make more, based on a percentage scale. So, maybe you start out paying 10% of your income but wind up paying 15% to 20% over time.
While this sounds great, Ramsey does not recommend it for several reasons:
They usually stretch out the length of the loan to 20 or 25 years, which, he said, means you’re just paying interest back for a longer period of time.
They often promise “forgiveness” of what remains of your balance at the end of that 20 to 25 year term, but this doesn’t always happen.
In essence, Ramsey said, it’s just a way of getting you to stay in debt longer.
Myth 4: Your Degree Enables You To Earn Good Money To Pay Back Your Loans
By taking out student loans and attending college, one assumes that you’ll finish school with a degree that enables you to get a decently paying job, so you can pay back those loans.
However, according to the National Consumer Law Center’s student loan borrower assistance page, as much as one-third of student loan borrowers never even complete college to get that degree! For reasons ranging from having to drop out due to physical, financial or family hardship, or simply not having the motivation to finish, taking out loans is no guarantee of an employable degree.
Yet you’re still on the hook for any amount of loans you took out, even if you have no degree to show for it.
There’s also the reality that even with a degree, you don’t know what the job market in your field or industry will look like at the time you’re ready to get a job. You might not be able to get a high-paying job immediately.
Myth 5: You Can Refinance Your Federal Loans Into a Private Loan
You may have heard that it’s possible to refinance a federal loan into a private loan to get a better interest rate. However, the National Consumer Law Center suggests that doing such a thing is “risky.”
Refinancing from federal to private means losing the other benefits that come with federal loans, such as the Public Service Loan Forgiveness program and any other loan cancellation programs. You would also lose access to their commitment to help you make affordable monthly payments based on your current income. And, as mentioned above, if you absolutely have to file bankruptcy, it’s easier to get a federal loan discharged over a private one.
You should exhibit extreme caution and careful research before making such a move.
While student loans are often the only way that some can attend college, consider lower cost alternatives, such as low-cost community or state colleges, first. Then, be sure you’ve read and understood the terms of any loans you take out and, to the best of your ability, calculated the likelihood of your ability to repay them.
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This article originally appeared on GOBankingRates.com: 5 Student Loan Myths That Could Cost You Money
