Loans can be stressful and student loans are no different. It can be unnerving to owe a large amount of money that you could likely never pay all at once. Creating and sticking to a budget is one way to ensure you can make your payments on time each month.
When using student loans to help pay for college, it’s important that you understand how they work and what can and can’t make paying your debt off easier.
In this article, we’ll bust some of the most popular myths surrounding student loan payments so you can be better prepared to handle the debt and your payments.
Myths About Student Loans Everybody Has Heard Before
Every student out there has probably heard one or two myths about how to handle (or not handle) their student loans. We wanted to call out some of the more common myths we’ve seen about student loans and the financial logistics behind them.
Here are some of the most common myths about student loans you’ll hear and the truth behind them.
Myth #1: Student Loans Don’t Accrue Interest While You’re Going to School.
One of the most common myths that people assume is that student loans do not accrue interest while you’re in school. While this could be true, it really depends on the type of student loan you have.
Some federal student loans – such as the Federal Direct Subsidized Loan – do not accrue interest while students are enrolled in school or if the loan is in its grace period. However, most private student loans (and Federal Direct Unsubsidized Loans) start accruing interest once the loan is disbursed and while students are in school. The interest will then be capitalized usually when you enter repayment. Interest capitalization occurs when the unpaid interest that accrued during your time in school is added to the principal of your loan.
Our experts at College Ave Student Loans recommend making payments on your student loans while you can. Even a payment as small as $25 per month can make a big difference in the total cost of your student loan!
Myth #2: All Student Loan Companies Offer the Same Rates and I Shouldn’t Shop Around.
They don’t, and you should absolutely shop around for the best rate. Research multiple lenders to see what rates and repayment terms they offer. Once you’re ready to apply, you’ll find out our rate by applying which will trigger a hard credit check. However, if you apply to multiple lenders within 30-45 days, credit bureaus will most likely only count it as one credit inquiry because it’s obvious you are shopping lenders for the best rate.
Tip: Undergraduate students typically don’t have the credit or income to qualify for a private student loan on their own. A parent or other adult with good credit can help you qualify by cosigning your student loan. A cosigner’s good credit history and commitment to a student’s education will provide the kind of support students need to reach their goals in education, and in life.
Myth #3: Refinancing Your Student Loans is Always the Right Option.
You may have heard about student loan refinancing and think that’s the way to go. After all, who doesn’t want a lower interest rate? But refinancing may not be the right financial move for everyone.
For example, if you have federal student loans, those loans could qualify for federal loan forgiveness or income-based repayment options. But if you refinance those loans with a private lender like College Ave, your federal loans will turn into privately held ones and you lose access to those federal benefits.
If you’re considering refinancing your federal student loans, carefully weigh whether you’re likely to need or qualify for those federal benefits. Whether you choose to refinance will depend on our loans, your current occupation, and your unique financial situation.
Myth #4: You Can Only Refinance Your Student Loans One Time.
The truth is you can refinance your student loans as many times as you’d like.
Graduates refinance to get a lower interest rate, lower their monthly payment, or sometimes both. Depending on your finances and rates, you may be able to take advantage of refinancing your student loans more than once.
You should always check for origination fees and other costs before refinancing.
Another thing to keep in mind is that each lender will do a “hard” credit check each time you apply. Too many inquiries on your credit report can lower your credit score.
Myth #5: Consolidating Loans Is Always the Right Option.
When you consolidate your federal student loans, you take multiple federal loans and combine them into a single new Direct Consolidation Loan. That translates to one interest rate and one payment each month. Sounds convenient, right? It kind of is.
But is it the right move for everybody? Not necessarily.
If you have multiple federal student loans, each of them likely has a different interest rate. If you plan to make extra payments or pay off your higher interest rate loans faster, you’ll want to keep them separate to make sure you’re putting those extra dollars to work.
Consolidation might not be the right answer if you’re currently making qualified payments towards Public Service Loan Forgiveness or under Income Driven Repayment plans – you’ll lose credit for any of those payments once you consolidate.
Before consolidating your loans, carefully consider your federal benefits and if you’re likely to use them now or in the future. Contact your loan servicer to discuss your options.
Myth #6: All Student Loans Have the Same Repayment Terms.
Not all student loans are created equal. Different kinds of loans come with different rules attached to them. For example, there are different kinds of federal loans such as Direct Subsidized Loans and Direct Unsubsidized Loans. Some of them do not accrue interest while you’re in school, while others do. And this is just the federal loans.
The repayment rules for private loans can be different from loan to loan and from lender to lender. Most lenders let you choose whether or not you want to make payments while in school. And others, like College Ave, also let you choose how long you take to repay the loan. No two loans are the same.
You’ll need to take this into consideration when applying for loans so that you feel confident you can plan for and pay all of your student loans on time each month.
Tip: Be smart when it comes to borrowing. A rule of thumb is to not borrow in total (both federal and private loans) more than you would expect to earn in your first year’s salary out of college.
Myth #7: Student Loans Won’t Affect Your Credit Score.
There are some students who still think that student loans won’t affect their credit score, but they do. Your credit score is a combination of your credit use, debts, and payment history expressing how much of a risk it would be to lend you a certain amount of money for a loan.
Just like other lines of credit, making regular, timely payments will have a positive impact on your credit score. However, missed or late payments can negatively affect your credit and potentially long-lasting financial repercussions. On-time payments are just one way that you can demonstrate to a future lender that you’re financially responsible and likely to repay the loan.
Tip: Many lenders offer an interest rate discount when you sign up for autopay. Plus, you’ll know your payments are being paid on time each month, positively impacting your credit score.
Myth #8: You Should Pay Off Your Student Loans Before Anything Else.
It’s understandable why people believe this student loan myth.
Student loans are probably the biggest debt most recent graduates have. Paying off your student loans early would give you more expendable income each month to save for a house or a car.
If you have credit card debt, chances are that your credit card interest rate is significantly higher than your student loan interest rate. You may be tempted to make a normal or smaller payment on your credit card and use any extra money to pay off your student loan. However, if you don’t fully pay off your credit card each month, you will be charged that high interest rate and you’ll end up owing a lot more.
Your circumstances may be unique but generally, it’s best to pay off your highest-interest debts (like credit cards) first and use that freed-up budget to pay off those larger, low interest debts second (like student loans).
Myth #9: Declare Bankruptcy and Your Student Loans Will Go Away.
Some people think that you can declare bankruptcy and that’ll somehow wipe away your student loan debt. But that’s not typically the case.
Can you eliminate your student loans by declaring bankruptcy? Technically, yes. But it’s so hard to qualify for, that the answer for most people is, essentially, no. In order to qualify to have your student debt wiped away, you have to prove to a bankruptcy court that you’re experiencing undue hardship due to your loan debt. The court could decide to restructure your debt instead of discharge the loans.
Declaring bankruptcy should only be used as a last resort. Not only can it be costly, but bankruptcy can have enormous long-term financial consequences and affect your ability to access credit in the future.
If you’re having trouble making payments, don’t ignore the problem. Reach out to your student loan servicer to discuss your financial situation and relief options such as deferment or forbearance. If you have federal student loans, you may be able to opt-in to income-based repayment which can significantly reduce your monthly payments.
Final Myth: You’ll Never Pay Off Your Loans.
With the right amount of planning and effort, you can successfully pay off your student loans. Start with a solid budget and adjust it as needed over time. Having a budget can help you stay on track and spot when you have extra cash to make extra payments to your loans.
If you’re looking for tips and resources on student loans and repayment, let us help. College Ave helps students find a different yet simple path to paying for college.
If you’re interested in private student loans or refinancing your existing student loans, try our free credit pre-qualification tool. College Ave’s pre-qualification tool will tell you whether your credit pre-qualifies for a loan, and what interest rates you can personally expect before you apply, without impacting your credit score.
For more help and less stress, count on College Ave Student Loans.