Student loans are such a huge issue that it’s easy for the spread of misinformation to spiral out of control. After making loan payments for years, just about anyone starts to feel like an expert. Unfortunately, that's not always the case.
The reality of student loan repayment is much more nuanced than most people realize. Things that can impact your situation are personal circumstances, loan type, and lender.
1. Myth: All Loans Are Created Equal
Truth: Federal Loans are Better than Private Loans
Many students graduate with a combination of private loans and federal loans. If you're still taking on loans, always choose Federal first. Federal loans offer a variety of repayment, forbearance, and deferment choices. These make them much more flexible than most private loans.
Federal loans also offer Public Service Loan Forgiveness. This allows students to get their loans forgiven after ten years if they work for a nonprofit or government agency.
Federal Student Loans
|Direct Subsidized Loans||Loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school.|
|Direct Unsubsidized Loans||Loans made to eligible undergraduate, graduate, and professional students, but in this case, the student does not have to demonstrate financial need to be eligible for the loan.|
|Direct PLUS Loans||Loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid.|
|Direct Consolidation Loans||Loan that allows you to combine all of your eligible federal student loans into a single loan with a single loan servicer.|
|Federal Perkins Loan Program||School-based loan program for undergraduates and graduate students with exceptional financial need -- under this program, the school is lender.|
Interest rates are often lower with federal loans. Private loans can come with higher rates and sometimes even risky variable rates. According to the Department of Education’s Federal Student Aid website, private loan rates can go up to 18%. For perspective, the current interest rate for undergraduate Federal loans is 3.76%.
However, consider the fact that every private student loan lender is different. Some may have options available to those who experience unemployment or unexpected financial problems. Some even offer deferment, through which you can temporarily suspend payments on your loans.
2. Myth: I Can Get Rid of My Student Loans in Bankruptcy
Truth: Student Loans Are Rarely Dischargable in Bankruptcy
While many loans can be discharged through bankruptcy, student loans are an exception. There are very few circumstances in which people have successfully had student loans discharged. These included severe illness, disability, and undue hardship.
Even still, the majority of people are unable to successfully discharge their loans in bankruptcy.
Even though bankruptcy isn't really an option for student loans, there are other options. Try switching to a lower monthly payment or applying for deferment or forbearance if you're falling behind.
Student Loans in Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
|Chapter 7||Chapter 13|
|You have little to no income to pay off your debt (and you're able to prove it)||You have a fair amount of income that allows you to pay off some of your debt|
|Most if not all of your debt will be erased and there will be no repayment plan||Your debt is restructured - so a repayment plan will be set up to suit your disposable income|
|Process to absolve debt could take 3 - 5 months||Agreed upon repayment plan could last 3 - 5 years|
3. Myth: You Can’t Refinance Your Student Loans
Truth: You Can Refinance Your Loans through a Private Lender
If you seek to refinance your loans through a private lender, you're letting the lender purchase your loans. This can be done with federal or private loans. But, when it's done, you can't convert your loans back to government-owned loans.
Refinancing is a great option for those paying high interest rates on a private loan. High interest rates are the biggest barrier to rapid repayment, so this can be a serious help.
Some of these companies include SoFi, DRB, LendKey, CommonBond, and Earnest Bank. In order to qualify, you'll need a good credit score and stable income. The refinancing process may be time-consuming, but it could save you thousands in the end.
Top Student Loan Refinancers
|Lender||Borrowing Amounts||Available Terms||Eligible Loans For Refinancing|
|CommonBond||$1,000 to $500,000||5-, 7-, 10-, 15-, and 20-year terms (Hybrid Rate loans are only available for 10-year terms)||Both Private loans and Federal loans|
|Citizen's Bank||$10,000 to $90,000||5-, 10-, 15-, and 20-year terms||Both Private loans and Federal loans|
|Discover Bank||$5,000 to $150,000||10- and 20-year terms||Both Private loans and Federal loans|
|Earnest||$5,000 to $500,000||5-, 10-, 15-, and 20-year terms||Both Private loans and Federal loans|
|PNC||$10,000 to $75,000||10-, and 15-year terms||Both Private loans and Federal loans|
|SoFi||$5,000 to the amount your schooling costs||5-, 7-, 10-, 15-, and 20-year terms||Both Private loans and Federal loans|
|Wells Fargo||$5,000 to $120,000||5-, 10-, 15-, and 20-year terms||Only Private loans|
The downside to refinancing federal loans is giving up the benefits they come with. These protections include income-based repayment, Public Service Loan Forgiveness, and deferment or forbearance options.
When you refinance, you also have an option to stretch your loans into a longer repayment period. While that can give you some breathing room on your monthly payments now, it could cost you more in interest over time. If you can, try to pay the same amount you were previously. Doing so will help you speed up your loan repayment process.
4. Myth: It’s Always Better to Choose a Lower Monthly Payment
Truth: You’ll Often Pay More in Interest if You Do
Federal student loans offer a variety of repayment plans designed to help graduates. But some people choose these plans when they could afford to make payments on the standard plan.
If you can afford to choose the standard repayment plan but you choose the graduated plan instead, you could pay more in interest over time. For example, let's say you owe $28,000 and are paying 6.5% in interest. If you were to choose the graduated plan instead of standard, you'd pay $2,000 more over the life of your loan.
That doesn't mean there's never a time to choose a lower monthly payment. For example, let's say you qualify for Public Service Loan Forgiveness. In this case, going with an income-based repayment plan could be a good idea since your loans could be forgiven after ten years.
5. Myth: There Isn’t Anything I Can Do If I’m Having Trouble Making Payments
Truth: Many Lenders Will Work With You
Experiencing problems paying your student loans is a common issue. If you find yourself about to miss a payment or choosing between groceries and student loans, it’s time to get help.
Many people assume that if they're struggling the last person they want to notify is the lender. But that’s not true. These companies are in the business of getting paid, and they want you to stay current on your loans. That means they may be willing to change your due date or let you pause your payments for a few months. Often, they'll do what they can to ensure you don’t skip out on the debt entirely.
When you contact your lender before you default, you're showing them that you're responsible. This can help you a great deal. Lenders would much rather amend the terms of your loan than come after you with a collection agency.
6. Myth: I Can Automatically get Public Service Loan Forgiveness
Truth: You Have to Qualify for the Program
One of the hallmarks of federal student loans is Public Service Loan Forgiveness. This program rewards those who work for a nonprofit or government job. How it works is that they forgive the remaining loan balance after ten years.
Unfortunately, this program is fraught with misconceptions. In order to qualify, you have to make consecutive payments for ten years. Missing just one payment in that whole decade could disqualify you. You also have to work full-time (at least 30 hours per week) for a qualifying organization.
Not all federal loans qualify for Public Service Loan Forgiveness. For example, Federal Family Education Loan Program loans and Federal Perkins loans don't qualify. However, you can consolidate those with your other federal loans. That new consolidated loan could then be eligible for Public Service Loan Forgiveness.
It's very important to double check that your employer qualifies for PSLF. For example, nonprofit organizations must be labeled 501(c)3 under the IRS. If not, they must provide the following types of public services. (This list also applies to for-profit companies):
- Emergency management
- Military service
- Public safety
- Law enforcement
- Public interest law services
- Early childhood education
- Public service for individuals with disabilities and the elderly
- Public health
- Public education
- Public library services
- School library or other school-based services
Tip: Even if you qualify, your loans will not be automatically discharged after ten years. You must file an application to have your loans forgiven.
Whatever myths you may encounter about student loans, don't buy into them right away. There are many organizations and resources that can dispel the rumors. If you have specific questions about your loans, contact your lender directly. For more general resources, here are some suggestions: