5 Common Beliefs About Student Loans That Get an ‘F’ From Experts
With the average 2016 college graduate owing around $37,000, student debt is an unavoidable topic.
But with all the information out there, it’s also hard to figure out what’s actually true and what may be a muddled interpretation — because seriously, student loans can be confusing.
To get to the bottom of what’s fact and what’s fiction when it comes to students loans, we spoke to a few experts.
They debunked these five common myths.
MYTH #1: Student Loans are a Must If My Family is Too Poor to Pay and I Don’t Receive Financial Aid.
Some students are willing to do anything — including shell out big bucks — to attend their dream school.
But students don’t always have to reach for student loans if they can’t afford the costs, says Vinay Bhaskara, co-founder of CollegeVine, a national provider of student mentoring and college admissions guidance.
“Many students resort to loans (private or government) when they don’t get a lucrative enough financial aid award,” Bhaskara says. “However, students can avoid this fate by planning ahead and applying to safety schools that offer generous merit aid and to merit scholarships at the schools that they really want to attend.”
And how do you snag that merit-based money? Crafting an excellent essay and resume, and positioning your involvement in activities well can improve your chances, Bhaskara explains.
It’s worth a try!
MYTH #2: The More Debt You Have, the Bigger Trouble You’re In
When you think about student loans, horror stories about students drowning in tens of thousands of dollars in debt may come to mind.
But according to Credible founder and CEO Stephen Dash, these often aren’t the students who have the hardest time paying back their loans.
“The borrowers who tend to get in the most trouble are those with small loan balances of less than $5,000, who either didn’t get a degree or didn’t get skills that boost their earning power in the eyes of employers,” Dash says.
Three-year outcomes for borrowers entering repayment in 2011. Source: Department of Education, via White House report, “Investing in Higher Education: Benefits, Challenges, and the State of Student Debt.”
MYTH #3: Paying Off Your Student Loans Should Be Your First Priority
You may feel stressed about the burden of your student debt — and you may want to funnel every spare cent into attacking it .
However, David Levy, editor of Edvisors, advises you to attack any debt that carries a higher interest first, then focus on your student loans.
“Debt that carries a higher interest rate than your student loans, like credit card debt or a personal loan, will deplete money from your bank account faster than your student loans will,” Levy said. “It’s best to tackle that debt first. Plus, you still need to save for long- and short-term goals, like building up your emergency fund.”
This approach is known as the avalanche method; while you attack your debt with the highest interest rate first, you keep making the minimum payments or a little more for the rest of your debt. When you knock out the debt with the highest interest rates, you focus on attacking the debt with the next-highest interest rate.
This method works — this woman used the avalanche method and paid off six figures of debt.
MYTH #4: You Can’t Pay Off Student Loans Until You Graduate
Direct subsidized loans and Perkins loans don’t accrue interest while you’re enrolled as at least a half-time student or during the six-month grace period after you graduate.
However, this may make students think they can’t (or shouldn’t) pay off their loans until they graduate. This isn’t true.
“You can start paying off student loans right away, and you should pay what you can as soon as you can,” says Joseph DePaulo, CEO and co-founder of College Ave Student Loans, who also worked for Sallie Mae, one of the largest student loan providers in the country. “Students who put money toward their loans during school save money in the long run.”
College Ave Student Loans’ interactive calculator shows that paying only $25 per month while you’re still in school toward a $10,000 loan with an 8.75% interest rate could save you over $2,000 in interest.
Just because you aren’t getting a monthly bill in your inbox doesn’t mean you can’t start making payments.
Go for it! You’ll thank yourself later.
MYTH #5: Lowering Monthly Payments Will Solve All Your Problems
Your monthly student loan payment can blow your budget or leave you with barely enough money to survive. That’s why jumping at the opportunity to lower your monthly payments can be tempting.
Government-offered income-based repayment programs can lower your monthly payments — but these programs extend the life of your loan, meaning you pay more interest in the long run. And while your debt is typically forgiven after 20 or 25 years, you’ll also owe taxes on the amount that’s forgiven.
You could also consolidate your student loans, which means you transfer all your loans to one lender and settle for a new interest rate with the goal of lower monthly payments.
Based on your circumstances, either of these choices could be a good idea — but it depends on a lot of factors.
Student Loan Hero CEO Andy Josuweit says lowering monthly payments is simply a short-term fix and believes consolidating your loans immediately after you graduate isn’t the best idea.
“Consolidation of federal student loans can be a bad idea if you want to pay off your student loans early,” Josuweit explains. “By consolidating, the interest rates of all your loans are averaged. You’re no longer able to make extra payments that specifically target the student loans with the highest interest rates first, which would save money on interest charges.”
Don’t automatically jump on this option. Refinancing student loans is a tricky strategy, requiring a ton of number crunching and evaluating.
Meanwhile, income-based repayment programs are designed for borrowers who have a high amount of debt compared to their income.
Make sure you have all the facts on how either of these strategies will affect your personal situation. Then, you can decide if paying more in the long run in return for lower monthly payments is worth it to you.
Your Turn: Did any of these myths about student loans surprise you?
Kelly Smith is a junior writer and engagement specialist at The Penny Hoarder and a senior at The University of Tampa. Catch her on Twitter at @keywordkelly.