7 Student Loan Myths Debunked
When you’re busy focusing on exams and your bustling social life, it’s easy to let the details of student loans fade to the background. But student loans can be tricky, so it’s important to understand what you’ve signed up for when you borrowed them to fund your education.
We’re debunking some common student loan myths to help you feel more prepared with the knowledge you need to stay on top of them and in control.
1. Student Loans Don’t Accrue Interest While You’re in School
One common myth student loan borrowers face is that student loans don’t accrue interest while you’re still in school. This could be true, but it depends on the type of loan you hold. If you have a Federal Direct Subsidized Loan , the loan doesn’t accrue interest while you are enrolled in school, during the grace period, or when loans are deferred after graduation.
If you have a Federal Direct Unsubsidized Loan , however, interest will accrue (which is another word for “accumulate”) on the loan while you are enrolled in school and during the grace period after graduation. While you are in school, you do have the option to make payments on the interest. If you don’t, after you graduate and your grace period has lapsed, the interest that has accrued is capitalized on the loan.
“Capitalized” means the interest is added to the principal value of the loan, and then interest is charged on that new principal—meaning you’re paying interest on top of interest. Interest also accrues during periods of deferment or forbearance of unsubsidized loans.
Again, you could pay interest-only payments during this period, but if you don’t, the accrued interest will be capitalized on the loan at the end of the forbearance or deferment period. (This applies to all federal unsubsidized loans, including Direct PLUS loans .)
Most private student loans begin accruing interest as soon as they are disbursed, so check with your lender for the terms of your loan.
2. Your Loan Payments are Based on Your Income
There are a few different repayment plans when it comes to federal student loans, but the default is the Standard Repayment Plan , which offers fixed payments over 10 years.
You could also select the Extended Repayment
Plan , which lowers your monthly payments by stretching the loan term up to 25 years. Another alternative is the Graduated Repayment Plan , where the monthly payments gradually increase every two years over a 10-year to 30-year term (for Direct Consolidated Loans).
If you’re interested in an income-driven repayment plan , you’ll have to apply for one. Generally, your payment amount is a percentage of your discretionary income (the income that is left over after expenses like food, housing, and paying taxes). The percentage amount varies by plan. There are four federal income-driven repayment plans:
• Revised Pay As You Earn Repayment Plan (REPAYE)
Generally, monthly payments are 10% of your discretionary income.
• Pay As You Earn Repayment Plan (PAYE)
Generally, monthly payments are 10% of your discretionary income, but never more than the 10 year Standard Repayment Plan amount.
• Income-Based Repayment Plan
Generally, monthly payments are 10% of your discretionary income if you’re a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount
15% of your discretionary income if you’re not a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount
• Income-Contingent Repayment Plan
Monthly payments are the lesser of the following: 20% of your discretionary income
Monthly payments are what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your discretionary income
Each of these income-driven repayment plans has a different term length. After that term length, the remaining loan is forgiven. You may be required to pay income taxes on the forgiven amount .
3. Public Service Loan Forgiveness Is Automatic
Nothing about the Public Service Loan Forgiveness (PSLF) program is automatic. PSLF is set up to forgive federal student loans for borrowers who are employed full-time in an eligible federal, state, or local public service job, or 501(c)(3) non-profit jobs AND who make 120 eligible on time loan payments.
To help ensure you are on track for PSLF, you can start by researching qualifying employers . From there, you can complete the PSLF Employment Certification form . This is the form to fill out when you start a job in qualifying public service, when you switch jobs, or annually, if your employment has remained the same.
You’ll also need to decide if you want to consolidate your loans. Only certain loans qualify for PSLF so if you have Perkins loans, or Federal Family Education Loans (FFEL), for example, you may need to consolidate your loans into a Direct Consolidation loan to qualify.
4. There Is No Penalty for Paying Off Your Student Loans Ahead of Schedule
Unlike other loans, when it comes to federal student loans, there are no penalties for paying them off ahead of schedule. This is also known as prepayment. If you have private student loans, check with your individual lender, because many are now offering student loans without any prepayment penalties.
One of the fastest ways to accelerate your student loan repayment is to pay more than the minimum balance of your loan each month. It can even help cut down on the money you spend on interest.
5. Federal Student Loan Consolidation Will Lower Your Interest Rate
Federal student loan consolidation is the process of combining your federal student loans into a single new Direct Consolidation Loan . One of the major misconceptions about the program is that you will secure a lower interest rate when you consolidate your loans.
However, your new interest rate with a Direct Consolidation Loan is the weighted average of your existing student loan interest rates, rounded up to the nearest one-eighth of 1%, which may not work out in your favor.
The main advantage of consolidation is that you are able to combine all of your monthly federal loans into one, which means one monthly payment. If you would like to lower your interest rate, you may wish to consider refinancing your student loans instead—especially if you have a combination of federal and private student loans, as only federal student loans are eligible for Direct Consolidation Loans.
6. You Can Only Refinance Your Student Loans Once
There is no limit when it comes to refinancing your loans. However, some lenders charge origination fees and other costs for refinancing. Fortunately, there are certain lenders, like SoFi, that do not charge any fees for refinancing.
If you qualify to refinance to a lower interest rate, that usually reduces the amount of money you could spend over the life of your student loan. Refinancing means you combine your student loans into a new private loan, hopefully with a lower interest rate.
7. You Need a Perfect Credit Score to Refinance Your Student Loans
While your credit report can impact the interest rate you are eligible for when you refinance, it’s actually one of several financial factors typically taken into consideration during the application process.
If you are considering refinancing your loans, you may want to do you research and compare what different lenders are willing to offer you. Many applications can be easily completed online in just a couple of minutes, and many lenders do a soft credit pull to estimate your new interest rate, which won’t affect your credit score*.
Refinancing Your Student Loans with SoFi
Refinancing your loans could be a smart way to lower your interest rate, which can reduce the money you spend on interest over the life of the loan. If you’re taking advantage of federal programs like PSLF or any of the income-driven repayment plans, refinancing might not be for you, as you will no longer be eligible for those federal benefits.
When you refinance with SoFi, there are no origination fees or prepayment penalties. If you’re interested in seeing what your loan with SoFi could look like, take a look at our student loan refinance calculator.
To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s Website on credit
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.