Don’t believe everything you hear about student loans. With tuition costs outpacing income, the fact is that 70% of college graduates need student loans to help pay for college. But bad information can make borrowers feel like they might have made the wrong decision.
Relax. Here are 5 myths about student loans that are pure fiction.
5 Myths About Student Loans
Have you been taken in by any of these student loan fictions and fallacies? A lot of students and parents are, which is why they’re still floating around.
Myth #1: Interest Rates Are Super High
It’s true that federal student loan interest rates can be higher than auto loan rates. But that doesn’t make student loans a bad deal. Here’s why.
Auto loans and mortgages are “secured” loans. The borrower’s car or home serves as collateral and can be repossessed by the bank if they default on the loan. Secured loans have lower interest rates because they’re less risky for the lender.
Student loans, meanwhile, are “unsecured.” If a borrower defaults on student loans, the bank doesn’t have anything to repossess. And so the interest rate is set a bit higher. But the interest rates on federal student loans are still much lower than what you’d qualify for at a bank.
Myth #2: Saving Money Is Impossible With Student Loans
For most people, student loan payments aren’t sky high. The key is choosing the right repayment plan. Take income-based repayment plans, which set monthly payments at just 10% of “disposable income” — or what’s left after your other bills are paid.
Let’s run some numbers. The average new graduate from a 4-year public college has $32K in student loan debt. And the average salary for 20- to 24-year-olds is $37K.
With income-based repayment, a single grad might pay about $138 per month. If they start a family, they pay much less: just $20 a month until their income grows. Which still leaves room for saving.
See how different terms and rates affect your monthly payment with our student loan refinance calculator.
Myth #3: Student Loans Kill Your Credit
Like any loan, student loans could help or hurt your credit depending on how you manage them. As long as you make your payments on time, student loans may build your credit history and boost your score over the long run.
If you’re struggling financially, consider switching your payment plan, or applying for student loan deferment or forbearance. Neither of these options will hurt your credit.
Myth #4: Student Loans Are All the Same
Nope. In fact, federal student loans are typically a better deal for borrowers than private loans. With subsidized loans, the government pays your interest while you’re in school and for 6 months after. And all federal loans offer special protections to borrowers in case of financial hardship.
In short, subsidized federal loans are pretty much the gold standard.
Myth #5: You Can Get Student Loans Forgiven, for a Fee
It sure seems plausible that a law firm or financial advisor might be able to cut through the red tape and reduce your payments or get them forgiven entirely. For a fee, of course.
Alas, this is a scam. If anyone reaches out to you by phone, text, email, or social media promising to help you with your student loans, it’s utter bull. You may catch on when the caller asks for your financial info, but your parent or grandparent may not, so you might want to warn them.
To make sure you hear about the latest student loan forgiveness news straight from the source, sign up for alerts from the DOE .
ReFi With SoFi
SoFi refinances student loans — both federal and private. (Just be aware that refinancing federal loans makes them ineligible for federal forgiveness and protections.) You can choose to lower your monthly payment by extending your term or pay off your debt faster and save money on interest. SoFi offers flexible terms and low fixed or variable interest rates. And there are no fees: no origination fees or late fees.
Photo credit: iStock/Khosrork SoFi Student Loan Refinance CLICK HERE for more information. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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