Perhaps you or your loved one wants to enroll in college soon. Or, you have been there for some time and are looking for ways to fill financial gaps and cover your educational expenses. Student loans come in to offer financial support, and the best part is that you don’t require a credit history to qualify for a loan. Student loans feature lower and more affordable interest rates and flexible payment plans. Nonetheless, a big part of applying and qualifying for student loans is understanding how they work. This guide debunks some of the typical student loan myths.
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Low-Interest Student Loans Are the Best
One of the outstanding features of student loans is their affordable interest rates. The rates are designed to accommodate students’ needs, especially considering that most struggle to raise fees.
However, different types of student loans have varying interests. And as much as you want to save money, you shouldn’t let the lowest rates lure you into making the wrong choices.
It will help to consider other aspects, such as the repayment term, as this determines how much you will be paying per month. Also, consider if the loan type demands a full balance or deferred payment options.
It would be better to settle for a student loan with a high-interest rate and better protections than to select one with a low-interest rate but one that fails to protect your interests.
Conduct online research. Then do an interest rate comparison and the pros and cons of each before making the final decision.
If You Cannot Afford to Pay, You Are Forgiven
Statistics reveal that about 43.2 million students are in debt. And about 42.9 million Americans with student loans have debts of an average of $37,105 each.
From these statistics, it is evident that most student loan borrowers are yet to clear their debts. The reason for this is that the majority of them are low-income earners who are unable to pay the full balance at this time.
But this is where most students go wrong. They assume that they will be forgiven.
The truth is, student loan forgiveness only applies to federal loans. And to receive forgiveness, you must enroll in an income-driven loan payment plan such as REPAYE or PAYE.
However, forgiveness under this plan may take up to 25 years, and you must meet specific income requirements.
You may also try out other manageable repayment options, such as graduated repayment or extended repayment.
Don’t hesitate to apply for a student loan due to fear of monthly payments. If your budget doesn’t favor you, contact your loan servicer to discuss the best options to meet your needs. The idea will save you from going into default, thus protecting your credit score for future gains.
Income-Driven Repayment Is the Best Option
Indeed, an income-driven repayment plan comes through for borrowers with budget constraints, but if you can avoid it, the better.
This repayment option considers your income and family size to dictate your monthly loan payment amount. Compared to the standard repayment plan, it is convenient but has a downside.
For starters, all income-driven payment options demand monthly payments of approximately 10–20% of your monthly income before tax. Most of the plans have a repayment period of 20–25 years.
If you do the math, 25 years of 20% off your income is ridiculously inconvenient. If you can, look for a means to repay the loan within the shortest period of time. Don’t rely on the possibility of loan forgiveness without considering all the requirements and loopholes for such plans.
Defaulting Does Not Affect Your Credit Score
You may think that defaulting on your loan will make your life easier. That is not any further from the truth. While student loan servicers don’t consider your credit score to determine your qualification, they will indeed report you if you fail to repay on time.
The credit bureaus will use your ability to repay your student loan to establish if you deserve other loans in the future. If you plan to buy a home in the future, you will need a home loan, which you may not qualify for if you cannot prove your trustworthiness now.
To avoid future inconveniences, ensure you understand your student loan repayment terms before applying.
Instead of defaulting, apply only for what you can comfortably repay in the future. If you wish to take an expensive course like nursing, try out scholarships for further financial help. The scholarships accommodate any best-honors student who cannot pay their fees.
The scholarships help cut down on some of your expenses and put you a step closer to achieving your goals. Check out online resources to discover more on ways to find great scholarships that meet your needs.
Student Loans Will Automatically Lower Your Credit Score
Having a student loan does not mean that you can’t qualify for other loans; failure to repay does. Your loan payment history plays a massive role in your credit score. If you strive to be consistent and reliable with repayment, your student loan will improve your credit score.
Lenders will see that you are a dependable borrower and will not hesitate to give you attractive offers. Therefore, steady student loan payments will qualify you for auto loans, personal loans, and mortgages in the future.
Check online resources for how to repay your student loan faster and more conveniently. For instance, you can lower rates through discounts, consider refinancing, or establish a repayment fund. With a good strategy, you will be better positioned to complete your repayment before your next loan application.
Federal Student Loan is the Same as Private Loan
Many individuals use federal and private loans interchangeably. The confusion between the two types of student loans has led them to make uninformed decisions during loan applications.
The federal government funds federal student loans. On the other hand, private student loans are given by individual lenders, such as state agencies, banks, or credit unions.
Federal loans feature terms and conditions set by the law. They also come with favorable benefits, like low-interest rates and income-driven payment plans.
The loans are primarily meant to help students with financial difficulties remain in school. A smart student no longer has to leave school due to a lack of fees and money to cater to other expenses. Also, with federal loans, you can choose to put off payment until you are done with school.
In contrast, private loans feature terms and conditions set by lenders. They are a bit expensive and not the best student loan option for low-income earners.
Most private loans require you to start repayment while still in school. You may talk to your lender to allow you to defer payment until you are out of school.
The other feature that sets federal and private loans apart is the interest rate. Federal loans have fixed interest rates, which are lower than most loans. In contrast, private loans can have fixed or variable interest rates depending on your servicer.
Federal loans do not need a credit check to determine your qualification, while private loans require an established credit history or a cosigner to qualify for financial help.
You Cannot Borrow More Than You Can Afford to Repay
You must be excited about attending college. This has always been your dream, but you are afraid of your dream getting crushed by the lack of funds.
College sounds expensive, but things get better with a ton of financial aid at your disposal. Nonetheless, with little to no knowledge about debts, it is normal to be hesitant about applying for a student loan due to your current financial capacity.
The truth is, most student loan lenders do not consider your financial capacity when granting you help. Private lenders, to be precise, are mainly concerned about profits. They know that the more they give, the higher the profits will be when they repay the amount in the future.
Therefore, it would help to do in-depth research and number crunching before settling for a loan. Don’t rush to take a massive loan because it’s being offered to you without considering how it will impact your income and budget when you get a job.
Borrow only what you require. Consider the cost of your college, your cost of living, and your financial aid award. With discipline, you don’t have to accept the whole loan amount as offered. You may enjoy it today, but you’ll surely suffer later.
Furthermore, you may consider working part-time to avoid taking a huge loan amount. You can use what you earn to cater to your personal expenses and only use your loan for fees.
It Costs You More to Repay Your Loan Early
Some student borrowers assume that they have to wait until they are done with school to start repaying their loans. But the truth is that you can begin to pay at any time you wish.
Although you are not expected to pay student loans before the six-month grace period is over, it will be of great help to start repayment early. The idea helps you save a lot on interest rates.
Early payment is a great saver, especially with direct and unsubsidized loans. These loans start accruing interest as soon as you take them. So, the longer you take to repay, the more interest accumulates.
Even better, paying off your student loan early helps you get ahead with your financial goals. You will have one less debt to worry about. Instead, you can shift the money to other expenses, such as saving for retirement, mortgage repayment, or even taking a vacation with your loved ones.
Most importantly, early repayment improves your debt-to-income ratio. This measurement plays a crucial role when applying for other loans. Lenders consider your debt-to-income ratio when establishing your eligibility for credit and better interest rates.
Strive to pay off your student loan fast, perhaps by taking a side hustle to earn extra cash while still at school or after. You may also try bi-weekly payments instead of monthly payments to increase the half-payments made per year.
Refinancing is Always a Great Move
Certainly, refinancing your student loan can help you save on interest rates in instances where you acquire another loan with a lower interest rate. Nonetheless, the idea may result in other unattractive consequences.
For starters, if you refinance your student loan, your new loan becomes a private student loan. This limits you from enjoying the same flexible payment options you enjoyed with federal student loans.
You can no longer use convenient repayment plans, such as income-driven and public service loan forgiveness.
Furthermore, possible legislative plans in the future will affect your loans. Take the example of the pandemic season, when student loan repayments were paused and interest rates wavered. Those who had refinanced their student loans missed out on this privilege.
Loan Consolidation is a Smart Idea
College life can be expensive, forcing you to apply for several loans. And you may be tempted to consolidate the loans and make one payment each month.
The idea comes with some benefits. It makes debt repayment more manageable and gives you more time to repay the loans.
However, student loan consolidation may limit you in numerous ways. Saving becomes nearly impossible. The reason is that if your repayment period is increased, you will pay more interest.
Consolidating student loans forces you to give up on amazing federal loan benefits, like repayment flexibility and loan forgiveness.
Before you decide to consolidate your student loans, consider how much you owe and how the idea will affect the interest rates. If all your loans are private, you can go ahead, but if one of the debts is from the federal government, rethink your decision.
Understand Student Loan Myths to Make Wise Application and Repayment Decisions
Differentiating student loan myths from the truth is the only way to make sound decisions about your debt. You know which loan type to apply for, the amount to take, and which payment plan to follow to speed up the repayment and save more.
Don’t believe everything you read or hear about student loans. Instead, learn about the education industry, the best student loans, and the most dependable servicer.
Keep checking our articles for more helpful content.