9 common student loan myths debunked

Can you tell fact from fiction when it comes to your college debt?

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Student loans can be one of the most complicated types of debt out there, thanks to a wide range of repayment, forgiveness and deferment options. It doesn’t help that student loan servicers sometimes give out misinformation — especially when it comes to forgiveness. Knowing student loan fact from fiction can help you navigate repayments and save in both the short and long term.

Myth #1: I’m stuck with the same rates forever.

You aren’t. You can change your interest rate by refinancing your student loans with another lender. While you need excellent credit to get the best deal, you can also apply with a cosigner who has strong credit to help you qualify for a lower rate. Refinancing can also help you extend your term to lower your monthly repayments — or shorten it if you want to get out of debt faster.

If refinancing is off the table, you can often negotiate your rate down with private lenders. Call up your servicer and make a case for yourself — most are willing to tweak the terms to help you avoid defaulting.

Myth #2: I should only refinance private loans.

It’s true that refinancing federal student loans means you lose all of the benefits that come with this government-issued debt. But if you’re making a high enough income to afford the Standard Repayment Plan and have good credit, chances are you wouldn’t benefit from income-driven repayments, deferment or even student loan forgiveness. But you could benefit from lower rates from a private lender.

Consider what you stand to lose and if it would actually be a loss before you write off refinancing.

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Updated November 13th, 2019
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Myth #3: Student loans should take priority over other types of debt.

News of the student loan crisis might make you think you should get rid of this debt as fast as possible. Paying off any kind of debt as quickly as you can is generally a good way to save. But if you’re juggling student loans, credit card debt and car payments, you might want to have your student loans take a back seat.

That’s because student loans typically have lower rates and more flexibility if you’re in danger of defaulting than other types of debt. You can change your repayment plan on federal loans at any time without having to refinance. And student loans generally come with more options to pause repayments if you hit tough times.

Myth #4: Consolidation can give me better rates.

Consolidating your federal student loans with a Direct Consolidation Loan will never give you a lower interest rate. The rate you get is a weighted average of the interest rate you have on all of your federal loans. That means you’ll pay the same rate or slightly more after you consolidate your loans. If you want to lower your rate, consider refinancing.

Myth #5: I can’t change my servicer.

You aren’t necessarily stuck with the company that handles your student loan repayments forever. If you have federal loans, you can switch your servicer by taking out a Direct Consolidation Loan to pay off your current balances.

With both federal and private loans, you can also change up your servicer by refinancing. Research your refinancing company’s servicer to make sure you’re making a change for the best by reading reviews and looking up complaints on the Consumer Financial Protection Bureau’s website.

Myth #6: Income-driven repayments are always cheaper.

Repayments based on your income are only less expensive if you have a low salary, high loan balance or both. If you’re thinking of making the switch, use the repayment estimator tool on StudentLoans.gov to see how much you’d pay on all plans you qualify for. You might be surprised to find that fixed repayments are actually much less expensive than income-driven repayments — and much less of a hassle.

Myth #7: Only federal loans are eligible for forgiveness.

True, only federal loans are eligible for Public Service Loan Forgiveness (PSLF). But PSLF isn’t the only forgiveness program out there. Federal loans still qualify for more programs, but there are several options that accept private loans — especially if you work in healthcare or law. Some employers also offer student loan forgiveness as a company benefit, which usually doesn’t discriminate between federal and private loans.

Myth #8: I can qualify for PSLF on any repayment plan.

You can only qualify for PSLF if you make 120 eligible repayments while on an income-driven repayment plan. This misconception is one of the main reasons why so many PSLF applicants were rejected during the first few rounds.

But there’s one exception to this rule: Congress created Temporary Expanded Public Service Loan Forgiveness (TEPSLF) in 2018, which accepts other types of repayments. However, 99% of the first round of TEPSLF applicants were also rejected.

Myth #9: Forgiveness is always free.

While PSLF and many other federal forgiveness programs are free, the IRS sometimes considers student loan forgiveness to be taxable income. Often, the program deducts federal taxes from the forgiveness amount before you receive it. You also might have to pay state and local taxes on it.

Bottom line

Student loans might be more flexible than you think. You have options to change your rates, switch servicers and even apply for forgiveness no matter what type of loans you have. You can learn more about how it all works by reading our guide to student loans.

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