photo credit: Getty
Getty
What’s the #1 student loan myth?
Answer: that you have no power to take control of your student loans.
Here are 5 student loan myths that you should stop believing – and what to do instead.
Myth #1: Your student loan interest rate will never be lower.
The best way to lower your interest rate is through student loan refinancing.
Student loan refinancing enables you to combine your existing federal student loans, private student loans or both into a new, single student loan with a lower interest rate and lower monthly payment. To be approved for student loan refinancing, you’ll need a strong credit score (typically 680 or higher) and strong, recurring monthly income. Each lender has its own underwriting criteria, which may include an evaluation of your debt-to-income ratio and monthly cash flow, among other factors.
This free student loan refinancing calculator can show you how much you can save.
Do This: If you don’t qualify for student loan refinance, you can still apply with a qualified co-signer. The co-signer assumes financial responsibility for your student loans, but many lenders offer a co-signer release option, which enables co-signers to be released from financial responsibility after you refinance student loans.
Myth #2: You can have your student loans forgiven through Obama Student Loan Forgiveness.
Hard truth: there is no such thing as Obama Student Loan Forgiveness.
Here are a few things to know about student loan forgiveness. First, student loan forgiveness only applies to federal student loans (not private student loans) and is principally available through the Public Service Loan Forgiveness program. Second, the Public Service Loan Forgiveness program is a federal program that forgives federal student loans for borrowers who are employed full-time (more than 30 hours per week) in an eligible federal, state or local public service job or 501(c)(3) non-profit job who make 120 eligible on-time payments over 10 years and are enrolled in a federal repayment program. Third, there are other types of student loan forgiveness programs, such as through income-driven repayment programs, but these require 20-25 years of student loan payments.
Do This: To determine if you qualify for student loan forgiveness, student loan refinancing and other options, this student loan quiz will provide you with a free customized student loan repayment plan in less than one minute.
Myth #3: Income-driven repayment programs offer the best student loan forgiveness
Not necessarily. While you can receive student loan forgiveness after 20-25 years of student loan repayment of federal student loans – depending if you hold undergraduate or graduate student loans, respectively – there’s a caveat. You may owe income taxes on the amount of federal student loan debt forgiven. For example, if after 20-25 years, you have $20,000 of federal student loans forgiven, you may owe income taxes on that amount.
Do This: An income-driven repayment plan may still make financial sense for you. Alternatively, consider a career in public service, which may result in federal student loan forgiveness without any income tax liability for you.
Myth #5: Federal student loan consolidation will lower my interest rate.
Federal student loan consolidation is the process of combining your federal student loans (not private student loans) into a single, new Direct Consolidation Loan. One major misconception is that federal student loan consolidation lowers your interest rate. However, your interest rate is equal to a weighted average of your existing federal student loan interest rates, rounded up to the nearest 1/8%.
Student Loan Consolidation: The advantage of federal student loan consolidation is to organize all your federal student loans into one student loan with one interest rate, monthly payment and student loan servicer.
Student Loan Refinancing: Only student loan refinancing enables you to combine both federal student loans and private student loans into a single student loan with a single interest rate, monthly payment and student loan servicer. In contrast, federal student loan consolidation enables you to consolidate federal student loans only.
Do This: If you want to lower your interest rate and pay off student loans faster, your best bet is student loan refinancing.
Myth #5: Applying to multiple lenders for student loan refinance will hurt my credit score.
Not so. If you are refinancing student loans, you should apply to multiple student loan lenders to maximize your chances for approval. Most applications are online and take only two minutes to find your new interest rate. With most lenders, you can check your new interest rate for free with only a soft credit pull (which does not impact your credit score). According to FICO, student loan “interest rate shopping” inquiries made during a focused time period (for example, 30 days) will have little to no impact on your credit score.
Do This: When you refinance student loans, apply to multiple lenders to maximize your chances of approval and to receive the best interest rate.
