College students have a tendency to ask each other for advice on financial management and student loans. Itâ€™s great to ask people in similar situations to yours for advice; however, the lack of understanding of student loans and related programs has led to a splurge of student loans myths.
Thereâ€™s an abundance of student loan myths out there that are costing borrowers heaps of money and are pushing them further into debt.
Check out these common student loan myths that people need to stop believing.
1.Â Paying Off Your Student Loan Early Will Cost You
This isnâ€™t true. Your student loans do not work like mortgages where youâ€™ll be charged with a â€śprepayment penaltyâ€ť.
If you have the money, you can pay off your loan early and save yourself thousands of dollarsâ€™ worth of interest. You have the flexibility to refinance your loan at any time.
2.Â Federal Student Loans are forgiven after 10 year by default
As much as we would appreciate it if federal student loans just disappeared after a 10-year period, itâ€™s not possible. However, the federal government does offer a program called Public Service Loan ForgivenessÂ that allows a studentâ€™s payments to be â€śforgivenâ€ť.
Students with federal loans are allowed to pay apply for Public Service Loan ForgivenessÂ if they are working a minimum of 30 hours a week in a public service/non-profit job and if theyâ€™ve made at least 120 timely monthly payments.
Note that even if students meet the criteria, they will still have to applyÂ for the programâ€”nothing happens by default.
3.Â You can take a Break from Monthly Payments
While a break from monthly student loan payments will be awfully convenient in an individualâ€™s life, itâ€™s not advisable.
If you fail to pay off your phone bill, your line will get cut or you could be penalized with a late fee. In order for you to get your connection back, youâ€™ll have to pay the phone bill along with the fee.
Missing your monthly payments will cost you in the same way. It will heavily impact your credit score and increase interest. You may save some extra cash for a short-period but in the long run it will cost you much more.
Donâ€™t avoid paying your monthly amount. You should aim to pay off your student loans as fast as possible.
In case you are struggling to make payments, consult a loan service or loan specialist to help you with refinancing.
4.Â Income-Based Repayment Plans Donâ€™t Impact Credit Scores
Students use income-based repayment plants to tailor student loans to their needs. An income-based repayment plan can reduce monthly payments based on the size of your family and your monthly income.
Many students make the mistake of thinking that since their monthly student loan payments have gone down, they owe less money and interest. They need to understand that their monthly payment amount hasÂ to include interest chargesâ€”if it doesnâ€™t, theyâ€™ll go into even more debt and their credit score will take a hit.
5.Â You can Save on Interest by Consolidating Loans and Refinancing
First and foremost, â€śconsolidationâ€ť and â€śrefinancingâ€ť are not the same and should NOT be used interchangeable.
Direct Consolidation Loan
Federal student loan consolidationÂ refers to merging all federal student loans into a single Direct Consolidation Loan. The purpose of consolidation is to make your life easier since you can now make a single monthly payment as opposed to multiple ones. Your interest rate will not be lowered but it will be a weighted average of the interest rates of your previous federal loans.
Keep in mind that Direct Consolidation Loan is only for federal student loansâ€”private loans donâ€™t count.
Refinancing Student Loans
For refinancing a loan, youâ€™ll have to work with a private lender. Refinancing involved combining several federal AND private loans into a single monthly payment with a new interest rate that is determined by your financial health and credit history.
However, when you opt for refinancing, you give up some of the protections that come with federal student loansÂ such as income-based repayment plansÂ and federal service loans.
With that being said, for borrowers that onlyÂ have private loans, refinancing is a great option.
Do you require assistance with student loan forgivenessÂ and refinancing programs? Get in touchÂ with the student loan specialists at American Student Services. Weâ€™ll walk you through your options and see if youâ€™re eligible for programs that can help your financial situation.
Call us at 1-800-409-0719 for more information on our services.