Student loans can help you get an education, but the terms and fine print can be confusing. Whether you’re talking to other students or trying to explore the implications on your own, it’s easy to find and believe the misconceptions during and after signing the paperwork.
Misinformation can be expensive if you make mistakes with your loans. Instead, know the truth about these five myths about student loans.
1. Myth: always borrow the maximum amount
When you apply for federal and private student loans, you can be offered more than you need. It can be tempting to take the maximum amount, who doesn’t like cash up front? But this might not be the smartest long-term idea when you have to return it.
Rate purchase markets like Credible allow you to compare offers from multiple lenders at once and determine the repayment term and total cost of the loan. This will give you an idea of the loan amount you can handle.
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You are not required to take the complete package in your financial aid award letter. Instead, calculate precisely how much you will need. Then consider other ways you can get financial aid, including methods that don’t have to be repaid, like scholarships and grants or a part-time job to earn extra income. Or choose a less expensive school.
A large loan amount will result in a higher monthly payment. Credible’s online student loan calculator will help you estimate the total amount you will owe and identify your monthly payment. This will help you see how much the maximum amount will affect your budget later and compare it to your anticipated income.
Even if you enter a field where you can apply for loan forgiveness, most programs require you to work several years to qualify. You’ll need to make your payments during that time, and only the rest will be removed.
2. Myth: You should always refinance your student loans
Interest rates are at record lows, and current student loan rates may be lower than what you have. That means you should refinance, right? Not necessarily. While refinancing your student loan may lower your rate and your payment, if you have a federal student loan, you may want to stay the course.
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To refinance federal student loans, you must convert them to private student loans, which eliminate the benefits you can get from federal loans. For example, you would no longer be eligible for a federal payment plan, such as income-based payment, which reduces your monthly payment based on your ability to pay. She would also give up her ability to participate in a public service loan forgiveness program. Be sure to consider the benefits federal loans offer before refinancing them, and shop around and shop around for the best deal if you do.
3. Myth: Federal student loans have the lowest interest rates
Federal and private interest rates are low right now, but just as the economy fluctuates, that’s subject to change. Federal student loans generally offer the lowest rates, but if you have excellent credit, you can get a lower interest rate.
Also, since private student loans are not need-based or federally subsidized, you generally qualify for a higher loan amount. Having a single low but higher interest student loan balance may be more attractive to your consolidation financing goals.
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4. Myth: don’t worry about paying off your student loans at school
Borrowers are not required to pay off student loans while they are still in school, but it can be a myth to think that it is the best method of managing your finances. It can be smart to start making student loan payments while you are in school or in the loan grace period to decrease the total loan amount.
Even small payments, like $ 25 a month, can lower your accrued interest and lower your student loan balance, making it more manageable later on. You’ll do yourself a favor in the future if you can afford to start the payment plan sooner and hopefully avoid having trouble paying later.
5. Myth: I will never repay my student loans
If your student loan balance is large, paying it can be overwhelming. The average amount of a college loan is $ 29,000, according to the College Board. Graduate loans are much higher, with an average master student loan balance of $ 55,200, according to the National Center for Education Statistics, and doctoral loan amounts reach six figures.
WHEN TO REFINANCE YOUR STUDENT LOANS
Although the standard term of a student loan is 10 years, it may seem like you will never reach the goal. But you have options. If you have loans, you can apply for an income-based repayment plan. You can also refinance to reduce the total amount of interest you will pay. However, be careful not to extend your term. Otherwise, it will further delay the end date. And one of the most effective methods is to re-examine your budget and create a plan to pay off your loan ahead of schedule.
The best time to start thinking about paying off a student loan is before taking it out to avoid making a mistake or believing the myths about student loans. If you’re considering getting private student loans to help pay for college, visit an online tool like Credible to see a rate chart.