3 Common misconceptions about student loans

Avoid these student loan mistakes

Borrowing money for college is pretty common. In fact, according to “How America Pays for College 2023” from Sallie Mae and Ipsos, 4 in 10 families borrowed to help cover the cost of school in 2023. Still, as common as student loans are, there’s still a lot of confusion about some basic facts. Let’s break down three of the most persistent misconceptions.

1. I’ll borrow money for college, but I won’t have to pay it back

Alright, let’s get this one out of the way first. It seems obvious—but it has to be said. If you’re taking out a private student loan (or any loan), you are expected to pay it back….in full…on time. A loan is money you pay back with interest. So, you end up paying back even more than you borrowed. This applies to both federal and private student loans.

Sadly, there’s still people who take out student loans without understanding that they’ll have to pay them back. Among borrowers with federal student loans, research shows that many expect their loans to be forgiven.

While there are some federal loan forgiveness programs (sometimes called debt relief programs),^{footnote 1} as of now they won’t cover every borrower. Don’t take out a loan thinking that it’ll be automatically forgiven. Assume you’ll have to pay it back in full on your own.

It’s also important to remember that these debt relief programs only apply to federal student loans (those are loans made by the government). It does not apply to private student loans made by banks and other financial institutions.

2. I want the lowest interest rate (but don’t want to bother comparing lenders)

Not surprisingly, borrowers say that getting the lowest interest rate is one of the most important factors when taking out a private student loan. You wouldn’t make any big purchase without researching your best options, right? By comparing loans’ rates and other features, you might be able to save money over the long term. But in reality, most borrowers don’t apply with multiple private student loan lenders to compare the rates they actually qualify for. 

When you apply for a private student loan with several loan companies, each lender will do a credit check. This activity could cause your credit score to drop; there’s no way to avoid that. But, according to Credit Karma, some credit-scoring models treat multiple credit checks within a 14-day period as just one single instance. That’s because reporting companies expect consumers to shop around and compare rates. In general, if you want to apply with multiple lenders, try to do it over a short period of time.

Pro tip: Along with the actual interest rate, consider all the rate-reducing benefits lenders offer. For example, with an undergraduate student loan from Sallie Mae, borrowers can get a .25 percentage point interest rate reduction just for enrolling in automatic payments.^{footnote 2}

3. I want to pay my loans off ASAP—but only by making minimum payments

One of the most common misconceptions among borrowers is that they want to pay off their student loans fast—while making only the lowest possible monthly payment. The truth is, these are two opposing ideas.

Making only your minimum monthly payment is totally fine, if that’s what works for your budget. And making regular, on-time payments each month is one way to help build credit. But it’s not the fastest way to pay off your loan. Although it can make your budget more manageable from month to month, sending in only the minimum payment prolongs the life of your loan. And more importantly, you’ll end up paying more in interest over time.

Think about what’s more important (and realistic) to you. Is it making larger payments and paying off your loan sooner? Or making smaller, more manageable payments for a longer period of time and paying more with the interest that will accrue (add up)? If you have questions, you can ask your lender to help you figure out how making larger payments will impact your timeline and lower your total loan cost.

Pro tip: Even if—to be on the safe side—you choose to make only the minimum payments each month, you always have the option to pay extra or make additional payments of any amount. So when you get a tax refund or a bonus at work, think about putting it toward your loan.

Know before you owe

When it comes to student loans, it’s important to know the basics of how they work before you borrow. That way, you’ll be able to understand the options available to you. Get the info you need, clear up those loan misconceptions, and you’ll be able to make choices that you’ll feel good about now—and later.