Borrowing money for college is pretty common. In fact, four out of 10 college families borrowed money for the 2021-22 academic year. Plenty of people expect student loans will be part of their paying-for-college plan. Yet as common as student loans are, there’s still a lot of confusion out there. Let’s break down three of the most persistent misconceptions.
1. Borrowing (but not expecting to repay)
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 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.
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 44% of them expect their loans to be forgiven.
Recently (chances are you heard this) President Biden did announce that if you have federal student loan debt and earn less than $125,000 per year, you’re eligible for up to $10,000 in federal student loan debt relief. Biden said that nearly 90% of debt cancellation benefits will go to borrowers earning less than $75,000 per year. This was big news—and a welcome relief for a lot of people.
However, right now there’s no longer term student loan forgiveness program in place for future borrowers—and it would be a mistake to count on it. If you’re taking out any sort of loan, assume you have to pay it back in full on your own.
It’s also important to remember that the debt relief Biden announced only applies to federal student loans (those are loans by the government). It does not apply to private student loans made by banks and other financial institutions.
2. Wanting the lowest rate, but not 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. What’s interesting is that 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, the lender does a credit check, which can cause your credit score to drop. But if you’re applying with different lenders to see who gives you the best rate, there is a way to limit the impact on your credit score. 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 shorter period of time.
It can pay off to apply for a private student loan with multiple lenders, as even a slightly lower rate could save you a lot of money over time.
Pro tip: Take into account 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.
3. Wanting to pay off ASAP, but only making minimum payments
One of the most common misconceptions among borrowers is that they want to make the lowest possible monthly payment and also pay off their student loan as quickly as possible—and those 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 things more manageable from month to month, making only the minimum payment prolongs the life of your loan. Also, 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? If you have questions, you can ask your lender 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.
When it comes to student loans, it’s important to know the basics of how they work before you borrow. Then, you want to understand the options available to you. That way you can make choices that you’ll feel good about now—and later.