Four student loan myths you might believe
Trying to find the right way to handle your student debt sometimes feels like trying to avoid talking about the presidential election. Everyone seems to have an opinion, so it鈥檚 easier to tune out and pretend it doesn鈥檛 exist. But your loans, like the election, won鈥檛 go away just because you want them to. So it鈥檚 important to know the details of your student debt.
We鈥檒l help you get started by shedding light on four common student loan myths you might believe:
1. If you don鈥檛 work in public service, you can鈥檛 get student loan forgiveness
聽isn鈥檛 the only way to get聽your federal loan debt wiped out. You can also get forgiveness if you sign up for one of the聽, like Revised Pay As You Earn, which is available to all federal loan borrowers. For those plans, your monthly payment amount is tied to your income, and forgiveness applies to any debt you have left over at the end of your loan term. That鈥檒l take 20 to 25 years, depending on which plan you sign up for.
If you qualify for both Public Service Loan Forgiveness, which forgives your debt after 10 years, and an income-driven repayment plan, you鈥檒l save the most by opting for both. That鈥檚 because the income-driven plan will lower your monthly payment amount, so more debt can聽be forgiven after 10 years.
Use the Department of Education鈥檚聽聽to see which income-driven plans you qualify for. You鈥檒l have to reapply each year and, unless you go through the Public Service Loan Forgiveness program, you鈥檒l have to pay income tax on any amount that鈥檚 forgiven.
2. Paying off your student loans should be your first priority
Not necessarily. Debt that carries a higher interest rate than your student loans, like credit card debt or a personal loan, will leech money from your bank account faster than your student loans will. It鈥檚 best to tackle that debt first. But getting out of debt is just one part of financial security. You鈥檒l also need to save for long- and short-term goals.
鈥淎n emergency fund and taking advantage of employer [retirement] matching contributions should almost always take precedence over paying off student loans,鈥� says David Metzger, a certified financial planner at Onyx Wealth Management.
Figure out what you owe and what your interest rates are by logging into your various financial accounts. Then take a look at your monthly income and examine聽your spending habits from the past month. That way you鈥檒l know which debts to pay off first, and you鈥檒l be able to make room in your聽聽for both rent and retirement savings.
3. If you have lots of student loans, consolidation is always a good idea
The truth is, it depends on when you took out your loans. Consolidation used to be a way to simplify your monthly payments, but recent grads usually have all of their federal loans with the same servicer, so it鈥檚 often no longer necessary.
罢辞诲补测,听聽is most useful in qualifying for Public Service Loan Forgiveness or income-driven repayment plans. That鈥檚 because Federal Family Education Loans, Stafford loans and PLUS loans need to be consolidated into a federal direct聽loan to qualify for those programs.
But if you have a Perkins loan and qualify for forgiveness, including it in consolidation would mean giving up forgiveness benefits for that loan. And if you have several different types of federal loans, it鈥檚 cheaper to exclude direct loans, since your new loan鈥檚 interest rate would be the average rate rounded up to the nearest 0.8%. Plus, your loan term will be extended if you owe more than $7,500, so you鈥檒l end up paying even more over the life of your loan.
鈥淚f you are going to pursue an aggressive repayment of student loans, it would save you both time and money to repay the loans with the larger interest rates first, an option lost once you consolidate,鈥� says Danna Jacobs, a certified financial planner at Legacy Care Wealth.
4. You鈥檙e stuck with the interest rates you got when you took out your loans
If you have student loans with interest rates over 6%,聽聽could lower your interest rates and rein in long-term costs. It鈥檚 usually not a good idea to refinance federal loans through a private lender, though, since you鈥檇 have to give up federal borrower protections like income-driven repayment and forgiveness. To qualify for refinancing, you鈥檒l need a steady source of income and a good credit score, typically 690 or higher.
Use NerdWallet鈥檚聽聽to see if it鈥檚 right for you.
Devon Delfino is a staff writer at NerdWallet, a personal finance website. Email:聽ddelfino@nerdwallet.com. Twitter:聽.
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