Debunking 5 Common Student Loan Myths

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You wouldn't get mortgage advice from that guy who rides a unicycle around campus and refuses to wear shoes to class, so why would you listen if he offered you student loan tips? College lending is confusing enough without having equally confused peers offering you advice on the matter. Here are five "tips" you may have heard about student loans — and what the truth really is.

1. It's Bad to Pay Your Loans Off Early

Nope — you're thinking of mortgages. A so-called "prepayment penalty" is a common way for mortgage lenders to make sure homeowners don't jump ship and refinance with another lender. There's no such penalty with student loans, so you can refinance or (dream of dreams!) pay the whole thing off ahead of time without an extra fee.

2. Federal Student Loans Are Automatically Forgiven After 10 Years

There is a federal program known as Public Service Loan Forgiveness, but there's nothing automatic about it. This program forgives (most) federal student loans for borrowers who are employed for more than 30 hours a week in an eligible public-service or nonprofit job, and who make 120 eligible on-time payments. Does all of that sound like you? You still need to apply for the program.

3. You Can Take a Break From Paying Your Student Loans

When you take a break from paying your phone bill, what happens? Your line gets disconnected, you're charged a late fee, and you still owe all the money you owed when you took the break. Similar things happen if you skip a student loan payment: It can hurt your credit score, and the interest will just keep piling up. If your student loans really are beyond what you're able to pay, get help. Contact your student loan servicer and consider student loan refinancing.

4. Income-Based Repayment Plans Won't Affect Your Credit Score

Technically, this is true: the act of setting up an income-based repayment plan won't ding your credit score. Income-based repayment plans can be a great way to better manage your student loans since they can lower your monthly student loan payments based on your income and family size. But don't be fooled: Just because your monthly payment is lower doesn't mean you owe any less, or that any less interest is accruing. If you don't pay enough each month to cover the interest charges, you'll go further into debt and your credit will suffer. Keep that in mind when you make your payments.

5. Consolidation and Refinancing Will Both Save You Money on Interest

A lot of people use the terms "consolidation" and "refinancing" interchangeably, but they're not the same thing. Federal student loan consolidation is when you combine your federal student loans into one single Direct Consolidation Loan. (This doesn't apply to private student loans.) That won't lower your interest rate; instead, you'll just get an interest rate that's a weighted average of your existing federal student loan interest rates, rounded up to the nearest 1/8%.

Refinancing, meanwhile, involves working with a private lender like CommonBond. With refinancing, you combine multiple federal and private student loans into one loan with one monthly payment and a new interest rate that's based on your credit history and financial health. The catch is that if you refinance your federal student loans, you give up the protections that come with those loans, like public service forgiveness and income-based repayment plans. But for borrowers who have only private loans or who don't qualify for those programs, refinancing can be a great way to pay less in interest.

CommonBond is on a mission to provide students and graduates with a more affordable, transparent, and simple way to pay for higher education. By combining advanced technology with competitive rates and award-winning customer service, it has funded more than $2 billion in loans for its tens of thousands of members. To see how CommonBond can make the student loan experience better for you, click here.

Written by Ashley Hamer August 30, 2018
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