When it comes to student loans, there are a lot of faulty sources and misconceptions floating around. Today, the student loan industry has ballooned to previously unheard of levels, with some estimates putting the amount of debt outstanding at $1.2 trillion dollars. Some 70% of college graduates today leave school with some level of debt.
While that might seem terrifying, the scarier part are the horror stories we seem to hear daily about people attempting to pay off mountains of student debt, or making a major mistake when trying to refinance or consolidate their loan. What most of us don’t realize, though, is that these mistakes are the result of not understanding, or in some cases misunderstanding, the student loan market.
So what’s the problem? Here are some of the most common mistakes we hear people make when they think about their student loans. Check out these common misconceptions about student loans and see how you can avoid them.
- All student loans are created equal: This is one of the most common mistakes people make. The US federal government has a program designed to provide student loans to any prospective college student, which is fully standardized. At the same time, anyone can apply for a private student loan from a bank or other lending institution. However, it’s important to remember that these two things might be very different. Federal loans include a series of benefits designed to help you, including debt forgiveness programs and the ability to get a loan with no credit, as well as generally lower interest rates. Private loans are just that—private loans. They are structured much like other loans and can have much higher rates than the federal variety. Make sure you understand the fine print when you’re choosing your loan. If you find a private loan that can offer strong benefits and friendly rates, it might be worth it to get them.
- You have to refinance or consolidate ALL of your student loans: This is just plain false. Just because student loans sound different from other loans, it doesn’t mean they are. A common mistake people make is that they attempt to refinance all their loans once they have graduated, including those with lower interest rates. The problem with this is that while you may end up with one single monthly payment, refinancing does not always lower your interest rate. It makes sense to refinance those loans with high interest rates to wrangle down your debt over time. However, make sure you are aware of your rates for all your loans, and refinance those where your final rate will not be raised.
- You Can Replace a Student Loan with a “Full Ride” Scholarship: While it might be a great sentiment that good grades will guarantee you a free ride to your university, this is not the case for most students. In reality, scholarships are incredibly competitive and in many cases are based on a variety of factors outside of grades, meaning that you shouldn’t bank on these exclusively if you are planning on going to university. It’s a good idea to apply anyway, but you should always be prepared in case you are not given a grant or scholarship.
By doing your research on student loans early on and making sure you have a plan to pay your way through college, you can avoid being locked into unfavorable loans out of sheer desperation. Make sure to do your homework and find a student loan that will help you soar, not chain you down.
