Know The Truth
Student loans are a useful tool that can be used to further your education and increase your earning potential. There is a lot of confusion about these loans however. Take a look at some common myths and the realities that you should know.
1) Student Loans Will Not Affect My Credit
A student loan is just like any loan. It will affect your score.
If you pay your loan on time, it will generally increase your score. The loan can add to your credit history, length of credit and will increase the diversity of credit types. All of these things will have a positive result on your credit score.
The opposite is also true however. If you do not pay on your loan in a timely manner, your credit score will take a hit. In addition, the debt will count against your debt to income ratio.This can affect other loans that you may try to get such as auto loans and especially mortgage loans.
As you can see, student loans most certainly will affect your credit.
2) Student Loans Should Be Consolidated
When you get out of college, chances are good that you will have multiple loans. Most people think that consolidation is almost a necessity. This may or may not be the case. Each loan situation is unique and consolidation does not work best for everyone.
Consolidating your loans could result in some negative side affects. Sure, you wrap everything up into one easy payment but you might end up paying more in the long run. Consolidation might leave you with a higher interest rate and without some of the benefits that came with your individual loans. It could cost you hundreds of dollars in interest, if not thousands.
If you are consolidating just to make your life easier, you need to rethink things. If the overall amount that you would pay is going to increase, use automatic payments instead and keep all of those small loans separate.
3) Bankruptcy Will Wipe Away My Loans
Yes and no. You may be able to wipe out some debt with bankruptcy, but federally insured loans can not be removed with bankruptcy. You are on the hook for those until they are paid off. You may be able to have private loans discharged.
The big problem with bankruptcy is that you have to prove that you do not have enough money to pay your bills and creditors. Bankruptcy is not automatically approved, you have to qualify for it with a ‘Means Test.”
4) Loans Are Repaid After School
If you have a federal loan, this is probably true. They may even come with a 6 month grace period after you graduate from college or lose full time status.
This is not necessarily the case with private loans however. Every private loan is different and you need to read the terms of your particular loan to find out when you must start making payments.
5) Taking Out The Max Amount Is Best
A totally incorrect assumption. Compared to other loans, the interest rate on a student loan might seem insignificant, but with the power of compound interest, your debt will rack up quickly. Over the course of your college career, you will be paying interest on your interest. The result in the end is a mountain of debt.
Always take out the minimum amount that you need through college. Taking more might make your current life easier but you will pay for it in the end.
6) Student Loan Debt Is For Forever
It might seem like it is impossible to pay off that student loan debt but it can be done.
The most important part is to have a plan. Just paying the minimum payment, like with all loans, will have you paying your student loans for the better part of your career. Pay extra, even if it is only an extra 200 bucks a month.
Your first few years out of college are your most important when it comes to addressing student loan debt. Making extra payments now will yield huge dividends in the future. Any extra principal that you can pay early is principal that will not be accruing interest for 20 to 30 years.
Student loans are something that are often misunderstood. This is understandable since most people begin accruing this debt at the age of 18. It is hard for an 18 year old to understand the ramifications of their loan decisions. All they know is that they want to go to college.
Take the time to educate yourself on student loans as soon as possible. Doing so can prevent you from believing some falsehoods and from making some potentially costly mistakes.