Student loan misunderstandings are all over the place, whether you graduated years ago and are thinking about consolidation or refinancing — or haven’t even started college, but are likely to take out debt to cover your education.
Indeed, as schools begin to ship out acceptance letters en masse, young people have just a few weeks to make decisions about where to attend — a major financial decision made all the more complicated by the fact that only 16.4% of U.S. high school students are required to take some sort of personal finance class, according to data from Next Gen Personal Finance.
At the same time, more and more Americans are realizing student debt has become a widespread financial problem: 92% of American voters said as much in a recent study by policy think tank Demos. The impact is also unevenly felt, with black college graduates owing nearly twice as much as white graduates four years after graduation, according to the Brookings Institution. Demos even found that non-college educated African-Americans, Latinos, and Asian-Americans have debt at the same or higher levels as white college graduates.
The prevalence of inequities within (and misunderstandings about) education debt shows better education is critically needed: More than half of student loan borrowers end up regretting their debt, according to a report from the Financial Industry Regulatory Authority.
To protect yourself, here are five of the most common myths about student loans that everyone should know about.
1. You don’t start paying interest on your loan until you graduate
One of the reasons a surprisingly high proportion of students cop to spending their student loan money on spring breaks is that many financial aid departments will disburse “refund checks” to students whose loans turned out being larger than the actual cost of that semester’s course load.
If you’d just gotten one of these refund checks and were on your way to the beach, it’s easy to see how that cash could end up covering a few hotel shares and last-minute bar tabs.
The problem with this approach is that most students don’t seem to realize that their loans are already earning interest, meaning that they’re already being charged a rate that goes up the more they borrow and the longer they take to pay their loans back. That’s according to a recent Student Loan Hero study, which found that some 52% of students didn’t realize their unsubsidized loans accrue interest while they’re still in school.
If your financial aid office cuts you a check, and you don’t actually need the cash to cover important stuff like living expenses or books, you should instead pay the company servicing your loan and ask that it’s applied to the interest on your debt. You can find a list of the federal student loan servicers, like Navient, Nelnet and OSLA — and how to get in touch with them — here.
2. Monthly student loan payments are based on what you earn
Another common misconception is that your lenders take how much money you make into account when they decide how much money you need to send them each month once you start making payments. 53% of the respondents in the Student Loan Hero study said that they thought the so-called “Standard Repayment Plan” for federal student loans pegs the monthly payment to your income automatically.
Instead, your monthly student loan payments are based on the amount you borrow and a standard 10-year repayment window. If those payments are too high, then you need to apply for an income-driven repayment plan through your servicer, with the caveat that this step will ultimately make your loans more expensive over time. A person who owes $25,000 at a 6% interest rate, for example pays nearly $1,000 extra in interest if it takes them 11 years to pay off their loans instead of 10, according to NerdWallet’s calculator.
3. Student loans are all forgiven if you go into certain jobs, like public service
More alarmingly, roughly 71% of respondents thought that their private student loans were eligible for forgiveness if they participated in the Public Service Loan Forgiveness Program, which allows students who go on to work in lower-paying fields to become eligible for federal loan forgiveness after a period of on-time payments.
There’s a lot to unpack here. For one, the program only covers your federal loans, not loans that were issued by a private company like Wells Fargo. Even if you have entered a field that seems like it may qualify, you will still need to apply to have your loans forgiven by the Department of Education once your repayment period is up.
And the department has notably seen more borrower-friendly days: CNN Money recently reported that as little as 13% of the first graduating class to qualify for Public Service Loan Forgiveness has been approved so far.
4. You can refinance your student debt through the government
Besides paying them off faster, one of the few ways to actually save money on loans you’ve already taken out is to try and refinance your loans with a different lender. Particularly if you’re an attractive borrower with a high income and a responsible credit history, refinancing at a lower interest rate could end up saving you thousands of dollars over the term of your loan.
Unfortunately, only two-thirds of student loan borrowers are even aware refinancing is an option, according to a recent survey from Student Loan Hero. Federal rates are set by Congress, meaning that there’s no revisiting them no matter how sterling your credit score. To refinance, you’ll need to work with an outside lender.
One sort-of exception? In some situations you may qualify for what’s called a direct consolidation loan from the government, which may end up saving you some money in the long run if you’re able to switch some of your variable loans into a fixed-rate loan. Yet while paying one lender instead of two or three or four is a lot simpler, it might not end up saving you much money: The rate on your new loan will be a weighted average of the loans you took out.
5. You shouldn’t start investing or saving for retirement until student loans are paid off
Conventional wisdom dictates that you should always pay off your debts before seeking out new investments: The logic here is that investing is essentially a bet, while paying off a loan is a sure thing — interest you don’t pay is automatically money in the bank.
That’s certainly the case with high-cost debt, for example a credit card or personal loan. But federal student loans are usually relatively cheap compared to other debt, the interest rates are fixed, and you also have certain consumer protections that you don’t get with private debt, for example the ability to cap your payments at a percentage of your income.
For that reason, certified financial planners will often recommend placing a few priorities over your student loans — for example, starting an emergency fund, or taking advantage of a retirement account with a corporate match, which is also free money.
To read more about how to prioritize competing financial needs, check out the Payoff guide to ranking money priorities.
Sign up for the Payoff — your weekly crash course on how to live your best financial life.
April 26, 2018, 4:09 p.m.: This story has been updated. A previous version of this story included a statistic about refinancing from a report published on the site Student Loan Report. The Chronicle of Higher Education recently reported that the website’s owners misled journalists about Student Loan Report’s authorship. The statistic has been removed and replaced with a similar figure from the site Student Loan Hero.