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’s easier to tune out and pretend it doesn’t exist. But your loans, like the election, won’t go away just because you want them to. So it’s important to know the details of your student debt.
We’ll help you get started by shedding light on four common student loan myths you might believe:
Public Service Loan Forgiveness isn’t the only way to get your federal loan debt wiped out. You can also get forgiveness if you sign up for one of the income-driven repayment plans, 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’ll 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’ll save the most by opting for both. That’s because the income-driven plan will lower your monthly payment amount, so more debt can be forgiven after 10 years.
Use the Department of Education’s repayment estimator to see which income-driven plans you qualify for. You’ll have to reapply each year and, unless you go through the Public Service Loan Forgiveness program, you’ll have to pay income tax on any amount that’s forgiven.
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’s best to tackle that debt first. But getting out of debt is just one part of financial security. You’ll also need to save for long- and short-term goals.
“An emergency fund and taking advantage of employer [retirement] matching contributions should almost always take precedence over paying off student loans,” 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 your spending habits from the past month. That way you’ll know which debts to pay off first, and you’ll be able to make room in your budget for both rent and retirement savings.
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’s often no longer necessary.
Today, federal student loan consolidation is most useful in qualifying for Public Service Loan Forgiveness or income-driven repayment plans. That’s because Federal Family Education Loans, Stafford loans and PLUS loans need to be consolidated into a federal direct 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’s cheaper to exclude direct loans, since your new loan’s 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’ll end up paying even more over the life of your loan.
“If 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,” says Danna Jacobs, a certified financial planner at Legacy Care Wealth.
If you have student loans with interest rates over 6%, student loan refinancing could lower your interest rates and rein in long-term costs. It’s usually not a good idea to refinance federal loans through a private lender, though, since you’d have to give up federal borrower protections like income-driven repayment and forgiveness. To qualify for refinancing, you’ll need a steady source of income and a good credit score, typically 690 or higher.
Use NerdWallet’s student loan refinance calculator to see if it’s right for you.