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Today we have a guest post from Dave Chen, the founder of Millenial Personal Finance. His passion for personal finance started when he graduated from college with $68,000 in student loan debt. Dave has spent the past few years learning all there is to learn about personal finance and reducing debt.
Keep reading to learn about the student loan myths that are not true for our southern neighbours in the United States.
Part of the Canadian crew? Keep an eye out for an upcoming blog post on Canadian student loans!
4 Student Loan Myths You Shouldn’t Believe
When you have no other way to pay for college, student loans can be a great way to help you get the education that you need to have the career that you want. Unfortunately, there is a lot of misinformation out there about student loans. Knowing the truth will help you avoid expensive errors when it comes to paying back your student loans.
Related: My Personal Debt Story
Myth 1: You Don’t Have to Pay Back Loans until After Graduation
While you aren’t required to pay back the loans until after you graduate, it is best to pay them back while you are in school. Living frugally is a way to do this. Even if you don’t finish college, deferment of the loans will last only so long and the amount owed on the loans will affect your debt-to-income ratio.
If you start paying back the loans while in school, you’ll have less of a financial burden on your shoulders after you graduate. Loans can be a great investment when they are managed correctly. Because of the interest involved, you save money when you pay back your loans quickly.
Myth 2: Bankruptcy Means Not Paying Back the Loan
There is a belief that if bankruptcy is filed, student loans won’t have to be paid back. This isn’t necessarily the case. Most student loan borrowers won’t be able to discharge their loans. This type of debt is in the same classification as taxes owed, which can’t be discharged. The only exception to this rule is if paying back the loan will cause a significant undue hardship. This hardship has to be displayed for the loans to be discharged. Because there are flexible payment options available, it is very unlikely a bankruptcy judge will allow student debt to be discharged.
The repayment plans that you can look into before attempting to have student debt discharged are:
- Income-based repayment plans – You must show a financial hardship, which means the income-based payment would have to be less than the current monthly payment. You achieve loan forgiveness after 20 years. You pay no more than 15 percent of your income.
- Pay as you earn – This is like the income-based repayment plan. The remainder of the loan is forgiven once 240 payments are made or 20 years have passed. You don’t have to pay more than 10 percent of your income. The eligibility requirements are stricter than with an income-based repayment plan. One loan has to be a Grad PLUS or Stafford loan issued on Oct. 1, 2011, or later.
- Income-sensitive – If you have a Federal Family Education Loan, then you may qualify for this type of repayment plan. You choose how much you pay every month that is between 4 percent and 25 percent of your income. You only have five years to use this plan.
- Income-contingent – Income-contingent repayment has simpler requirements. Your loans must be Direct loans, and the remainder of the loan is forgiven after 300 payments have been made. You pay no more than 20 percent of your income.
Myth 3: Your Cosigner Must Pay the Loan if You Die
First, not all student loans require a cosigner. The only time a cosigner is required is if you are getting a loan from a private entity that requires a good credit score. In the case of your death, most of the large lenders forgive balances on student loans. It is also possible for the loan to be forgiven if you become permanently and totally disabled.
Myth 4: My Student Loans Will Never Be Forgiven
You may feel that your student loans will never be forgiven. While it may not seem that way right now, you may encounter opportunities for forgiveness. For instance, your loan type may allow forgiveness if you work in a specific career field. If you work in a government position or for a nonprofit organization, you may be able to take part in the Public Service Loan Forgiveness Program. If you have Direct loans, you’re in luck, because you could have them forgiven after 120 payments. If you have a loan from the Federal Perkins Loan Program, you may be able to have a percentage of the loan forgiven.
Now that you know the facts, you can make more informed decisions about student loans. The decisions you make can have an impact on how quickly they are paid back and how they affect your future. Make sure you do adequate research so you can position yourself well.
Related: My 2017 Personal Finance Goals
About the Author
Dave Chen is a relatively new millennial blogger who started freelance writing out of college along with working in the real world. He got to experience the whole nine yards by starting a family and taking on debt. Needless to say, he wishes he planned more coming out of school. With that in mind, he took his side job even further by starting Millennial Personal Finance in an effort to improve financial literacy.