When students start college, they are probably more concerned about how they’ll cover college costs than how they’ll repay their student loans in the future. One problem at a time, right? Of course, many also carefully consider the loans they take out, the schools they attend, and their intended profession, all in an effort to reduce the costs of their education as much as possible.
For some students, a major part of their plans for eliminating education debt includes qualifying for student loan forgiveness or refinancing. While these can be rewarding for eligible borrowers, there are many misconceptions associated with them that could end up costing graduates in the long run. We’re here to clear up some of those misconceptions.
1. Everyone is eligible for student loan forgiveness
Although many students may become eligible for student loan forgiveness programs, don’t automatically assume that this is a possibility for you. For starters, loan forgiveness programs generally apply to specific loans, specific professions, and/or specific sets of circumstances, according to the Office of Federal Student Aid.
Direct Loans, FFEL (Federal Family Education Loan) Program Loans, and Perkins Loans may all qualify for forgiveness, discharge, or cancellation, but only in certain circumstances, such as:
- Public service loan forgiveness
- Teacher loan forgiveness
- Perkins Loan cancellation and discharge
- Total and permanent disability discharge
- Discharge due to death
- Closed school discharge
- Unpaid refund discharge
- False certification of student eligibility or unauthorized payment discharge
- Borrower defense discharge
- Discharge in bankruptcy
Note that these reasons may not apply to every type of loan, and some of them apply to very specific sets of circumstances. For example, the borrower defense discharge specifically relates to students seeking loan forgiveness because a school they attended misled them or engaged in other misconduct or violation of applicable state laws. This clearly doesn’t apply to every student, every school, or every loan.
Furthermore, you have to fill out an application for loan forgiveness, discharge, or cancellation and receive approval. Until then, you must continue to make payments in good faith unless you are able to defer payments or you are granted forbearance in the meantime, according to the Office of Federal Student Aid.
2. If I’m approved for student loan forgiveness, it can’t be rescinded
Unfortunately, it’s not entirely uncommon for professionals who thought they were eligible for student loan forgiveness to find out they were wrong. For example, under the PSLF Program, qualifying students must not only have the correct loan type to be eligible for forgiveness, but they must also meet criteria for qualifying employment and payments (and payment plans).
After all that, borrowers still have to apply and continue to meet qualifications until such time as they’re approved. In other words, there are a lot of hoops to jump through, and a lot of ways to make mistakes that could make you ineligible for loan forgiveness.
3. If I’m not eligible for student loan forgiveness, I’m stuck paying my loans
This is partially true. If it turns out you’re not eligible for any form of forgiveness for your student loans, for whatever reason, you’re still responsible to repay the money you borrowed. Even filing for bankruptcy won’t automatically discharge student loan debt. Of course, when you’re in good shape financially and perfectly capable of paying loans, you will be required to do so.
Unfortunately, by the time borrowers learn that they’re ineligible for student loan forgiveness, they’ve often already accrued higher interest costs because of smaller payments in the early stages of repayment. The good news is that you have options to reduce your debt if loan forgiveness is not on the table.
Once you’ve established a reliable income and credit history, you can, for example, explore the possibility of refinancing your student loans. This gives you the opportunity to consolidate loans, and potentially reduce interest rates and monthly in the process. Whether you refinance your education debt or not, you can also cut down on the overall interest costs and time spent in repayment on your loans by making more than the minimum payments each month.
That said, refinancing is kind of like leveling up. You can get access to better terms, and potentially lower interest rates or smaller monthly payments. Many people have misconceptions about student loan refinancing, however, which keep them from taking advantage of student loan refinancing benefits.
4. Refinancing student loans is complicated and expensive
Don’t fall prey to the misconception that student loan refinancing is a tedious or complicated process. In fact, refinancing is usually very straightforward. You complete an application and wait a couple of days for the lender to run your credit report and verify your personal information. If approved, your lender will notify you, and you’ll sign your final loan documents. Generally, the process takes up to a couple of weeks, but could take more or less time depending on your lender.
Unlike mortgage refinancing, student loan refinancing typically isn’t expensive. Many lenders, such as ELFI, don’t charge application or origination fees, or a prepayment penalty, which is a fee for repaying the loan ahead of schedule. You may owe a late fee if you make a payment after its due date, but that can be avoided by setting up automatic payments.
5. You need a high income and perfect credit to refinance student loans
While some lenders require that borrowers have a high income to qualify for student loan refinancing, others are more lenient. All lenders, however, care about your debt-to-income (DTI) ratio, which is your monthly debt payments divided by your gross income. Most lenders want a DTI percentage below 50%.
To calculate your DTI, add up your monthly debt payments including mortgage, car loan, credit card payments, and any other loans. Then, divide that total figure by your gross or pre-tax monthly income. If your DTI is below 50%, then you’re likely a good student loan refinancing candidate. If it’s higher, you’ll need to increase your income or pay down your debts.
You may also think you need excellent credit to qualify for student loan refinancing, but lenders often accept borrowers with credit scores as low as 660. This is great news for young borrowers who haven’t built a strong credit history yet, or who ran up some credit card debt in college. What may hurt your chances of being approved are any recent late payments, bankruptcies, defaults, liens or recent applications for other loans or lines of credit. Before applying to refinance your student loans, check your official credit report at AnnualCreditReport.com.
6. When student loan refinancing, you have to include all of your loans
Many borrowers have a mix of federal and private student loans and assume they have to refinance all those loans at the same time. But in reality, you can choose to refinance only a portion of your student loans if you’d like. For instance, you might decide to keep your federal loans to retain federal loan benefits and only refinance your private loans.
7. You can only refinance your student loans once
A common misconception is that you can only refinance your student loans once. In reality, there’s no limit on how many times you can refinance, provided you meet lenders’ borrower requirements. Many choose to refinance whenever the Federal Reserve decreases interest rates because they can get a better deal on their student loans. The only thing that might affect how often you can refinance is your credit score.
Final Considerations
Don’t fall for these misconceptions that are commonly circulated about student loan forgiveness and student loan refinancing. Understanding the truth about each is important, as it can help you decide which is right for you. In some cases, you may not qualify for student loan forgiveness, but you can look into refinancing instead.
If you’re considering a refinance, ELFI can help. When you apply to refinance with ELFI, you’ll be matched to a member of our Loan Advisor team. Every time you call ELFI, you can speak to that same person. This minimizes the confusion and frustration involved with the refinancing process.
