There is no shortage of student loan myths.
We reached in the Make Lemonade mailbag to find the 5 biggest student loan myths. Here’s what you need to know and what to do about it to start saving money.
Myth #1: You’re stuck with your interest rate.
The best way to lower your interest rate is through student loan refinancing.
Student loan refinancing enables you to combine your federal and private student loans into a new, single student loan with a lower interest rate and lower monthly payment.
To be approved for student loan refinancing, you’ll need a strong credit score (typically 680 or higher) and strong monthly income. Each student loan company has its own underwriting criteria, which also might evaluate your debt-to-income ratio and monthly cash flow, among other factors.
This free student loan refinancing calculator can show you how much you can save.
Insider Tip: If you do not qualify on your own for student loan refinance, most companies will still refinance your student loans with a qualified co-signer.
Myth #2: You can have your student loans forgiven through Obama Student Loan Forgiveness.
News flash: there is no such thing as Obama Student Loan Forgiveness.
Student loan forgiveness is a hot topic, but it’s important to understand who qualifies.
First, student loan forgiveness only applies to federal student loans (not private student loans) and is available through the Public Service Loan Forgiveness program.
The Public Service Loan Forgiveness program is a federal program that forgives federal student loans for borrowers who are employed full-time (more than 30 hours per week) in an eligible federal, state or local public service job or 501(c)(3) non-profit job who make 120 eligible on-time payments over 10 years and are enrolled in a federal repayment program.
Insider Tip: You can analyze the financial impact of various student loan repayment plans with these free student loan calculators.
Myth #3: Applying to multiple lenders for student loan refinance will hurt my credit score.
If you are refinancing student loans, you should apply to multiple student loan lenders to maximize your chances for approval.
Most applications take only two minutes to find your new rate, and you can check your new interest rate with only a soft credit pull (which does not impact your credit score).
Insider Tip: According to FICO, student loan “interest rate shopping” inquiries made during a focused time period (for example, 30 days) will have little to no impact on your credit score.
Myth #4: There is a penalty for paying off your student loans faster.
The good news about student loans is that you can pay off your student loans early with no penalty.
For some, paying off student loans early is a pipe dream. However, you would be surprised how much you can save in interest with extra payments.
There are two smart ways to pay off your student loans faster: increase your monthly payment and make a one-time, lump-sum payment.
Let’s assume that you have $50,000 of student loans with an 8% interest rate and 10-year repayment plan. If you pay only $100 extra per month, you would save $4,923 in total interest and pay off your student loans 1.99 years early.
Myth #5: Federal student loan consolidation will lower my interest rates.
Federal student loan consolidation is the process of combining your federal student loans (not private student loans) into a single, new Direct Consolidation Loan.
One major misconception is that federal student loan consolidation lowers your interest rate. However, your interest rate is equal to a weighted average of your existing federal student loan interest rates, rounded up to the nearest 1/8%.
The advantage of federal student loan consolidation is to organize all your federal student loans into one student loan with one interest rate, monthly payment and student loan servicer.
If you want to lower your interest rate, your best bet is student loan refinancing.
The other difference is that only student loan refinancing enables you to combine both federal student loans and private student loans into a single student loan with a single interest rate, monthly payment and student loan servicer.
More Info: www.forbes.com