Many myths and misconceptions are harmless. For example, despite popular belief, bulls don’t actually get angry when they see the color red. In fact, bulls are partially color-blind and can’t even really see the color red.
In the case of bulls, unlearning a commonly-held misconception is interesting.
When it comes to student loans, the stakes are raised considerably. The things you don’t know can lead to costly mistakes. It’s why falsehoods accepted as facts are so dangerous for borrowers.
Today, I will push back against some commonly-held beliefs about student loans. The sooner everyone gets the facts right; the more people will be able to avoid bad decisions.
Student debt is good debt.
I’ll start with the most expensive myth of them all. Some claim that borrowing money to pay for school is “good debt” because you are investing in yourself. Spend some money today; earn way more in the future.
Student debt is not good debt.
We can debate whether or not there was a time when student loans met the good debt standard. However, it is absolutely false to say that all student loans are good debt today.
If the degree’s value doesn’t match the expected return, it is a bad investment. Today, many students run up massive debt chasing degrees that are not worth the investment.
If you are headed to school, or you know someone headed to school, it is critical to assess whether the cost of the program is worth the investment.
Student loans can’t be discharged in bankruptcy.
Some borrowers are stuck with student loans they have no meaningful chance of ever repaying.
For these borrowers, filing for bankruptcy to discharge the debt could be the best option.
The existing law for bankruptcy does make it difficult to get student loans discharged, but it certainly isn’t impossible. In fact, recent changes to how the federal government handles bankruptcy petitions for student loan borrowers could make a bankruptcy discharge significantly easier.
Taking bankruptcy off the table as a solution to handling student debt could be a huge mistake.
Refinancing and consolidation are the same things.
The comingling of the terms refinancing and consolidation is less of a myth and more of a misconception.
In both a refinance and a consolidation, a brand new loan is created, and the money from that loan is used to pay off existing loans.
In the student loan world, it’s generally accepted that consolidation refers to the federal direct loan consolidation process. Refinancing is used to describe what happens when a private lender pays off existing student loans.
Using the dictionary definition, calling a private refinance a consolidation is technically correct. However, by using the terms refinance and consolidation interchangeably, we risk confusing borrowers. By using refinance exclusively to describe the process offered by private lenders and using consolidation exclusively to describe the federal process, we avoid confusion.
For some borrowers, federal consolidation is an essential step in their repayment journey. For other borrowers, private refinancing is a great opportunity to lower interest rates and save money.
Unfortunately, both consolidation and refinancing are permanent changes, and mistakes can be very costly. If we get everyone on board with the terminology distinction, we can help borrowers avoid expensive misunderstandings.
My debt will never get forgiven.
Many borrowers subscribe to the theory that federal student loan forgiveness is impossible.
For some, it seems too good to be true. For others, reports of 99% rejection rates made impossibility an easy conclusion to reach.
The reality is that student loan forgiveness comes in many different forms. These options are nowhere near a quick fix, but forgiveness provides a viable path to debt elimination for many borrowers.
My loans will eventually be forgiven.
Some borrowers look at forgiveness from the other extreme. They assume their loans will eventually be forgiven.
Assuming that forgiveness is inevitable is a colossal mistake. For starters, qualifying for forgiveness usually takes some careful planning and years of closely following program rules.
Just because you can qualify for forgiveness does not mean you will qualify for forgiveness. If borrowers assume forgiveness is easy or requires zero effort, they risk wasting years of payments and starting from scratch.
It is important to push back against student loan myths and misconceptions.
Over the last decade, I’ve noticed that people are more willing to discuss student loans and their finances.
This is a huge step forward.
The next step forward requires us to be careful about what we accept as fact. When a friend or family member shares their student loan plan, they may leave out important details. Worse yet, they might even subscribe to some of the myths we’ve covered today.
Borrowers shouldn’t feel obligated to correct every mistake that someone makes when describing their loans or their plans. Nobody wants to be that person.
However, it is constructive to question something that is potentially inaccurate. Here are a few phrases that can help correct a student loan misconception without causing conflict:
- I thought I had read something different.
- Have you looked into [blank]?
- You might want to double-check that because if you are wrong, it could be really bad.
Nobody wants to be told they are wrong or made to feel ignorant. However, helping people unlearn student loan myths and misconceptions is critical.