There are a lot of misconceptions about student loans. A lot of people hate them, a lot of people need them. The majority of people don't understand every facet about them – and that can lead to trouble.
Given that student loans can be a huge part of your financial future, you need to understand how to best pay for college, and how to pay off student loans fast.
Given that there is over $1.5 trillion in student loan debt, and that the average graduate has almost $36,000 in student loans, borrowers need to understand these facts to make sure they are making the best decisions possible.
Share your thoughts in the comments -> did you know these facts about student loans?
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
1. The Collateral For Your Student Loan Debt Is Your Future Earnings
When you buy a car and get a car loan, the collateral for the car loan is the value of the car. If you don't make your monthly payments, the bank simply repossesses your car. The same is true for a house and a mortgage. You don't pay your mortgage, the bank forecloses on your house.
So when you take on student loans, what do you think the collateral is? Just goodwill? No, the collateral on your student loans in your ability to earn money in the future. If you fail to pay back your loans, the lender (either the government or bank) can garnish your wages, garnish your Social Security, and even offset and take your tax refund.
This is the key reason why, for the most part, student loans aren't dischargeable in bankruptcy. Bankruptcy helps liquidate your assets to repay your debt and cancels the rest if you really can'y repay it. But with student loans, as long as you have the ability to earn, you have the ability to pay something. It's also the key reason why there is student loan forgiveness for being disabled – you simply can't earn any more money to repay the loans.
So, when you take out student loans, you need to calculate your ROI (return on investment) and ensure that you can repay the debt.
2. You Can Refinance Federal Student Loans
There is a big misconception about student loan refinancing. Many borrowers don't think they can refinance their student loans to lower their payments, specifically with private student loans. However, since 2009, the government has allowed borrowers to refinance their Federal student loans… into private student loans.
Now, this doesn't make sense for a lot of borrowers. If you rely on your Federal student loans for income-based repayment programs, or some type of forgiveness program, then you shouldn't refinance your loans this way. The reason is that you will lose access to student loan forgiveness programs and special features like deferment and forbearance.
However, if you are on the Standard Repayment Plan and are looking for options to lower your payment and interest, the refinancing into a lower interest rate private student loan could make a lot of sense. I recommend using Credible, a marketplace for student loans. Like Kayak or Expedia except for student loan refinancing, Credible helps your receive offers from multiple lenders after filling out a single form.
A special offer for College Investor readers – get a $200 bonus when you refinance your loans with Credible!
3. Parents Who Take On Loans For Their Kids Owe The Debt
One of the most commonly asked questions I receive about student loan debt goes like this: “I took out $30,000 in student loans to pay for my daughter's college. Now I'm 55 and nearing retirement, and my daughter can't make payments because she doesn't have a job yet. What are my options?”
When getting ready to finance college, a lot of parents are under the misconception that if they take out student loans, their children have to make the payments on them. This is incorrect and one of the most misleading facts about student loans.
If a parent takes out a loan, the parent is responsible for the loan – not the student. If the student can't pay, the parents are on the hook for the debt. Want to switch repayment plans? It might not be possible.
Parents should never take out student loans for their children. Going back to Fact #1 – the student loan's collateral is earnings. If the parent takes out the loan, the collateral is the parent's earnings now, not the student.
If you already did, and are struggling, here are you're options for dealing with Parent PLUS Loans.
4. If You Don't Graduate College, You Still Have To Pay Back Your Loans
Too many students go to college to “find themselves”. This is not a good idea. College is expensive. Life changes. In a lot of these stories, the student ends up leaving college to pursue a dream, with no degree and a bunch of student loan debt.
The fact is, whether you graduate or not, you're still on the line for your student loan debt. Just because you don't finish doesn't get you out of repaying what you've already spend on school. I was recently talking to a woman named Sara, who went to college for a year and a half before deciding the college wasn't for her. She accrued $45,000 in debt from that year and a half. She really wanted to become a dental hygienist, which required another couple years of vocational school, at a cost of $20,000 per year. She was looking for a way out of the original debt – but it wasn't happening.
Whatever your post-college plans are, you need to repay your debt. Vocational school can be a great option, but remember the total cost of school post-graduation. You still have to repay your student loans even if you dropped out of school.
5. Cosigners On Student Loans Are Just As Responsible As The Student
Finally, when you cosign a loan, including a student loan, you are just as responsible as the borrower. Parent, grandparent, family member, friends – don't cosign a student loan. If you really must, you need to cosign a student loan the right way.
When you cosign a student loan and the student can't repay the debt – you must repay the debt. In a worst-case scenario, if you cosign a loan and the student dies, you might still have to repay the debt.
Even after graduation, and the student is making payments every month, it can be difficult to get a cosigner release. That means, you can still be on the hook for the entire duration of the loan. This can have an impact on your own credit score, and even prevent you from purchasing a car or house in some circumstances.
If you're not in a position to personally take out a student loan, then you shouldn't cosign one. It's the same thing.
If you're considering refinancing your student loans, look for student loans that have “cosigner release”. This option allows for the cosigner to be removed from the loan after a set number of on-time payments. You can compare options like this at Credible for free.
Sadly, in cases where a borrower dies, the cosigner could also be responsible for the debt. That's why it's so important for cosigners to ensure there is a term life insurance policy for the borrower just in case. We recommend getting a quick quote at Haven Life.
Bonus Fact: Where To Get Help
Even though I’ve said countless times you can do it for free at StudentLoans.gov, there are still people who’ve asked me “that’s great Robert, but I still want to pay someone to help me – who can I trust?” That’s a fair question, so who can you trust?
The basic starting point is to call your student loan servicer and get help directly. They are literally paid by the U.S. Government to help you with your student loans.
Next, you can do a lot of it yourself on StudentLoans.gov.
Finally, you can consider paying an expert for help. If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
If you need help, it can make sense to pay for it. Just don't pay too much and really know what you're getting.
Did you know these student loan facts? Have you ever had to get help with your student loans?
Celeste says
I just started college a month ago and I already want out but don’t know what to do. They’re trying to screw me over and have me set up for $30,000 for two years
Faylinn says
My younger sister has been talking about taking out student loans for college and so I am really glad that I found this post, because I am going to send it to her to look over. However, I had no idea that loans could be refinanced for lower payments. If she is going to be doing loans, though, should she be looking into that while she is taking out loans or after she finishes school?
Robert Farrington says
You **should** only refinance private loans, not Federal loans (there are exceptions, but this is a pretty general rule). Don’t worry about it up front. Only take out Federal loans up front and really focus on ROI – return on investment. She should never borrow more than she expects to make in her first year after graduation.
So, if she expects to be a teacher, don’t borrower more than $40,000 (or $10,000 per year for 4 years). If she plans to be an engineer and will earn $60,000, don’t borrow more than that. Hopefully that is a good guide for her.
Nicholas Rokita says
why should one not take out more loans than their expected annual income? Or say they live with their parents for a few years after graduation to cut down on living expenses would you still give the same advice?
Robert Farrington says
It’s a rule of thumb, so not hard and fast. The reason is you’ll find it difficult to make the payments after graduation if you borrow more. If you live with your parents, your expenses will be lower, so that will help, but at the same time, I would look for ways to minimize costs of education.
It’s rare that spending more than your first year’s salary on education is worthwhile and will give you a positive ROI.
Juan says
If someone owes on a student loan and they are already getting their refund withheld, then they cosign with someone else for a house loan, would the house be subject to be taken as form of payment toward the loan??
Robert Farrington says
Probably not, but it’s best to consult a student loan lawyer. The bigger issue is, if you’re getting your tax refund offset, it means you’re in default on your student loans. That also means your credit is terrible. Chances are, the borrower would be better not even having that person as a cosigner for a mortgage, because they are just hurting the process, not helping.
Anita says
I’m not defaulting on my loans, I pay them regularly. My problem is the interest accruing. I already owe twice what I borrowed because it took me so long to get serious about paying them. I plugged some numbers into a student debt calculator and it looked like, even if I doubled my monthly payments and had the extra put on the principle, I would only have paid down a small fraction of what I owe 10 years from now. This is why people decide to default. It’s like you’re throwing money away because the payments aren’t making a difference. I spoke to a financial counselor and he recommended that I pay the minimum amount and then in 25 years the balance would be forgiven. That way, I can live my life, and still protect my credit. Do you think that’s good advice? I don’t want to spend the rest of my life working to pay off loans that aren’t going anywhere. Thanks!
Robert Farrington says
The plan they are talking about is IBR – and yes, it can be a good strategy. As long as you pay your payment each month (and certify your income annually), you’ll see any remaining balance forgiven. Plus, your credit score is more about on time payments, so don’t be late.
Yohnat says
Hi,
In 2009, I took a loan from federal student loan 20,000 and 14,000 from the school loan, a total of 40,000 for a two year collage. I am currently not working full time. I made an arrangment IBR plan on my Federal loan. But I cant afford to repay my remaining 3,400 (14,000) on my other school loan . I woud rather pay my Federal loan so to prevent wage gurnishment.
If Im deliquent on my private school loan of 3,400 , what would be the worrest case senarrio? my credit score is at 627 at this point 🙁
Thanks
Robert Farrington says
If you default on your private student loan, the worst that can happen is your lender can sue you, they win, and they get a judgement to collect against you – which can also result in wage garnishment and more.
Larry Mazola says
About 15 years ago my wife refinanced her student loans. They are at about 8% interest rate. She has made regular payments all along but has paid off less than half the debt. We would like to pay off the entire principal now but the loan company says that we have to pay the interest that we would have paid had we just paid it out over time. How can we pay off the principal without paying all that interest?
Robert Farrington says
You need to call the lender and ask for a final payoff amount – and give them a specific date. They will calculate the balance at that date, and that is the amount you’ll have to pay to get rid of the loan.
Jeremy says
I had to move due to a death in the family and the tech college wasn’t in the area I had to move to. They didn’t seem to care and now I realize I should’ve talked to the ones paying the school. Is my situation the same? I’ve also let them default and owe almost double what I borrowed.
Robert Farrington says
Not quite sure what you mean? Did you not finish? Do your credits not transfer?
Dallas says
I did not attend the school that the Federal Loan is listed as paid to. I never attended a trucking school. Is there a way to get out from under my loan debt based upon this? I went to school for medical assisting (in 1989) and have never been able to obtain work in the field. The Fed loan was being paid from my paychecks and they suddenly stopped taking payment (This occurred about 3 years ago.. Today they have just a s suddenly restarted with no warning. They also have taken my taxes for all these years, so I don’t know how I even still owe over $8,000 for a course that was about $6,000 in 1989
Robert Farrington says
If you believe that the loan was taken out incorrectly, you might consider speaking to a lawyer about this.
Cicerly Clemons says
In 1997 I attended an orientation at a school in which my plans were to major in Health care administration. I was informed by the counselor that I sat with that that program wasn’t gonna start until the next semester, but I should get started on what they said were the prerequisite for this program. Long story short a semester later no health care administration program starting, the schools on an accreditation line that no school will accept the credits, so me and allot of other people left the school. The funds were sent to the school, not me, but I do remember being called up to the office to endorse a check for the first semester. When I left the school, shouldn’t the funds have been returned to the lender if I was not in attendance. Original loan was 2, 600 in 1997, I’ve been so stubborn about repaying funds I didn’t use that it’s now 5,300 in 2017. I don’t know where to start.
Robert Farrington says
There is a program called Borrower Defense To Repayment that may be helpful for you. Research it here: http://growth360tci.wpengine.com/18752/understanding-borrower-defense-repayment/
However, don’t keep delaying your loans. They will only grow larger if you don’t take action.
Trina Elsman says
Can Students take out student loans without a parent co-signing ?
Robert Farrington says
Yes, Federal student loans are taken out be the student without a parent cosigner. Private loans can be too, but it’s rare – only 10% of private loans have no cosigner. Learn more about private loans here: http://growth360tci.wpengine.com/16435/how-to-get-a-private-student-loan-with-no-cosigner/
HG says
Hi,
Question if the “school” contacted us for financial aid to be a co-signer on a loan, and we advised them that said loan in question we are only to be co-signers, the person we spoke with told us yes you will only be co-signing in order for child to get loan, sent us the paperwork stating “parent copy” as well a when approval came in had child’s information on it. Come to find out we are the holder of the “loan”. Not the co-signers. Is this legal?
I have googled, searched and dug like I was looking for a missing person in order to find some kind of answer or similar case. Nothing.
Any help is greatly appreciated.
Thank you.
Robert Farrington says
What type of loan is it? A Federal Parent PLUS loan is just in your name. A private loan that you cosign is in your child’s name, but you are equally responsible for the debt. As such, if your child doesn’t pay, you have to. And anything that is late could impact your credit.
If you feel like you were mislead, you might consider speaking to a lawyer.
Rene says
I work for state agency and have been in contact with customer service at Student loans.gov. in regards to Public Loan forgiveness. I’ve been told so many different things every time I call in, now I’m finding other things out about loan forgiveness. I was advised to consolidate my loans (owe 20,000), apply for income contingent and possibly file my taxes married but separate so my payments are calculated off my income, not my husband’s. But now I’m seeing things that say loan forgiveness is not always the right thing to do. I already have 7yrs at my employment and plan to continue, but can guarantee I’ll be there another 10 yrs. How do I figure out my best repayment plan? I also found that after forgivenss the amount is taxable. So then i woukd owe IRS a large amount if i did make it to forgiveness. Do i talk to a tax adviser? I feel lost.
Robert Farrington says
Loan forgiveness is ALWAYS the best thing to do. Public Service Loan Forgiveness is tax free. Other income-driven repayment plans are currently considered taxable, but if you qualify for these plans, it makes sense because you likely can’t afford a higher repayment plan (and if you could – you wouldn’t be looking at income-driven options).
Remember, PSLF requires 120 qualifying payments – so if you’re 7 years in, you can potentially get your loans forgiven in 3 years.
We have a short program that walks you through exactly what to do: Public Service Loan Forgiveness Training Program.
HannahMackay322 says
Don’t go to college! I’m a teacher and I’ve seen a lot of kids go off to college too soon and fail out! Here is some advice for graduating seniors and their parents based on 15 years of observations.
1. Make them work and pay for some of it.( they have to have some skin in the game)
2. If they are immature and not self- reliant don’t let them go to a far off University.
3. Have them talk to recent graduates to get advice/tips; they are much more likely to listen to them than you.
4. A community college is a great place to save money and usually has professors who are teachers 1st unlike the research focused professors at Universities
5. Don’t be frivolous with your cash. Consider things like $25/month car insurance (from Insurance Panda), $20/month mobile phone (TMobile), $15/month gym membership (Planet Fitness), and use apps like GasBuddy to save money in other ways. College is expensive – save for it!
6. Speaking of which – Don’t try to “Keep up with the Jones”. This dooms kids and forces them into the student debt trap.
7. Don’t be afraid to let them fail. If you constantly bail them out you will be doing it for the rest of their lives and they will never grow as a person.
8. Make them aware of the differences in earning power/job availability of different majors.
9. The military, tech school, and apprenticeships are all viable alternatives to college.
10. Do a cost/ benefit analysis if you are going to take on significant debt make sure it’s for a valuable degree. 60k debt for a chemistry degree is ok, 60k for Art History is not.
Jazz says
If I sign up for school.. But I decide before class start before the first day before orientation. . before anything that its not a good time . Do I still have to pay the student loan back ? If so. Does the money come to my account.? And can I just repay them with the money I was supposed to borrow for school ?
Robert Farrington says
Yes, as long as you don’t owe the school any money, you can simply use the funds to pay the loan off.
Angela says
I have a question. I am in debt about $30,000 with my student loans. I was in deferment, but now I am in default. The loans were federal Stratford loans, but now are Great Lakes borrowing services loans. If I buy a house, can they take my house?
Robert Farrington says
Hi Angela, you need to get your student loans out of default. You’ll likely never be able to purchase a house unless you pay cash, because you’ll never qualify for a mortgage with your student loans in default. Furthermore, having a student loan default prevents you from getting an FHA, VA, or USDA loan, because if you default on government debt, it makes you ineligible to receive another government backed loan.
To get out of default, you need to go through a process called student loan rehabilitation.
Richard says
As a parent I don’t see as I have much of a choice not to consign because college costs much more than the max loan a young person with little credit and only part time work can qualify for. If I don’t consign then their choices are the military, community college (no 4 year degree there) or part time college for a long time. Parents are the only realistic option.
Robert Farrington says
Federal student loans require no cosigner. Only private student loans do. Parents could also get a Parent PLUS loan, but it’s highly NOT recommended. I wrote about this in Forbes: https://www.forbes.com/sites/robertfarrington/2014/07/14/parents-stop-taking-out-loans-for-your-childs-college-education/#60975aa460a6
A more realist (and better option), is to have candid discussions with your child early on about costs, expectations of contribution, and potential ROI. The bigger issue is students are borrowing too much for future jobs that don’t pay much. A simple rule of thumb is to never borrow more than your expected first year earnings. Here’s a full breakdown: http://growth360tci.wpengine.com/7868/college-worth-investment/
For example, if you want to be a teacher, look at what the median starting salary is in your area. Maybe it’s $40,000? Okay, so don’t borrow more than $40,000 for your entire college costs. Want to be an engineer? Maybe the salary is $60,000 – don’t exceed that.
How do you close the gap between college costs, and potential savings/student loans? Scholarships and work. Also, look at knocking off general education courses at community college for a fraction of the cost. Take AP classes in high school to knock a year off college.
The bottom line is there are a lot of ways to reduce student borrowing, but it starts with the parents having good discussions with their college bound children about these important considerations.
Shiney says
What are the facts about parents paying their childs student loan debt after the child passes away?
Does it automatically become the parents debt? Or does it only become the parents debt if they were a co-signer?
Robert Farrington says
It depends. We have a full breakdown of what happens to student loans if the child student dies.
In general, for Federal loans, the loans are forgiven. The parent doesn’t inherit the debt unless the are a cosigner on a private loan. There are complication with PLUS loans we discuss in the article above.
J says
Can a student take out a loan for let’s say $17,000, pay-off a school balance, and use the excess money for another school (transferring from school A to school B)?
Robert Farrington says
If you have no balance at your school, and a student loan is dispersed to it, the bursar will usually just issue you a check. Then you can do whatever you want with the money. Just keep in mind you still owe the loan – so not a good idea to just go spending it willy-nilly.
Mason says
I went to college for a semester and decided it wasn’t for me. In that time I had about 4200 in loans which was in fall of 2014. They took my state taxes at the start of 2016 and have only emailed me one time, also was in 2016. I asked them how much my monthly payments would be and they wanted alittle over 350 a month. With me having a kid and a house I can’t do that. And I have never been contacted again. And it’s not on my credit report. What should I do?
Robert Farrington says
What kinds of loans were they? Federal or private?
To garnish your tax returns, they usually have to be Federal, unless you were sued for private loans and didn’t know you were sued.
For Federal, look at this article: http://growth360tci.wpengine.com/20755/stopping-tax-offsets-due-student-loan-debt/
Then, get your loans rehabilitated: http://growth360tci.wpengine.com/15577/student-loan-rehabilitation/
For private, you might want to consult a student loan lawyer: http://growth360tci.wpengine.com/19516/lawyer-for-your-student-loan-debt/
Mason says
I would say they were private due to it was the school them selves that contacted me. I never signed any paper work about a federal loan. But they only took my state taxes one time, im going to contact a lawyer tomorrow and see what they say
Robert Farrington says
If it was the school that contacted you, it could have been a Perkins loan. Perkins loans are owned and serviced by your school.
Mason says
Thank you
Chester says
My dad took out a loan for me back in college (can’t recall the exact number but it was around $20,000 plus). We had an agreement that I’ll help him pay off the loan after graduation, it’s a student federal loan. At the moment I’m unable to pay this loan due to financial reasons and it’s already two payments late (a little more than 60 days perhaps) so the status of the loan is delinquent. My question regarding your #3 fact, is it myself who will be in debt or my dad? I know that the answer is clearly stated and I’m relieved to know about this, but just wanting to clarify for myself. Thanks alot.
Robert Farrington says
It’s your dad who is technically behind on the loan. Here’s some options for a Parent PLUS Loan.
Chester says
Thank you for your reply. My loan details show that I have direct sub, unsub and fed unsub stafford loan all together. The whole root of it started when I stopped college for the fall semester of 2009, then I returned in the spring semester and continued from there. Ever since then my dad instructed me to go to financial aid every end of the school year for continued support. Despite of all of this my dad is still the one technically behind it right?
Chester says
I looked at some of our conversations from years ago and he did apply for a parent plus loan when I was still in college.
Susan Griswold says
My daughter recently got married, she and her husband work (she did not graduate college). Can I be re removed from cosigner…
Robert Farrington says
Some private student loans have cosigner release. Usually payments have to be made for 2-3 years on time, then the cosigner can be released. Learn more here: http://growth360tci.wpengine.com/15470/cosign-student-loan/
Tom says
It’s my understanding that there is a loan forgiveness program for people who go to work for state or non-profit agencies, but that it’s also contingent on working full time. After I graduated I worked as an adjunct professor at several colleges for 11 years, often working for several colleges at the same time, just to make ends meet. However, I was never able to secure a full-time tenure track position. I very much wanted to work full-time, and applied for full-time positions every year. In addition, many universities these days choose to operate by hiring large part-time faculty, greatly reducing available FT positions. Am I correct in that unless someone worked full-time, they were exempted from this option? If so, why is that? It seems to me part-time adjuncts are being penalized simply for not be able to secure FT work, and we need the loan forgiveness much more than those who received the FT positions receiving 50,000 + salaries.
Robert Farrington says
Public Service Loan Forgiveness does require full time employment to qualify. However, if you had two qualifying part time positions, that still counts as well. You can learn more about public service loan forgiveness here.
brent @ allaboutinterest.com says
I’m so thankful I didn’t have to take out a student loan. It’s one gift I received from my grandfather that I hope to repay to my children and grandchildren. It’s one reason I was able to start investing earlier.
Yvette Lopez says
I took out a federal loan for my daughter, and the school withdrew her, since its under my name, I have to pay it, but the director of the school was a jerk, and I cant even call and ask why she was withdrawn because I have no rights since she is over 18 (she is 23). What do I do here?
Robert Farrington says
You need to talk to your daughter. She’s an adult now and she knows why she was withdrawn or can find out. You need her to tell you… you might also want to stop borrowing money for your daughter if she isn’t going to be honest with you.
Katherine Irby says
I don’t get it. I have my own loans, $100K +..that I cannot pay. My kids are continually asking for parent loans. Sometimes, I get approved. How? I really don’t know. Now, I get notified that I have loans due at $800/month…this almost as much as my mortgage! I am so under…..I’m desperate. Please give me some good advice.
Robert Farrington says
If your children signed you up for Parent PLUS loans without your permission, you might find this helpful: https://thecollegeinvestor.com/20981/child-forges-name-parent-plus-loan/
If you are struggling with your own loans, read this: https://thecollegeinvestor.com/21512/student-loan-payment/