Money

3 Myths College Students Believe About Their Student Loans

March 4th 2017

By:
Danielle DeCourcey

Americans owe more than $1 trillion in student loan debt, and millions of college students will add to that pile this year.

However, a new survey suggests that many college students may not actually understand the basics of their federal loans.

Lendedu, an online marketplace for student loan refinancing, conducted a survey of 500 college students in February for Financial Aid Awareness Month, and found three myths college students believe about federal student loans:

1. Nearly 50 percent of respondents thought they would receive some federal student loan forgiveness after graduation.

man-holding-dollar-bill

It is definitely possible to receive loan forgiveness but most student loan borrowers are not eligible. Federal student loan forgiveness programs are limited to very specific circumstances, such as loan forgiveness for people in public service jobs, teachers, people on disability, or death. Obviously in the last instance, the borrower would not be around to receive the benefits of the loan forgiveness.

Students on a federal income driven repayment plan will have their loans discharged after 25 year years, which is the maximum payment term in most cases. However, there is no maximum term for private loans.

2. Most students thought the federal government would refinance their student loans.

handful-of-cash

Of the students who took the lendEDU survey, 64 percent thought that the federal government would "refinance" their loans. Refinancing is something that private banks do for student loans, while the federal government offers income-driven re-payment plans, and that distinction is very important.

crumpled-one-dollar-bill

Federal loans offer deferments and other protections if a borrower becomes unemployed, and federal income-driven repayment plans aim to keep monthly payments manageable based on the borrower's income, none of which are required offerings from private loan companies. However the lower monthly payments over a longer period of time can make the total cost of the loan much larger.

If a private bank refinances a student loan, which essentially means the bank pays off the federal loans and then enters a new private loan agreement with the student, the borrower loses protections that the federal government offers.

3. Most students thought that Parent PLUS loans could be transferred after graduation.

Parent PLUS loans, which are federal loans available to parents of undergraduate students, are not transferable after graduation, but 57 percent of survey respondents did not know that. In 2014, 77 percent of parents said they planned to help their children pay for college, and one of those ways is a Parent PLUS loan from the federal government. However, even if a student makes an agreement with a parent to make the payments on the loan, the repayment terms, including eligibility for deferment, loan forgiveness, and the amount of the monthly payment will be based on the parents' income and life situation, not the students. That means students could be stuck paying a lot more money for a much longer period of time, because their parents are likely earning a higher income than they are.

RELATED: Here's How You Can Lower Your Monthly Student Loan Payment