There's nothing that can kill the heady rush of earning your degree faster than receiving your first student loan statement in the mail. If you borrowed your way through college, seeing how much you owe in black and white can bring your graduation celebration to a screeching halt.
Ideally, you should be working on a plan to tackle those nasty loans while you're still in school. Reading up on what your payment options are and figuring out what the cost of all that interest will be can prepare you for the impact it'll have on your wallet once you're in the real world. Unfortunately, a lot of grads don't take the time to get educated about their debt, so they end up buying into misconceptions that can make paying it off harder.
If you recently graduated or you're about to collect your diploma, here are five student loan myths you shouldn't fall for.
1. You have to go with the standard repayment plan
Student loan repayment plans aren't one-size-fits-all, and the Department of Education offers several that are designed to accommodate just about every student's budget. If you don't tell your loan servicer exactly which one you want, you'll automatically be enrolled in the standard option. Under this plan, your minimum payment is at least $50 a month, and your repayment period lasts for 10 years.
While the biggest benefit of going with the standard plan is that it lets you wipe out your loans the fastest and pay the least amount in interest, it's not always feasible from a financial standpoint. Unless you score a great job right out of school, you might need a little more flexibility, which is where the income-driven repayment plans come in.
Income-based, income-sensitive, and income-contingent plans let you cut down on your monthly payment amount and give you more time to pay off your loans when you're not drawing a big paycheck. If you think the standard plan will put too much of a pinch on your finances, you should be comparing the different income-driven options using the Department of Education's Repayment Estimator tool to see which ones you qualify for.
2. Making payments during the grace period isn't allowed
One of the nice things about taking out federal loans is that you have a little time to adjust to life outside of college before you have to start paying on them. Generally, you're allowed a six-month grace period from the time you graduate to the time your repayment period kicks off. Grads are often confused about what their responsibilities are during the grace period, and they get the impression they can't pay anything at this time, which is not the case.
In fact, it's to your benefit to throw any money you can at your student loans before your official repayment period begins. Depending on the type of loans you have, interest may already be accruing, so it's worth your while to make whatever dent you can in the balance. Unlike other kinds of loans, there's no prepayment penalty to worry about, so you won't take a hit for chipping away at the debt ahead of schedule.
If you owe private loans, you'll want to call up your lender to find out what the grace period is, if there is one, as well as what the penalties there for prepaying. Some lenders expect you to start paying on your loans as soon as they're disbursed, so that's something you'll want to be prepared for.
3. Loan forgiveness is guaranteed with income-based repayment
What makes the income-driven repayment plans so attractive for some borrowers is the fact that after a certain period of time, any remaining loans you owe can be wiped out completely without your having to pay another dime. While these plans were designed to offer relief to overwhelmed student debtors, they're also creating a sense of false hope for some.
A survey published earlier this year by Junior Achievement and PwC found that 24% of students aged 18 to 29 believe their loans will be forgiven at some point. Considering that you have to be on the income-driven plans for as long as 25 years before that happens, that seems pretty optimistic.
If you're banking on loan forgiveness, it's probably because you don't fully understand how the plans work. Your payments are based on your household size and income, which means you can only earn up to a certain limit to qualify. If you're expecting to move up the career ladder, staying on the plan for the long term likely isn't an option. You're better off thinking of income-driven repayment as a temporary fix, rather than a permanent solution for your student debt problem.
4. There's no penalty for loan forgiveness
Unless you're participating in the federal Public Service Loan Forgiveness program or something similar, you will pay a price for having part of your loans written off. Under the current IRS guidelines, forgiven debt is treated as taxable income, including loans that are eliminated through income-based repayment.
5. You can always write your loans off in bankruptcy
There's a lot of misinformation out there concerning when you can and can't ditch your student loan debt in bankruptcy. While it can be done, you shouldn't make the mistake of assuming it's an automatic out if the debt becomes too much to handle.
To include student loans in a bankruptcy filing, you have to be able to prove a severe and sustained financial hardship that keeps you from paying. In other words, you have to show that even paying the minimums would prevent you from maintaining a minimum standard of living. You can also make the claim that the school you attended isn't an eligible institution if it's not able to participate in the federal student aid program, but proving that can be challenging.
While reforms to the bankruptcy code with regard to student loans have been suggested, nothing is set in stone yet. For now, it's safer to operate on the assumption that skipping out on repayment isn't an option.
This article originally appeared on MyBankTracker.com.
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