5 Student Loan Misconceptions

Drowning in debt after graduation? Here are some myths to keep in mind

Are student loan payments eating up a large portion of your monthly budget? If you're in your 20s or early 30s and are college-educated, the answer is probably yes. Young people are taking on larger student loans than ever before, and upon finishing school, many find the repayment of these debts absolutely crushing.

There are a number of options available to you to get a handle on your loans, but for those who have an above-average amount of debt (more than $19,000), you may be contemplating taking some drastic measures. Before you do, there are some student-loans myths that you need to keep in mind:

1. Tuitions will eventually get cheaper . If you're holding off going to college (or returning to college) because you think costs are destined to drop, think again. There is no evidence, either statistical or political, to indicate tuition is going down anytime soon. Between 1992 and 2001, the average cost of college in the United States increased 4.77 percent annually - more than twice the rate of inflation for the same period. Today, tuitions are increasing at a rate that will see them double every nine years.

2. Your lenders have your best interests at heart . While banks and government agencies offer myriad options to make paying back your loans easier, don't doubt that they are more concerned with their profit margins than they are with your well-being. They saw your education as an investment opportunity, and they'll want their money back and then some. In the end, creditors don't care whether you can pay back your debt comfortably or uncomfortably; they just care that you pay it back.

3. Consolidation works for everyone . Student loan consolidation is often touted as the best way to get a handle on monthly payments, and for a lot of borrowers this is true. But keep in mind that there are distinct advantages and disadvantages to consolidating your loans and you should think long and hard before following through on this option. The most important thing to keep in mind is that consolidated loans usually happen through a private lender, so getting interest relief may be a pain should you decide to go back to school.

4. You can defer your loans indefinitely . Nope and nope again. "Defer" simply means "delay," and you will eventually have to pick up your student loan payments. Typically, you're allowed to defer your debt only for very specific reasons; for example, you've decided to return to school or have fallen on extreme economic hardship. With some loans, you're allowed to defer on the principal only, which means you still have to make monthly payments to cover the interest.

5. Bankruptcy is a viable option . Over the last few years, a lot of young people drowning in student loans have declared bankruptcy to wipe the slate clean and start fresh. This kind of tactic can provide temporary relief but can hurt your long-term financial goals, including home ownership and saving for retirement. As well, President George W. Bush made it officially harder for consumers to use insolvency as a financial tactic when he passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

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