According to recent statistics regarding student debt in our country, Americans owe over $1.4 trillion in student loan debt, which is spread out among nearly 44 million borrowers. Furthermore, the average amount of student loan debt for a graduate of the Class of 2016 was approximately $37,172, up six percent from the previous year. (Sources via: WSJ, and federalreserve.org)
Student loan debt isn’t the only major issue surrounding students and young adults; young Americans (age 25-34) have the second highest rate of bankruptcy after Americans 35-44, and nearly 1 in 5 Americans ages 18-24 qualify themselves as being in “debt hardship.” These findings suggest that the younger you are, the tougher your financial situation seems to be.
Given these statistics, it’s no wonder that there is so much information floating around about debt.
Unfortunately, not all of it is true. So let’s take a look at a few of the important facts and myths:
1. Applying for a loan or credit card doesn't hurt your credit.
This can be true in certain cases, but in general, if you’re applying for a loan or a credit card, your credit score may decrease.
Anytime you apply to borrow money, your credit score is pulled. This is called a hard inquiry. Hard inquiries on your credit can cause your score to drop, whereas soft inquiries won’t harm your score.
The good news is that if you apply for a loan and you’re shopping around, the credit bureaus will cut you a break. They understand you’re trying to get the best deal, so they count all inquiries in that timeframe as one single inquiry, as long as you do your shopping within a 45-day period.
2. Refinancing your loans is always a good idea.
Student loan refinancing is a great way to negotiate a lower interest rate, a longer payment schedule, or both. It can also help make your loan payments easier to manage. Refinancing private student loans is nearly always beneficial, but you’ll want to be careful when it comes to refinancing your federal student loans.
When federal student loans go through the refinancing process, they’re typically converted into private student loans and are no longer eligible for other income-based repayment plans. Depending on the various types of student loans you have, there are specific repayment plans that may help you better afford your monthly payment.
Since federal student loans are usually treated differently than private student loans, it’s a good idea to talk to an expert before choosing to refinance any type of student loans.
3. Paying off debts will instantly repair a credit report.
Not exactly. Credit reports provide an overview of your current credit standing and your credit history. Most negative information will remain on your credit report for up to seven years. Negative items located under the “Public Record” section of your credit report, such as judgements or bankruptcies typically stay with you for up to 10 years. Paying off debts will improve your credit report and credit score, but it won’t erase all past problems. That requires time.
4. Monthly student loan payments are based on what you earn.
There is some confusion around this topic so let’s provide some clarity on this. A large majority of borrowers believe that lenders take into account how much money you make when they decide how much money you need to send them each month. Actually, your monthly student loan payments are based upon how much you’ve borrowed and the repayment term associated with your loan.
If your payments are too high, then you can apply for an income-driven repayment plan through your servicer, with the caveat that this step will ultimately make your loans more expensive over time. The most important thing to keep in mind with any debt you have, is to keep communicating regularly with your lender/creditor. By knowing your options, they can assist you if you’re unable to afford the payments required.
5. Debt consolidation is only for people who can't handle their finances.
Most likely, undisciplined spending is why you're looking at debt consolidation, but that's not always the case. Often, life throws expensive curve-balls such as home-repairs, medical bills, and career changes. Many people take advantage of the curve-balls and work to use that time to restructure their debt and take advantage of lower interest rates. Regardless of why you choose debt consolidation, it is a chance to get your finances in order and assist you in reevaluating your financial goals.