5 Things You Might Not Know About Your Student-Loan Debt

Melanie Lockert
October 9, 2018

Whether you love them or hate them, student loans can be a necessary evil in your life. Though I despised my student loan debt, I know that I wouldn’t have been able to attend college otherwise. The downside was I signed my loan paperwork when I was 17 and had not one clue about what I was getting myself into. While you may know the basics about student loans, here are five things you may not know about them.

1. Student loans can help build credit

Aside from the necessary student loan debt I had, I used to be very debt averse. So much so that I didn’t get my first credit card until I was 28 because it felt too close to debt to me.

When I graduated from college and got my first apartment on my own, I was nervous during the credit check as I didn’t have much of a credit history without a credit card. But it turns out just taking out student loans and paying them back on time for a few months gave me a credit score of 720, which helped me get approved for the apartment.

In that moment, I was grateful for my student loans and happy to know that you can build your credit with a student loan.

Student loans are considered installment loans, which you pay back over a specific amount of time. That can be good for your credit history but it can be better to get a credit card too, which is a revolving account.

Credit mix makes up 10% of your FICO score, so having different types of loans can help. All in all it was my student loans that helped me produce a credit score — and score me my first grown up apartment on my own.

2. All student loans aren’t created equal

When you think of student loans, you may just think of a loan you use for your education. But it truly matters where you get your student loans from and the types of loans you get.

For example, it’s advised to apply for FAFSA (Free Application for Federal Student Aid) and get federal student loans first, which are given out courtesy of the U.S. Department of Education.

If your federal student loans aren’t enough, you may turn to private student loans. There’s actually a huge difference between federal and private student loans.

Because federal student loans are from the U.S. Department of Education, there are many different types of repayment plans and special programs.

You can choose to go on an Income-Driven Plan that caps your payments as a small portion of your income or you can sign up for a Graduated Repayment Plan.

If you don’t choose anything, your loan servicer will put you in the Standard Repayment option, which is a repayment term of 10 years — which is the shortest amount of time, thus saving you more in interest.

Federal student loans may be forgiven under an income-driven plan or under the Public Service Loan Forgiveness program. Also, your interest rates on your student loans will never change as they are fixed.

Private student loans are pretty much the exact opposite from federal student loans. Since private loans are given out by private financial institutions who can make their own rules, pretty much they set the standard.

Unfortunately, private loans don’t have a lot of repayment plans to choose from and definitely don’t have any forgiveness options. Also, they may have higher, variable or fixed interest rates as well, depending on your credit and other economic factors.

That’s why it’s typically recommended that you pay back your private student loans first, while paying the minimum on your federal student loans. Since there is a lack of protections and not a lot of varying repayment options, it’s best to pay off private student loans which may be less flexible.

3. Uncle Sam will tax your forgiven student loans

I remember when student loan forgiveness first came out, I thought it was a dream! Get my student loans forgiven? Who wouldn’t want that? I then realized that under an income-driven plan I’d have to pay my student loans for 20-25 years and then have the rest forgiven. Not only that, but the interest that would accrue would potentially double the amount I borrowed.

So I stuck with my Standard Repayment plan. I’m glad I did, especially now that I know an important detail I didn’t know before.

The student loan amount that is forgiven will be taxed. Yep, Uncle Sam wants his share, because forgiven debt can seem like taxable income in a way.

What you will owe will vary on your unique tax situation, but it could still be a large sum — and one that hits you unexpectedly if you’re not aware. You don’t want to celebrate your loans being forgiven and then hit with a tax bill you cannot afford.

4. Interest accrues every day

I’ll admit that interest was the most confusing part to me when I took out my student loans. I didn’t realize how capitalization (when interest is added to the principal balance) worked and was confused how I borrowed $18,000 but graduated with $23,000 for my B.A.

It was the interest. When I started making payments, it felt like a good chunk was getting swallowed up by interest.

Then I found out that interest accrued daily on my student loans. By the time I graduated with my M.A. and had even more student loan debt, my interest was costing me $11 per day.

I was shocked. I was disgusted. But I used that energy and put it toward paying back my student loans so I could be free once and for all.

5. Student loan discharge in bankruptcy is possible, but rare

As so many graduates struggle to pay back their student loans, it can be tempting to wonder: “Can you discharge student loan in bankruptcy?” It’s a good question.

While the answer, technically, is yes, it’s extremely rare. Essentially, you have to prove that you are insolvent and under undue hardship. So this is a route that should only be taken if your student loans are causing you incredible financial difficulties — and you’ll need proof.

Another thing to note is that federal student loans have a Total and Permanent Disability Discharge, so if you’re struggling to pay back your student loans because of a disability, it’s something you should look into.

Final word

It seems like nearly everyone has student loans these days, but how many of us feel like we’re empowered with information? I’m guessing not many of us. Which is why it’s crucial to understand some of the more nuanced details and the financial implications around student loans. When you’re empowered with information, you can make better decisions and get your debt repayment on the right track.

Melanie Lockert is a personal finance expert, the blogger behind DearDebt.com and author of the book “Dear Debt: A story about breaking up with debt.” Melanie paid off $81,000 of debt and is now on a mission to help others do the same.

Feature Illustration: Laura Caseley For The Money Manual

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