Approximately 44 million people in the U.S. have some form of student debt, but even though so many of us make monthly loan payments, basic knowledge about how these loans work is frighteningly scarce. VICE frequently receives emails from people desperate for a bare minimum of information. That's probably because in a system with so many moving parts, it’s easy to get tripped up on the details.
Even more confusing is that the system of loan servicers, forgiveness plans, and odd loopholes could be undergoing a transformation, with Democratic presidential candidates openly discussing mass loan cancellation. At the same time, existing debt-forgiveness programs seem to actually benefit very few people thanks in part to loan providers allegedly misleading borrowers. And according to the federal government, too few college students have the financial literacy required to understand the loans they’re taking out.
So here’s an up-to-date primer on student loans—answers to questions VICE is frequently asked, along with information people should have gotten, but probably didn’t, in college.
Bernie Sanders and Elizabeth Warren have both said they want to eliminate my debt. Does this mean I should stop paying?
Absolutely not: If you have a federal loan, the government will just take the money out of your paycheck if you stop paying. You could apply for forbearance, which is to say get permission to take a break from your loans, but you only get three months max, and that is intended for cases where the borrower has lost their job or faces some other kind of economic hardship. Also, any sort of implementation of debt cancelation is going to take a long, long time if it ever even happens.
"That’s one of the problems with proposals like this," said Mark Kantrowitz, an author and leading national expert on student loans. "First of all, who knows if they’re going to get elected, and then who knows if they’re going to be successful in getting Congress to pass their proposals? You may be waiting for Godot if you’re waiting for your loans to disappear."
Is there any way I can lower my student loan payments?
The best way to lower your monthly payment by a significant amount is to get on an income-driven repayment (IDR) plan. You have to apply online through your servicer to see if you qualify, and then after that, your payment will be capped at a certain percentage of your income. (There are a few different kinds; here’s a useful breakdown.) There are some other really important benefits that come from getting on an IDR, such as debt forgiveness. That means if you make on-time payments for 20 or 25 years, the government will wipe your balance clean. The only catch there is that the erased amount will be taxed as income, so you will owe the IRS a chunk of cash at the end of everything. Experts refer to this big bill, which only comes if you don't apply for forgiveness through a special program for public service employees, as the “tax bomb.”
The two most popular forms of these plans are called PAYE and REPAYE, and though they might seem similar, there are actually a ton of very small nuances that make a huge difference for some people. Even experts can disagree on which is better, so you should get personalized advice and choose carefully
If I get on an IDR, should I even worry about paying all my debt back?
It might not make sense to make more than the minimum payments if your debt is more than double your income, according to Travis Hornsby, an accountant who helps people with student loans. "But if your debt-to-income ratio is below 1.5 to 1 and you work in the private sector, you likely have little to no shot at forgiveness," he said. "You'll pay the whole thing off because your 10 percent ‘tithe’ to the government for your education will be a high enough number that it will get rid of everything you owe."
How do I figure out which of my debts to pay off first?
Kantrowitz said that it’s really simple to figure this out: Line up all your debts and investment opportunities by their after-tax interest rates. Whatever has the highest is what you want to pay off or invest in more quickly. So if you have a 14-percent interest rate on your credit card, you want to pay that off more quickly than a 5-percent student loan, because you’re saving money over time by avoiding that high interest. But if you have a 5-percent interest rate on your student loans but can earn 6 or 7 percent in the stock market, it may be better to try maxing out your retirement plan than to pay off your student loans quicker. If your employer matches contributions to your retirement plan, you should always maximize those contributions.
The only downside is that by doing this, you might end up with student debt long into adulthood, which could present a financial conflict if you have kids who end up wanting to go to college as well. As Kantrowitz put it, "That’s not a nice feeling."
Will having student loans hurt my credit score?
Actually, if you make regular payments, having loans will actually help your credit score.
What happens if I die with massive student loan debt?
For the most part, nothing, though like everything else having to do with student loans, it depends on individual circumstances. A little less than half of private loans will be charged against your estate when you die or will need to be paid by a co-signer if you had one, though the rest will disappear. Same with any federal loans.
I heard that a lot of people got denied loan forgiveness last year for being on the "wrong plan"? How do I know if I’m on the right one?
Last year, out of the 30,000 people who applied for what’s called public service loan forgiveness (PSLF), a program intended to help people who went into civic-minded jobs after school, only 96 qualified. The vast majority were told they were on the wrong plans or found out that their servicer hadn’t been recording certain payments. "The issue with PSFL is that there are a lot of details you have to get right," said Kantrowitz. "The key things are that they have to be in the direct loan program and not in the old bank-based program by consolidating them." Here’s a checklist that explains how you can qualify.
I know I can’t declare bankruptcy on my student loans, but can I refinance my student loans with a company like SoFi and then declare bankruptcy?
No, sorry—those loans from SoFi and similar companies are usually designed to be educational loans, so they won’t be erased in a bankruptcy. Even if you took out a personal loan to pay off your student loan, bankruptcy wouldn’t be a way out. "Bankruptcy judges have a lot of latitude to deny you if they think you’re gaming the system," Kantrowitz said.
So is refinancing ever a good idea? Some of these companies advertise that they can save you money guaranteed.
Last year, SoFi settled a lawsuit filed by the Federal Trade Commission based on inflated claims about how much it saved consumers. That said, refinancing is still helpful to a narrow class of people who might make too much money to qualify for IDR and want to lower their interest rates. Just be careful about the claims, Kantrowitz said, because sometimes the savings companies advertise just come from suggesting a repayment plan that’s faster than normal—say, five years.
"Anyone shopping around for a lower interest rate should shop more than one company,” said Hornsby. "Options like Earnest, Commonbond, Laurel Road and others frequently have lower rates than Sofi but many only shop the one place they've heard about."
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