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What You Need to Know About Student Debt

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College isn’t cheap. And unless an individual has grants or scholarships, it’s actually one of the most expensive things most people will ever pay for out of pocket, next to a mortgage. That may sound scary, but consider the alternative: How many successful people do you know without college degrees?

Certainly, those people exist. But not seemingly in large-enough numbers to dispel the notion that a college degree is a crucial first step in building the career you want, whether true or not. Or perhaps this notion also exists, because the availability of manufacturing and trade jobs have declined over the last three decades. With globalization and continued advancements in automization, it’s hard to believe those jobs will ever return to what they were. There has been a cultural shift for many, to view a professional degree as a less risky long-term investment to get a stable job, regardless of cost.

But that cost is still high. For most people, they will need to take out student loans to go to college. If you are one of those people, here’s a rundown of what you should know – and what you should avoid.

Applying for a Student Loan

No one is eligible for federal student loans without completing the Free Application for Federal Student Aid, or FAFSA. The FAFSA asks about parental income, tax returns and demographic information. Many schools also use data from the FAFSA to determine eligibility for scholarships or grants given out by the school.

Federal loans will be included in a student’s financial aid package. The terms of the loans – including interest rate, amount borrowed and type of loan – will be spelled out in the Master Promissory Note that students will need to sign in order to take out any loans.

Federal student loans are typically preferred over private loans, as they offer more repayment plan options, including deferment and forbearance. These also include income-based plans that allow graduates to pay what they can afford.

Common Misconceptions about Student Debt

  • My student loans will be forgiven. Many presidential candidates have promised free college tuition or total student loan forgiveness. Unfortunately, the likelihood of these ideas coming to fruition is slim. Continue to make payments as you would otherwise, and don’t let a slim hope put you in financial trouble.
  • I can’t refinance my loans. Many startups and banks now offer student loan refinancing. Those who take advantage can save thousands or tens of thousands of dollars in interest, especially if they keep making the same payments after refinancing.
  • I can’t pay off my student debt early. Paying off your student debt early can save you money on interest and make it easier to buy a house or obtain a business loan. Some people assume it’s better to hold onto student loans because they can deduct the interest on their taxes. But this only is beneficial depending on your income tax bracket and how much your interest payments are. You cannot deduct more taxes than you owe, so if you’re in a lower income bracket, the amount you deduct may not be worth the interest you’d save. Additionally, according to the IRS, you can only deduct up to $2,500 annually in taxes using student loan deduction. If you have a large debt or large interest rate, you could easily exceed that amount in interest payments annually.

Loan Forgiveness

Student loan forgiveness is possible through several avenues, including companies who help pay your student debt, federal government programs that reward those who work in underserved or low-income areas and non-profit companies.

Loan forgiveness is often contingent on several factors and may be denied easily. For example, those interested in the Public Service Loan Forgiveness program have to work for a qualified employer for 10 years and make payments during that time. Missing a payment or spending two months working for a for-profit company can disqualify you entirely.

One of the best strategies for loan forgiveness is to choose an income-based repayment plan. Most forgiveness programs don’t require that you pay taxes on the amount forgiven, so it’s in your best interest to make the smallest payment possible. Applying for an income-based repayment plan is simple and free through but it’s important to be aware that there are companies out there that will attempt to charge you for this free service under a program commonly referred to as Obama Student Loan Forgiveness.


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