Top 3 Myths About Student Loans

1. Myth #1 — My loan balance is frozen while I’m enrolled in school.
Wrong! Many college financial aid offices encourage students to take out the maximum in loans for tuition and living expenses, and reassure them that interest doesn’t accrue while you are in school. This is not usually true. Most borrowers have a mixture of Subsidized and Unsubsidized Direct Federal Loans, interest does in fact still accrue, and will be tacked on to the principal at the end of the school deferment period, adding potentially tens of thousands of dollars to your loan balance and greatly extending your repayment period.
2. Myth #2 — I can keep extending my forbearance periods while I get financially stabilized.
Wrong! During the forbearance period, interest continues to accrue on the loans, and will be capitalized at the end of the forbearance period. This will cause your loan balance to balloon to a potentially disastrous level, increasing your monthly payments to the point where your payments will not cover the accruing interest making it impossible to ever pay off your loans. You could just keep paying and paying and get no where. Which brings us to myth # 3.
3. Myth #3 — If things get too bad I can declare bankruptcy and get the loans wiped out.
Wrong! Because federal law prohibits bankruptcy discharge of student loans in most situations, this will very rarely work. In fact, in a recent case in New York, the federal court ruled that a single mother, on welfare, unemployed, and living in Section 8 public housing did not show enough hardship to entitle her to forgiveness of her student loans (even where she showed years of unsuccessful efforts to find a job!). Horribly, if you try to declare bankruptcy and the court refuses to discharge the loan, all the unpaid interest and penalties from when the case is pending will be tacked onto your principal, leaving you much worse off than when you started!
But, you may ask…Are there any options for people in trouble?
THANKFULLY, YES!! Beginning in 2009 new payment plans and forgiveness options were enacted that, when used correctly, could lead to you saving tens or even hundreds of thousands of dollars on your loan balance and monthly payments, and put you on a path to paying off the loan or having it forgiven. However the process requires a great deal of paperwork, investigation of loan documents, and deep knowledge of the law and regulations and tax consequences. A qualified attorney can help you navigate this web of options and forge the best path forward.

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