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From forbearances and deferments to consolidation and refinancing, the process and terminology surrounding the student loan repayment process is confusing and frequently misunderstood. The following seeks to debunk some of the most common student loan myths.

Fiction:

Student loan consolidation and refinancing are one and the same.

Fact:

Student loan consolidation typically refers to combining multiple federal loans into one in order to simplify the repayment process or to take advantage of a specific repayment or forgiveness program. The consolidated loan is still handled through the federal government, and the interest rate of the loan is a weighted average of the various loans that are being bundled together.

Refinancing refers to taking out a new loan, usually at a lower interest rate, to pay off an existing loan. The federal government does not refinance student loans, so this option is only available for private loans. If the new loan is used to pay off multiple private student loans, the result is essentially the same as consolidation, which is one reason why the two terms are often confused.

It may be possible to use a private loan to pay off multiple federal student loans and combine them into one private loan payment, but this is typically not advised. Private loans do not offer the same range of repayment options, such as deferment, forbearance, and income-based repayment.

Fiction:

Student loan consolidation makes sense for everyone.

Fact:

Student loan consolidation is not something that should be undertaken without thoughtful consideration. For individuals who find it difficult to make the normal monthly loan payment, a loan consolidation can make it possible to access repayment options that are more favorable to their current financial circumstances. The consolidated loan, however, comes with a longer repayment term, which increases the amount of interest that will be paid in the long run.

Fiction:

It costs money to consolidate federal student loans.

Fact:

There are companies that offer to consolidate federal student loans for a fee. This is completely unnecessary and should be avoided. The consolidation application can be submitted for free using the federal student loan website.

Fiction:

Income-based repayment options always make the most sense.

Fact:

Income-based repayment options typically calculate payments at 10 percent of your discretionary income. This is often significantly less than the normal monthly payment amount. While these repayment options can provide an important lifeline during a short-term financial crisis, they do come with a rather steep price. First, fees and interest continue to accrue, which means that you pay more over the life of the loan. In addition, any amount that is ultimately forgiven is treated as taxable income, which means that you could end up with a significant tax bill in a single year.

Fiction:

I can eliminate my student loan debt by filing bankruptcy.

Fact:

In most cases, student loan debt cannot be discharged in bankruptcy. A court may make an exception if the payment would cause a significant undue financial hardship; however, most courts are reluctant to do this, and the definition of what constitutes an undue hardship can vary from court to court.

If you are having difficulty repaying your student loans, it is important to talk with your loan servicer or lender as soon as possible. The lender or servicer has a vested interested in ensuring that you repay your loan and avoid default and can help you find the right repayment, forbearance, or deferment option to suit your circumstances.