5 Things Every 20-Something Has Wrong About Student Loan Debt

As someone who has built a business around the fact that I once carried six figures in student loan debt, I've uncovered countless misconceptions about student loans over the years. While some of the misinformation out there is due to honest misunderstandings, other myths are created by borrowers hoping to take the easy way out.

Sadly, those “white lies” are often the most costly. With national student loan debt now topping $1.3 trillion, it's time for each one of us to face the truth. Those of us with massive student loan debt cannot go back in time, but we can force everyone else to listen if we scream loud enough. Here are six lies about student loans that need to be called out:

1. Student loans make college more affordable.

When you see your financial aid package for the first time, it's easy to become confused. Not only will it list any scholarships and grants (which generally do not need to be paid back), but it will also list your expected family contribution and any federal or private loans you might need to take on.

Mixing in loans with gift aid is one way to obscure the out-of-pocket costs you'll need to pay for that year of school. In reality, loans need to be paid back, and they never make college cheaper. In fact, the interest you'll pay over the many years you're in repayment can actually make college much more expensive.

Always remember, a loan is a loan. The word “aid” slapped on the front doesn't change the fact that you'll have to pay back every cent.

2. College will cost the same every year.

Often, when students see their financial aid package for the first year of school, they scan the paperwork, tally up their total costs and multiply it by four to come up with the full cost of their four-year degree.

This is a big mistake. Not only does college tuition generally rise 3 to 4 percent or more each year, but many of the scholarships and grants you receive are for one or two years only, not for the duration of school.

Because of this fact, the last three years of school can cost considerably more than the first; graduate school can cost much more than that. Students who don't realize this fact can wind up spending far more than they ever planned to complete their degree. But once they realize it, it is usually far too late.

3. You'll have plenty of income after graduation to make payments.

When you're in your late teens or early 20s, it can be difficult to imagine how student loan debt could affect your lifestyle. You've examined the average salary for your future occupation, and you assume you'll have plenty of extra cash to throw around.

Sadly, the chunk of change you fork over to your loan servicer each month can lead to disastrous consequences for your budget and your long-term goals. Also, the bigger the loan – and the monthly payment – the more disruptive it can be.

That's why I always tell students to play around with a student loan payment calculator and figure out what their monthly payment may be down the line. Then take that monthly payment and create a sample budget that includes other bills you might have: rent, car payments, utility bills, health insurance, groceries and personal care.

4. Income-driven repayment and forgiveness programs are a way out.

The popularity of income-driven repayment and loan forgiveness programs has brought them into the mainstream. But, as always, the devil is right there in the details. Income-Based Repayment (IBR), for example, can require you to fork over 15 percent of your discretionary income for the next 25 years of your life before forgiveness is even an option.

Public Service Loan Forgiveness (PSLF), on the other hand, requires 10 years of payments before your loans are forgiven, but forces you to work in a qualified (low-income) public service position for the entire decade you're enrolled in the program.

Other loan forgiveness programs come with myriad stipulations, some of which make signing up just as harsh as paying off your loans the old-fashioned way. That's why loan forgiveness programs aren't the end-all-be-all we sometimes make them out to be. Students should only look to these options as a last resort.

5. All student loans are created equal.

When you're borrowing money for college, you might think the type of loan you take out is inconsequential. However, that couldn't be further from the truth. For example, federal student loans come with protections that private student loans simply do not offer. If you ever want to take advantage of deferment, forbearance or income-driven repayment plans, private student loans will prevent you from doing so.

Additionally, federal loans can be either subsidized or unsubsidized, the latter of which will rack up interest during the grace period even though you aren't required to make payments yet. Then there are fixed interest rates versus variable rates. For instance, the monthly payments on a fixed-rate loan will always be the same amount for the life of the loan. Variable loans might offer a lower interest rate up front but could end up costing considerably more in interest if rates rise.

At the end of the day, the types of loans you take out will make all the difference in how long it takes to repay them, how much you pay in interest and what — if any — federal repayment options you can access. (While I mentioned that some of these programs come with tradeoffs, they can still be the best option for students who wind up with crushing levels of student loan debt.)

Each one of us has a hand in how the future plays out. By sharing the truth about student loans, including the potential consequences of taking on that debt, we have the power to convince the next generation to think long and hard before signing on the dotted line.