If the stress of student loan payments keeps you up at night, you are not alone. Over 40 million Americans are deep in student loan debts and owe a total of $1.5 trillion. Over 18 percent owe more than $50,000. The burden of student loan payments can force you to delay major financial and personal milestones including buying a house, getting married, or having children. It can also add to feelings of anxiety, depression, stress, and ill-health. While there is no quick fix for student loan debt, you can relieve some financial and mental burden by reducing the amount you must pay. Here are eight ways to lower your student loan payments.
1. Extend Your Repayment Plan
Under the standard plan for student loan payments, you pay a fixed amount every month for ten years. But if this amount is too high, you can extend your payment term from 10 to 25 years and pay less each month. You can either make fixed or graduated payments. Fixed payments stay the same throughout the length of the loan while a graduated payment starts lower but increase every two years.
To be eligible for this plan, you will need to have more than $30,000 in Direct or FFEL loans. Also, you cannot have any outstanding federal student loans dated before Oct 7, 1998.
The downside to an extended repayment plan is the massive interest charges it incurs. Sometimes the interests can almost equal the original debt. Also, this plan makes you ineligible for the public service loan forgiveness (PSLF) program. If you are working towards loan forgiveness, you will want to consider other plans on the list.
2. Refinance Your Student Loan
One of the few options available to individuals with private loans is refinancing. In refinancing, you collect a loan from a private lender for the amount you owe and use it to pay back your student loan provider. This allows you to restructure the terms of your loan for a better interest rate and lower monthly payments. Some private lenders offer interests as low as 2.5 percent on variable rates and 3.5 percent on fixed rates. You can even extend the length of your repayment plan.
Let’s assume you have a student loan debt of $25,000 at a 6.6% fixed interest rate. Under the standard 10-year plan, you would pay $285 per month with interest charges of $9,271. With refinancing at a fixed rate of 4.00% for 15 years, your monthly payment would be $184.92 with interest charges of $8,286. Even with an extension of 5 years, refinancing is still a far cheaper option compared to a standard student loan repayment plan. Generally, the higher the rate of your current student loan, the more you’ll benefit from refinancing.
Each private lender has its processes for eligibility and approval. But to increase your chances of qualifying you will need to have a stable income, a fair credit score, and a qualified co-signer. It’s also advisable to apply to multiple lenders for a better chance of approval. You can quickly check your new interest rate for free using a soft credit inquiry, which won’t impact your credit score. Applying to multiple lenders under 30 days is also treated as a single inquiry on your credit report.
The downside to refinancing for government borrowers is losing Federal repayment protections. Refinancing makes you ineligible for Federal deferment and forbearance options as well as loan forgiveness programs. Some refinancing companies allow you to defer payments if you encounter an unexpected financial setback. But most times, the terms are less impressive compared to Federal loan protections.
3. Apply for an Income-Driven Repayment Plan
As the name implies, an income-driven repayment (IDR) plan customizes your student loan payments to what you can afford based on your income and family size.
An IDR plan offers the most comfortable repayment option for federal borrowers because the amount you pay monthly can adjust depending on your circumstance. If you are sick, unemployed, or just had a baby, your monthly payment can reduce to zero. In addition, any balance after the repayment period is forgiven. An IDR plan also qualifies you for the PSLF program where your loans can be forgiven tax-free if you consistently make payments for ten years.
There are four types of IDR plans offered by the government, and each type requires you to pay a percentage of your discretionary income every month. The time frame for repayment is also different for each of them. These include:
• Revised Pay as You Earn Repayment Plan (REPAYE Plan): Payments are capped at 10% of your discretionary income. But there are no limits on how high your payments can go, and the amount you pay will increase if your income rises. Also, for married couples, your spouse’s student loan debts and income will be a factor in how much you pay. The repayment period under REPAYE is 20 years for undergraduate loans and 25 years for graduate loans.
• Pay as You Earn Repayment Plan (PAYE Plan): Payments are capped at 10% of your discretionary income. There is a limit, however, and your payments will never exceed what you would pay on the standard plan. The repayment period is 20 years.
• Income-Based Repayment Plan (IBR Plan): If you took out a loan before July 1, 2014, payments are capped at 15 percent of your discretionary income and the repayment period is 25 years. If you borrowed after July 1, 2014, payments are capped at 10 percent of your discretionary income and the repayment period is 20 years. Payments also have a limit and will never surpass what you would pay on the standard plan.
• Income-Contingent Repayment Plan (ICR Plan): The ICR plan is designed for people in public service with lower incomes and is capped at 20% of your discretionary income for 25 years or a fixed monthly repayment for 12 years, whichever option is cheaper. There is no limit on how high your payments can go and the amount you owe is a factor in how much you will pay each month.
To be eligible for PAYE and IBR, your student loan debt must be higher than your annual discretionary income or take up a large chunk of your annual income. The ICR and REPAYE loans are eligible to anyone with federal student loans. To continue to qualify for any of the IDR plans you will need to provide information (re-certify) each year on your income status and family size even if nothing changed. Failure to do so will lead to loss of eligibility or increased monthly payments.
IDR plans come with a few drawbacks. Extending your plan beyond the standard ten years will increase what you pay in interest. Also, you will end up paying taxes on any forgiven balance. Use the Department of Education’s repayment estimator to find out how much you will pay monthly on each IDR plan.
4. Apply for a Graduated Repayment Plan
If your income is a too high of a level to qualify for an IDR plan, but still not enough to comfortably make monthly payments on the standard plan, you can opt for a graduated repayment plan. This plan allows you to start payments with a lower amount that slightly increases every two years. The amount reaches a limit once it’s three times what you would pay on other plans. A graduated repayment plan is also a good option if you are expecting a promotion, salary raise, or more profits from your business that will allow you to make higher payments in a few years.
The terms are different for consolidated and unconsolidated loans. The major difference is the time frame. With an unconsolidated loan, your repayment period is ten years. But consolidating your loans qualifies you for an extension of up to 30 years, depending on the total amount you owe in student loan debt, including federal and private loans that are not part of the graduated repayment plan.
Here’s a table showing the repayment period for consolidated loans.
A graduated repayment plan is eligible to all borrowers. But expect to pay more in interest. Also, if your income does not increase as expected, it may be difficult to continue making payments on this plan.
5. Consolidate Your Loans
If you have multiple loans from various services, consolidation can combine your loans into a single package that come with special benefits. For starters, many of the repayment plans on this list and forgiveness programs require you to consolidate your loans. A direct consolidation loan also increases your repayment term for up to 30 years and allows you to change any loan from a variable to a fixed interest rate, which can lower your monthly payments. The interest rate will be a weighted average of your previous loan rates.
The downside to merging your loans is the higher interest charges due to a longer payment period. Consolidation can also cause you to lose important benefits such as interest rate discounts and forgiveness programs. If you are making payments towards qualifying for an income-driven repayment plan forgiveness or PSLF, you will lose all existing credits when you consolidate your loans.
To be eligible for direct loan consolidation, your loans must be in a repayment or grace period. You can consolidate a defaulted loan but only if you agree to pay under one of the IDR plans or make three consecutive monthly payments.
6. Sign Up for Auto-Pay
Enrolling in your lender’s automatic pay program qualifies you for a minor discount of o.25 percent each month. This discount may seem small, but it compounds over time, and together with other payment reducing efforts, you can save a significant amount of money.
7. Pay on Time
Making payments on time improves your credit score which can help you qualify for refinancing. It also helps you avoid late fees. In addition, many lenders offer discounts if you consistently pay on time and in full each month.
8. Get Help from Your Employer
More employers now offer assistance with student loan payments as an added benefit. Most times, the company matches your payments on loans like they would a 401(K). This can help reduce your out-of-pocket payments each month. Find out ways you can approach an employer for financial aid in paying back your student loan debt.
Student loans are manageable. With the right information at hand, you will be able to figure out the best way to manage your student loan debt. Start by checking the options we’ve listed to help you lower your student loan payment. Before committing to a plan, however, make sure you carefully understand the terms that apply.
Schedule a free consultation today for a risk-free debt assessment. The only thing you have to lose is your debt.