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Three Ways to Lower Student Loan Payments
Student loan debt can be overwhelming, but you’re not alone. Forty-three million Americans have student loan debt, and it adds up to a whopping $1.1 trillion dollars.
With so much debt, it can be tough to pay the monthly student loan payments. About 16.3% of student loan borrowers are in default, which could have serious repercussions for their credit history. But student loan burdens don’t have to keep you from achieving your goals, such as buying a house, small business practice, or growing your savings.
If you’re having trouble making student loan payments, don’t lose hope. There are ways to lower your payments so you can strategically manage your budget around your loans and still pay them off. Here are three options for lowering your student loan payments:
Change Your Federal Payment Plan
The type of repayment plan you choose determines your monthly student loan payment amount, how many years it will take to pay back what you borrowed, and how much interest you will pay over the life of your loan. Keep in mind, the longer it takes to pay back your loan, the more interest will accrue and increase the overall cost of your loan. The three types of payment plans available for those with federal student loan debt are standard, extended, and income based repayment plan.
Standard Repayment Plans have a fixed monthly payment over 10 years. You’ll pay less interest for your loan under this plan, but your monthly payments will be higher. A great option when possible, because you will pay your loan off the fastest and pay the least amount of interest over time.
Extended Repayment Plans allow you to pay your loans over 25 years and are available for those with over $30,000 in Direct Loans or FFELP loans. These plans may be a good option if you need a lower monthly payment than a standard plan; as you stretch the time required to pay off the loan, your monthly payment gets lower. Extended Repayment Plans can be either Level (payments are the same each month) or Graduated (payments start lower and increase over the repayment period). Be aware that early stage payments in an Extended Graduated plan go towards interest only and not principal.
Income-Driven Repayment Plans allow you to make monthly payments that are based on your income— you pay more as you earn more. You’ll have reduced payments for up to 25 years, and any remaining balance may be forgiven. Generally, you will be eligible for an income-driven repayment plan if your federal student loan debt is higher than your annual income.
The type of income-driven repayment plan you qualify for depends on your specific situation. Use the U.S. Dept. of Education’s Repayment Estimator to help determine which income-driven option is best for you. There are three types of income-driven repayment plans.
- Income-Based Repayment plans cap monthly payments at 15% of your income. If a balance remains after 25 years (20 years for those who borrowed before July 1, 2014), your loans will be forgiven.
- Pay As You Earn Repayment plans are the newer sibling to Income-Based Repayment plans. Only “new borrowers” are eligible, those who borrowed after Oct 1, 2011. Pay As You Earn plans are a better deal that Income-Based plans, as monthly payments are limited to 10% of your income and repayment periods last for twenty years.
- Income-Contingent Repayment plans do not require financial hardship and any borrower with eligible loans can pay under this plan. Payments will be the lesser of 20% of your income or what you would pay on a standard fixed payment over a 12 year period. Here, your payment is always based on your income, even if it grows to the point that your payment is higher than the amount you would have to pay under the 10-year Standard Repayment Plan.
Income-driven plans can be a great way to ease the burden of your student loan payments during hardships or while you are just starting a career. As you begin to earn more, you can transition back to a standard plan, and you may fully repay your loan prior to the end of your extended repayment period.
Consolidate Your Loans
You still have options to lower your payment if you don’t qualify for the income-based repayment plans. Federal loans can be consolidated through the Direct Consolidation Loan program. Consolidation allows you to combine multiple loans into one loan, leaving you a single monthly payment. Repayment periods are extended, which can reduce your monthly payment. There’s no underwriting required, so your current credit score won’t prohibit you from consolidating.
The interest rate on a Direct Consolidation Loan is the weighted average of the interest rates of any loans consolidated, rounded up to the nearest 0.125 percent. So, the interest rate on a consolidation loan may be higher or lower than the underlying loans. However, the interest rate is fixed for the life of the loan.
With Direct Consolidation, you’ll remain eligible for federal student loan programs like the Public Service Loan Forgiveness program. This program forgives the balance of your loan after 120 payments with no tax liability if you work in public service. If you’re unable to make the 120 payments, the program will forgive your loans after 25 years, but the amount forgiven will be taxed. There’s a loose definition of public service; work at a non-profit hospital may even qualify. Federal loan consolidation still allows you to qualify for forbearance and the various Federal repayment plans.
Refinance Your Loans through a Private Lender
If your financial situation has improved since you first took out your student loans, you might qualify for a lower interest rate loan. This will lower your monthly payment. Private lenders, such as Sofi.com focus on young earners with significant loans, and might offer a more competitive rate than is available through your public loan.
Refinancing through a private lender requires underwriting, unlike Direct Loan Consolidation, meaning your interest rate will be based on your credit score and other personal information.
Think hard before consolidating federal loans and private loans together. You’ll lose valuable federal loan benefits, such as Public Service or Forbearance when you refinance with a private lender.
When you refinance your loans, you can choose either a fixed or variable interest rate. While the variable rate will be lower, you’ll also risk your interest rate — and your monthly payment — rising as the interest index rises. If you are confident that you can pay off your loan quickly, a variable interest rate might be the right choice for you. If you expect you’ll paying off the loans for years to come, and you value knowing exactly what you’ll have to pay every month, a fixed rate loan will be a better choice.
Lower Your Student Loan Payments
If you’re struggling to make your monthly student loan payments, you have options. Explore payment plans, loan consolidation, and loan refinancing. Getting on top of your monthly payments now can help free you to pursue your next financial goals. Take the available steps to make your student loan payments more affordable for your life.