How to Cut Student Loan Payments
There are many reasons why a borrow might want to reduce their monthly student loan payments. There are also many ways to cut student loan payments.
Why Might a Borrower Want to Cut Student Loan Payments?
Cutting monthly student loan payments generally increases the total interest paid over the life of a student loan, except if the borrower will qualify for student loan forgiveness.
Nevertheless, there are several reasons why a borrower might choose to reduce their student loan payments.
- More money in monthly budget. Cutting the monthly loan payment reduces the impact of the loan payments on the borrower’s cash flow. This may be especially important for retired borrowers who are living on fixed income.
- Borrower is struggling financially. Sometimes, borrowers who are experiencing financial difficulty are unable or unwilling to suspend the loan payments entirely using a deferment or forbearance. The borrower might have used up their eligibility for deferments and forbearances, or they may want a more permanent solution than a deferment or forbearance.
- Maximize loan forgiveness. If a borrower will qualify for student loan forgiveness, reducing the monthly loan payment increases the amount of forgiveness. So, even though the total cost of the loan would normally increase as the loan payments decrease, the loan forgiveness cuts that short.
Considering a deferment? Use our Cost of Deferment Calculator to evaluates the impact of interest capitalization at the end of a deferment or forbearance on the monthly loan payment and the cost of the loan, assuming that the loan payments are re-amortized after the deferment or forbearance.
Reduce Loan Payments by Changing Repayment Plans
Changing the repayment plan or choosing a longer repayment term can reduce the monthly student loan payments as compared with standard 10-year repayment.
- Income-driven repayment plans base the monthly loan payment on a percentage of the borrower’s discretionary income, as opposed to the amount owed. Lower income may yield a lower student loan payment. If the borrower’s income is less than 150% of the poverty line, the monthly loan payment may be as low as zero. There are several other ways to cut loan payments in an income-driven repayment plan.
- Extended repayment plans involve a longer repayment term, which reduces the monthly loan payment, but also increases the total cost of the loan. For example, increasing the repayment term from 10 years to 20 years might reduce the monthly payment by about a third, depending on the interest rate, but also increase the total payments by about a third.
- Graduated repayment plans start with a low payment, usually slightly more than an interest-only payment, and increase the loan payment every two years. No payment can be more than three times any other payment.
A hybrid approach involves increasing the repayment term on loans with a lower interest rate, while decreasing the repayment term on the loans with a higher interest rate. This will save money on interest, since it accelerates repayment of the most expensive loans. But, it might not reduce the total monthly loan payment.
Reduce Loan Payments with Loan Discounts and Tax Breaks
Many lenders offer an autopay discount, which reduces the interest rate on your student loans by 0.25% or 0.50% if you agree to make your payments through an automatic transfer from your bank account to the lender. You may also have to agree to electronic billing, where you receive your loan statements by email and download from a secure web site.
Borrowers can also claim the student loan interest deduction on their federal income tax returns. The student loan interest deduction is an above-the-line exclusion from income, where you can reduce your adjusted gross income (AGI) by up to $2,500 in interest paid on federal and private student loans. This will reduce your tax bill by up to $600 ($300 is typical). You can claim the student loan interest deduction even if you don’t itemize. You must be obligated to repay the debt to claim the deduction and there are income phaseouts.
Reduce Loan Payments by Refinancing
You may be able to get a lower interest rate or longer repayment term by refinancing your student loans.
Fixed-rate private student loans generally do not allow borrowers to switch to a longer repayment term, since the loan pricing was based on the length of the repayment term. Interest rates are often lower on loans with shorter repayment terms. So, the main way to get a longer repayment term on a private student loan is to refinance.
If you improve your credit scores, you may be able to qualify for a lower interest rate on a private refinance.
Keep in mind refinancing federal student loans means a loss in many benefits – the option for income-based repayments, generous deferment options, and potential loan forgiveness.