How to Lower Your Student Loan Payments
If you’re one of the millions of Americans who collectively owe over $1.6 trillion in student loans, knowing how to lower student loan payments is a big deal. Student loan borrowers pay an average of almost $400 per month to pay back their debt.
When you’re just starting with a new job and new home/apartment, that student loan debt that once seemed manageable can suddenly feel like it is holding you back from your goals. Whether you are struggling to make payments or simply want to free up money for other financial goals, there are ways you can lower your monthly student loan payment.
This article will show you the options for reducing monthly payments on your student loans.
Income-Driven Repayment Plans
One of the most common ways to lower your student loan payments, if you have a federal student loan, is by using an income-driven repayment plan.
These are federal student loan repayment programs. The programs adjust your payment based on your income and the size of your family. They also cap the length of time you must make payments.
The details vary for each plan but, in general, your monthly minimum payment will be a percentage of your income (and also based on your family size). If your income is low enough, your monthly payment could even be $0.
Many of these plans use discretionary income as the basis for adjustment instead of your total income. Discretionary income is the money you have left over after subtracting a multiple of the poverty line, such as 150% of the poverty line.
If your payment is less than the interest owed each month, the total amount owed can go up even while making payments, as the interest keeps building. Remaining loan balances are forgiven after you make a certain number of payments. After 20 or 25 years of making payments (depending on the plan and when you borrowed), your loans are forgiven. Keep in mind that unlike Public Service Loan Forgiveness, that forgiven balance is taxed as income. So while loan forgiveness sounds great, there can be a hefty tax bill with that.
If your balance owing has continued to grow over that period, due to the interest being more than your payments, that increased debt could leave you owing more taxes. If the loan is forgiven at the end of your student loan term, you can still owe taxes on the amount you didn’t pay. The loan forgiveness is taxable under current law.
The four types of federal income-driven repayment plans for student loans are:
- Income-Based Repayment (IBR): Sets payments at 15% of your discretionary income and forgives debt left after 300 payments (25 years).
- Income-Contingent Repayment (ICR): Sets payments at 20% of your discretionary income and doesn’t cap the loan payments so the loan payments will grow as your income grows. Remaining debt is forgiven after 300 payments (25 years).
- Pay-As-You Earn (PAYE): Sets payments at 10% of your discretionary income and forgives debt left after 240 payments (20 years).
- Revised Pay-As-You Earn (REPAYE): Sets payments at 10% of your discretionary income and forgives debt left after 240 payments (20 years) if you have only undergraduate student loans, 300 payments (25 years) otherwise. Payments are not capped, like in the ICR program. If you’re married, REPAYE considers your spouse’s income plus your income in calculations.
With all of the income-driven repayment plans, if a payment is lower than the new interest that accrues (added each month), your actual owed total will increase.
Borrowers of Federal Parent PLUS loans aren’t eligible for income-driven repayment plans, except for ICR if they include the Parent PLUS loans in a Federal Direct Consolidation Loan.
Defaulted loans aren’t eligible for income-driven repayment plans. Private student loans are not eligible for income-driven repayment plans either.
Other Alternative Repayment Plans
The vast majority of student loans ($1.5 trillion) are federal. This high volume of loans means there’s a lot of demand for help on federal student loans and the government has developed more plans to assist. So even if you don’t qualify for an income-driven repayment plan, you can still consider alternatives to the standard repayment plan for your federal student loans.
There are two main alternative repayment plans outside the income-driven repayment plan program. These are the graduated repayment plan and the extended repayment plan.
Graduated Repayment Plan: A graduated repayment plan starts with low payments that will increase every two years. This plan may be ideal for the typical graduate with federal student loans who expects their salary to increase over time. This plan also never sets a payment lower than the interest that gets added each month. Monthly payments under graduated repayment are also never more than three times any other payment. Non-consolidation student loans will have payment loan terms of 10 years and consolidation loans may have payoff terms between 10 and 30 years.
Extended Repayment Plan: The extended repayment plan lowers your monthly payment because it uses a longer repayment term, up to 30 years. It allows options of 10, 12, 15, 20, 25 or 30 years for payment terms, depending on how much you owe.
Deferment or Forbearance
If you need temporary help with your loan, a deferment or forbearance might help. Both a deferment and a forbearance can temporarily pause payments for a length of time. Depending on your loan, it may still accrue interest during this time, however.
Forbearance temporarily suspends your payments or temporarily lowers your payments without stopping your interest accrual.
Deferments temporarily suspend your payments and may also suspend interest accrual for certain federal student loans. But, the rules on interest accrual vary for each loan type, with interest suspended on subsidized federal student loans but not unsubsidized loans. Deferments are usually only offered for limited situations such as hardships.
For federal student loans, there are eight main deferment categories.
- Unemployment Deferment: Unemployment deferment is a deferment granted if you lose your job. Unemployment deferments generally last six to twelve months (depending on your loan type) and interest may still increase during the deferment.
- Economic Hardship Deferment: Economic hardship deferments are for those with financial difficulty but are still employed. Family size and other benefits you receive are part of the considerations for qualification. Total eligibility for the program (regardless of number of times used) is 36 months.
- Military Service and Post-Active Duty Student Deferment: If you are a military member and called to active duty your student loan payments may qualify for deferment. Likewise, if you’re returning to school after active duty, a deferment to allow you to get re-enrolled in school may be available.
- Rehabilitation Training Program Deferment: This deferment program is for those receiving vocational training or treatment for certain conditions such as drug abuse, mental health issues, and alcohol abuse.
- Graduate Fellowship Deferment: Those receiving graduate fellowships may be eligible for deferment during the fellowship funding term.
- In-School Deferment: This deferment is for those still attending school either full or half-time. The deferment length may vary depending on the original student loan type.
- Active Cancer Treatment Deferment: Authorized by Congress in 2019, this deferment covers the period of time during which the borrower is actively undergoing cancer treatment.
- Parent PLUS Borrower Deferment: Parents who took out a PLUS loan may be eligible for this deferment. If the student is still enrolled at least half time in school, this deferment lasts while the student is still in school and for up to six months after graduation or withdrawal.
Some private loan lenders also offer a forbearance under certain situations. You can contact your student loan lender or your loan servicer (the company that handles payment collection) for more details on your options.
- SoFi offers forbearance options for borrowers undergoing rehabilitation for a disability or who are on active duty in the U.S. military. SoFi also offers an option for temporary forbearance if you lose your job.
- LendKey offers an option for forbearance during an economic hardship, available for up to six months at a time and no more than 18 months total.
- Earnest offers forbearance options if you’re serving in the Peace Corps or on active duty in the US Armed Forces. Earnest also offers forbearance if you lose your job, get an income reduction, take parental leave or you are experiencing high medical bills. You can also skip one payment every year, upon request.
If you have private loans, call your lender to see what options they offer.
Besides your lender, assistance with student loan payments may be available from your employer or your local government.
Many employers are offering student loan repayment assistance to their employees. When searching for a job after college, looking into these types of programs is a good idea before accepting a job offer. You could also talk to your current employer about the likelihood of this being offered in the future. Some employers require that you stay in your current position for several years before this benefit kicks in.
In hopes of bringing college graduates to a particular area, there are cities and states that will help pay your loans when moving there. Some locations, like Kansas, are offering incentives to attract a college-educated workforce to more rural areas to support employers important to the state. Other states, like Maine, are offering benefits to all residents living and working in-state. Still others, like Texas, have job-based incentives for high demand jobs such as nursing home nurses, attorneys and doctors.
Student Loan Forgiveness
The Public Service Loan Forgiveness program wiped out the remaining debt on over $99 million worth of student loans in 2019.
For federal student loans, the elimination of debt has three names. Forgiveness, cancellation, and discharge, all of which result in debt removal. But the terms apply to different programs. Not all programs are available for all loans.
Job-related loan forgiveness looks at what job, or volunteer work, you do and if it meets program qualifications. These programs are:
- Public Service Loan Forgiveness: Forgives the student loan balance after a borrower makes at least 120 payments if they work for the government or a not-for-profit organization.
- Teacher Loan Forgiveness: Forgives up to $17,500 on certain student loan types for those teaching five years full time in certain low-income qualified schools.
- Perkins Loan Cancellation and Discharge: Cancels or discharges Perkins Loans for certain teachers and some volunteer positions.
School-related loan forgiveness revolves around situations where your college either didn’t live up to their obligations or committed fraud or other failures. These programs are:
- Borrower Defense to Repayment: Discharges loans in certain cases where a college misled students, broke federal or state laws, or committed other acts outlined in the program.
- False Certification Discharge: Discharges loans if a college falsely certified the borrower as loan eligible.
- Unpaid Refund Discharge: Discharges parts of loans in cases where colleges didn’t return unused loan amounts to the lender.
- Closed School Discharge: Discharges federal student loans if the college closes while the student is enrolled or within 180 days of the student’s withdrawal.
Catastrophic forgiveness programs are meant to provide a safety net in drastic events. These programs are:
- Total and Permanent Disability Discharge: Discharges loans if the borrower becomes totally and permanently disabled.
- Discharge in Bankruptcy: Most student loans cannot be removed by bankruptcy. But, there are limited cases where a student loan may be discharged during bankruptcy if the borrower files an adversary proceeding as part of their bankruptcy filing.
- Discharge Due to Death: Should the borrower die, or the student whom a PLUS loan benefited die, the loan will be discharged.
Sometimes parents may also file for loan forgiveness. If you took out a Parent PLUS loan for a student, you should contact their lender for details of available programs.
Refinancing a private student loan could potentially lower your interest rate, saving you money overall. Refinancing may also result in a lower monthly payment if you chose a longer loan term. It could also make repayment easier by streamlining multiple student loans into one monthly payment.
While you can refinance your federal student loans into a private student loan, keep in mind you’ll lose the great federal perks that go along with it. Some of these perks include the potential for any student loan forgiveness, generous deferment options, potential for subsidized loans, and income-driven repayment plans.
Sometimes, though, your payments might increase with a shorter repayment term. Some lenders couple a lower interest rate with a shorter repayment term, in which case your monthly loan payment could increase.
If you choose a shorter repayment term, it will mean higher monthly payments, but you will be paying less interest and wipe out your debt sooner. If you choose a longer repayment term, it will mean a smaller monthly payment but you will pay more in interest and have your debt longer.
When you refinance your student loans, you are borrowing a new loan with a new interest rate. Shop around for the best rate.
Consider the pros and cons of student loan refinancing to determine if it’s right for you.
Splash Financial is a student loan marketplace that allows you to check your interest rate and matches you to a lender for refinancing.
“Student loan repayment made effortless” is the motto of this innovative app. Here’s how it works:
Every time you make a purchase, ChangEd rounds it up to the next dollar, and that money goes toward your student loan. Say you pay $3.50 for a coffee. The remaining $0.50 automatically goes into your ChangEd account, and the money is deposited once you hit your chosen threshold, which can be as low as $5. Learn how it works.
You don’t have to let high student loan payments hold you back. There are plans and options to help you lower the payments.
The programs we’ve just talked about offer opportunities for you to take back control of your finances and continue working forward.
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