If you have a high student loan payment, it can be difficult to make ends meet. That’s a reality for millions of people. According to the Federal Reserve, 20% of adults with outstanding student loans are behind on their payments. Becoming delinquent or entering student loan default has serious consequences, including collections, damaged credit, and even wage garnishment.
If you’re trying to figure out how to lower your student loan payment, here’s what you should know.
3 Ways to lower student loan payments
Whether you need more money for rent or you simply want more breathing room in your budget, there are three core ways to lower student loan payments.
1. Consolidate your debt
For federal loan borrowers, one way to lower your payments is to consolidate your debt with a Direct Consolidation Loan. Consolidating your debt can give you a lower payment by extending your repayment term, giving you up to 30 years to repay your loans instead of just 10. Direct Loan Consolidation won’t affect the interest rate you have — your new loan’s rate is based on the weighted average of your existing debt — but it can reduce your monthly loan obligation.
2. Enroll in an income-driven repayment plans
If you have federal Direct student loans, you may be eligible for an income-driven repayment (IDR) plan. In each of the four plans, the loan servicer extends your repayment term and determines your monthly payment based on your family size and discretionary income. Depending on your situation, you could get a much lower payment; some people even qualify for $0 monthly payments, so they don’t have to make payments but remain current on their loans.
3. Refinance your student loans
If you’re wondering how to lower student loan interest as well as your payments, student loan refinancing may be for you.
Unlike loan consolidation and IDR plans, student loan refinancing is for both federal and private loans.
To refinance your debt, you apply for a loan from a private lender for some or all of our existing debt. After you refinance your loans, you only have one loan and one monthly payment. Depending on your credit history, you may qualify for a lower interest rate, which can lower your monthly payment. And, you can decide to extend your repayment term — some refinancing lenders offer terms as long as 20 years — further reducing your payment.
For example, let’s say you had $40,000 in student loans with a 6% interest rate. With a 10-year repayment term, your minimum monthly payment would be $444.
If you refinanced and qualified for a 15-year loan at 5.5% interest, your monthly payment would drop to $327 — a savings of $117 per month.
|Original Loan||Refinanced Loan|
|Loan Term||10 Years||15 Years|
|Total Interest Paid||$13,290||$18,830|
Benefits of lowering your student loan payments
Figuring out how to lower student loan payments is obviously appealing, but there are three reasons why it’s especially beneficial:
1. You’ll have more money for other expenses
If you’re struggling to make ends meet or want to save money for other financial goals, like buying a new car or home, lowering your student loan payments helps free up more money for those expenses. With a lower monthly payment, you can increase your savings for your goals.
2. You’re less likely to enter default
When you lower your monthly payment, you’re more likely to be able to afford your bills. With more wiggle room in your budget, you’re less likely to fall behind on your payments or enter into student loan default.
3. You can reduce your debt-to-income ratio
When you apply for a mortgage or car loan, lenders look at your debt-to-income ratio (DTI) — the amount of debt you have relative to your monthly income. If you have a high student loan payment, your DTI may be higher than lenders require, making it difficult to qualify for a loan.
By reducing your monthly payment, you can lower your DTI and increase your odds of getting a loan.
Drawbacks to lowering student loan payments
While reducing your student loan payments can be an attractive idea, there are some downsides you should keep in mind:
1. You’ll pay more money in interest over time
If you consolidate your debt, enroll in an IDR plan, or refinance your loans and opt for a longer term, you’ll get a lower monthly payment thanks to an extended loan term. However, you’ll likely pay more in interest over time because your loans are in repayment longer. You could pay thousands more in interest charges than if you stayed on your current repayment plan.
2. It’ll take longer to pay off your debt
Obviously, extending your loan term means it will take longer to pay off your debt. But many people don’t think about the consequences of that decision. If you’re a recent graduate and extend your loan term to 20 or 30 years, you could be repaying your loans when you’re in your 40’s or 50’s. That drawback can place a major weight on your shoulders, especially if you want to start saving for your children’s education.
3. You could lose out on certain loan benefits
Depending on what strategy you use to lower your monthly loan payments, you could lose out on certain loan benefits. For example, when you consolidate with a Direct Consolidation Loan, you lose credit for payments made toward loan forgiveness and you may lose previous interest rate discounts.
When you refinance federal loans, you transfer your loans to private loans. You’ll no longer have access to benefits like income-driven repayment plans, loan forgiveness, or federal deferment or forbearance.
However, the downsides may be worth it to get more breathing room in your budget and to lower your financial stress.
Managing your student loans through refinancing
If you’re struggling with student loan payments, there are several ways you can lower your minimum payments. If you decide to refinance your education debt, make sure you compare rates from multiple lenders. With Purefy’s Compare Rates tool, you can get quotes from top lenders after filling out one simple form, and it doesn’t affect your credit score.