How to Lower Your Student Loan Payments (and Should You?)
April 25, 2019
For some people, it happens right after you graduate. For others, it comes later. You could be sitting at home when it crosses your mind that you’re currently paying for five different streaming services. One thought leads to another. You think about rate shopping for rental insurance and switching to store brand aluminum foil. You feel nervous, yet strangely proud. You realize it’s time to think about your budget and how your student loan payments fit into the big picture of your financial goals. You may even think to yourself, “I could do so much more with lower student loan payments. Should I look at lowering them?”
This a complex question with a complex answer. It’s best to not rush into these things. Fortunately, Purefy can help break it down.
Are there other, non-essential expenses you can cut to maintain your budget?
First, you’re going to need to do more self-reflection before deciding if this is the right move for you. If the answer to the above question is “yes,” you can stop reading. Just cut out the non-essentials. Five streaming services is a lot. You’re making the right decision. Okay, please don’t stop reading – there is still a lot to learn here that could help you in the future.
What type of loan and repayment plan do you currently have?
You could have either private or federal student loans, or both. If you graduated from college with federal loans you would have been enrolled in the Standard Repayment Plan by default. This plan breaks up your loan into a 10-year term, or 120 equal payments. If you’ve consolidated your federal loans into a Direct Consolidation Loan or FFEL Consolidation loan, your repayment plan could be between 10 and 30 years, depending on the repayment plan selected. If you’re feeling budgetary pressure because of your monthly payment, you have options.
(Note: If you’d like to learn how to lower private student loan payments or refinance your federal loans through a private lender, then you can skip the next section. No hard feelings.)
How to lower student loan payments for federal loans
Great news! With federal loans you have lots of options for Income-Driven Repayment plans. You’ll want to familiarize yourself with the details of each plan to choose which one works for you.
Graduated Repayment Plan
Your payments will start low and gradually increase every two years. This plan still requires that you pay your loan off in 10 years (10 to 30 for consolidation loans, depending on your indebtedness). Keep in mind here that as the years go by, you’ll eventually be paying more per month than the original standard repayment plan. If you expect your salary to increase over time but need a low monthly payment right now, then this may be the plan for you.
What to look out for: Those early lower monthly payments are going to interest only, which means you’re going to pay more over time. This plan generally does not qualify for Public Service Loan Forgiveness (PSLF).
Extended Repayment Plan
This plan can have either fixed payments or graduated payments (see above). This plan will take your 10-year term and extend it up to a 25-year term, which lowers your monthly payment.
What to look out for: Lower monthly payments mean you pay more over time. Not all federal loans are eligible – Direct Loan borrowers must have more than $30,000 outstanding in Direct Loans. FFEL borrowers must have more than $30,000 outstanding in FFEL loans. You can’t combine your FFEL and Direct Loans to meet the $30,000 requirement. This plan is also not eligible for PSLF.
Revised Pay as You Earn (REPAYE)
With this plan your monthly payments are 10% of your discretionary income (gross, after tax income minus the poverty guidelines for your family size). Payments are recalculated yearly based upon your updated income and family size. The big benefit of this plan is that any outstanding balance on your loan will be forgiven if you haven’t paid off your loans in 20 years for undergraduate study, or 25 years for graduate or professional degrees. This plan is also eligible for PSLF.
What to look out for: You may be noticing a pattern here. Lower monthly payments mean you’ll most likely pay more over time. This plan is available only for Direct Loans and you may have to pay income tax on any amount that is forgiven. Married borrowers must use their household income when calculating their payments.
Pay as You Earn (PAYE)
This is much like REPAYE, but with PAYE your income must be low enough that your new monthly payment is less than it would be if you were doing Standard Repayment Plan. With this plan you can also use only your individual income if you and your spouse file taxes separately. This plan is eligible for PSLF.
What to look out for: Same story, different plan. Lower monthly payments mean you pay more over time. You must be a new borrower on or after October 1, 2007 and must have received of a Direct Loan on or after October 1, 2011. You must have a high debt relative to your income. You may have to pay income tax on any amount that is forgiven. It is also only available for certain Direct Loans.
Income-Based Repayment (IBR)
This has many of the same requirements as PAYE but is open to different types of federal loans. With IBR your monthly payments will be either 10 or 15 percent of your discretionary income, but never more than your payment would be on the Standard Repayment Plan. This is the only income-driven repayment option that includes non-consolidated FFEL Program loans. PSLF is available.
What to look out for: Think PAYE, but without the date constraints. Parent loans are not eligible.
Income-Contingent Repayment (ICR)
With this plan your monthly payment will be the lesser of a) 20% of your discretionary income, or b) the amount you would pay on a 12-year fixed repayment plan. Like the above plans, payments are recalculated each year. Any outstanding balance will be forgiven after 25 years. Like REPAYE, ICR has no financial hardship eligibility requirement, so it is easier to qualify. Like PAYE, if you file your taxes separately, you don’t have to include your spouse’s income when calculating your monthly payment. This is also the only IDR program available for Parent PLUS loans.
What to look out for: These are only available for Direct Loans. Payments could end up being higher than the Standard Repayment Plan, depending on your income. You may have to pay income tax on any amount that is forgiven.
Income Sensitive Repayment
With this plan your monthly payment is based on your annual income, but your loan must be repaid in 15 years.
What to look out for: You’ll pay more overall (surprise!). The formula for determining your monthly payment can vary from lender to lender. This program is available only for FFEL Program loans and is not eligible for PSLF.
Lower your monthly payment for private or federal student loans through refinancing
If you’d like lower student loan payments on your private student loans or you can’t find the right plan for your federal loans, you could also consider private student loan refinancing. With refinancing, you may even find that if you have high interest student loans, you can lower your monthly payment without increasing your term length. Hello, savings!
If you are most concerned with having a lower monthly payment and don’t mind paying on your loan longer, you can also shop for the best rate and a term length that works for you directly through a comparison site (hey, we provide one of those!). Each lender you shop with will have different criteria, but the lowest rates are generally offered to borrowers or cosigners with high credit scores and low debt-to-income ratios. Sometimes, income level or level of education factor into your rate as well.
What to look out for: If you end up choosing to extend your term-length, you will likely end up paying more over time, but that depends on the rate you get. If you are going from a federal loan to a private loan, you will lose certain federal protections, such as forbearance or deferment options, and you’ll forfeit any forgiveness options.
If your student loan payments are keeping you from paying your other essential expenses, you may want to look at lowering your monthly payments. In most cases, lowering your monthly payments will mean you have to pay more over time, but not always. If you are looking to lower monthly payments on your federal loans, you should consider federal options for Income Driven Repayment, but you also have the option to refinance with a private lender. With certain refinance programs, you may find you can lower your monthly payment and save over time. Keep in mind, moving from federal to private will cost you some of the benefits of the federal income-driven repayment programs, but the interest savings could be substantial.