It’s a startling feeling. You sign into your student loan account to make your usual monthly payment, only to find you owe more than usual.
According to the Federal Reserve, the average monthly student loan payment is $393. With such a high monthly payment, any increases are especially painful. Unfortunately, monthly payment increases can be common.
If you recently saw your payment go up, here’s what you need to know.
5 reasons your student loan payment may increase
If your payment has gone up, there are five possible reasons for the change:
1. You chose a variable-rate loan
If you took out a private student loan or if you have an older federal loan, you may have a variable-rate loan.
Unlike fixed-rate loans, where interest rates stay the same for the length of your repayment, variable rate-loans usually start off low. But over time, they fluctuate along with the market.
If the variable-rate goes up, you could see your payments increase, too. A variable-rate loan can cause your payments to change many times over your repayment period.
2. You lost interest rate discounts
Some lenders offer interest rate discounts. For example, you could qualify for a 0.25% discount when you sign up for automatic payments. Or, if you link your student loan account to a checking account with the same bank, you could qualify for a 0.25% loyalty discount.
While those discounts can help you save hundreds over the length of your loan, they can be taken away. If you stopped automatic payments or switched banks, you could lose those discounts. With a higher interest rate, your monthly payment could go up.
3. Your salary increased
If you have federal student loans, you may have signed up for an income-driven repayment (IDR) plan. With these plans, your loan servicer extends your repayment term and limits your monthly payment to a percentage of your discretionary income. Your discretionary income is determined by looking at your household income relative to the federal poverty line and your family’s size.
Every year, you must recertify your IDR plan application and include your updated income information. If your annual salary has gone up thanks to a raise or a new side hustle, your loan servicer could increase your monthly payment. If you have a big jump in salary, you’ll likely have a higher student loan payment, too.
4. You put your loans into deferment
While deferments are usually associated with federal loans, some private lenders offer deferments, too. With this approach, you can postpone making payments for several months, giving you time to get back on your feet.
However, there are some drawbacks to deferments. With most loans, interest will continue to accrue on your debt while they’re in deferment. Your accrued interest is capitalized — meaning it’s added to your loan balance — and your interest is now calculated using the higher balance. Depending on how the loan is structured, your monthly payment could go up once the deferment is over.
5. You are on an alternative payment plan
If your payments were too high on a standard 10-year repayment plan when you first graduated from college, you might have opted for an alternative payment option — like a graduated repayment plan — to make your payments more manageable.
With graduated repayment, your payments start out quite low. However, they will increase every two years, regardless of your income or family size at the time, and the loan will be paid off within 10 years. Depending on your loan balance, your monthly payment toward the end of your loan could be as high as three times the normal payment.
How to stop payment increases
Having your monthly payment increase can be frustrating, and it can make it difficult to budget accordingly. If you want to stop payment increases, consider these three options:
1. Refinance your student loans
If you have federal or private student loans, you can refinance them together. When you do so, you can choose between a variable-rate loan or a fixed-rate loan. By refinancing and opting for a fixed-rate loan, you can make sure your payments stay the same throughout your whole repayment term.
Student loan refinancing has some other major benefits, too. You could qualify for a lower interest rate —helping you save significant money. Or, you can extend your repayment term to make your monthly payments more affordable.
2. Consolidate your student loans
If you have federal loans that you don’t want to refinance because you want to keep federal benefits, another option is federal loan consolidation. With this approach, you take out a Direct Consolidation Loan for the amount of your existing debt.
Direct Consolidation loans can have repayment terms as long as 30 years, so your monthly payment could decrease. And they’re fixed-rate loans, so your payment would stay the same for the length of your repayment.
3. Choose a standard repayment plan
If you’re currently on an IDR plan or alternative payment plan and are sick of payment fluctuations, consider switching back to a standard 10-year repayment plan. When you make the change, your payments will stay the same for your entire repayment period —helping you keep track of your finances more easily.
Tackling your student loan debt
While your monthly student loan payment may feel painful enough, it could fluctuate over time, so you may have to deal with costly increases. If the uncertainty bothers you, there are ways to stabilize your monthly payment so it never changes.
If you decide that student loan refinancing is right for you, use Purefy’s Compare Rates tool to get multiple quotes from top refinancing lenders at once.