Should You Lower Your Student Loan Payments? If So, How?

By Kevin Mercadante

| Photographs By robdoss

There’s a lot of discussion in the media about the size of student loans. But what may be more important to people who have student loans is the size of the monthly payment. Should you lower your student loan payments, then?

In most cases, that will make sense. But there are some situations where you might choose to do otherwise.

Should you lower your student loan payments?

If you’re struggling to make your monthly payments, then you should do whatever it takes to lower them. And if you can lower the payment by refinancing into a loan with a lower interest rate, you certainly should.

But it’s also important to remember that most other payment-lowering strategies provide savings by increasing the term of the loan. Even federal government programs, aimed at lowering payments based on income, can turn a 10-year loan into a 20- or 25-year loan. You may get lower payments, but that will come in exchange for spending a big chunk of your life making those payments.

In each case, you have to weigh the benefits against the costs.

How to lower your student loan payments

Exactly how you will go about lowering your student loan payments will largely depend on the type of loan(s) that you have. If you have private student loans, you can look to refinance through banks and other lenders.

If you have federal student loans, you can also look for solutions through banks. But you’ll be better off looking for options through the federal system. Federal student loans have certain benefits that will be lost if you refinance through private sources.

With that in mind, here are several options to lower your student loan payments:

Refinance, if you have private student loans

If you have private student loans, consider refinancing to get a lower interest rate. For example, if you are currently paying 6.50 percent on a $50,000 loan for 15 years, your monthly payment will be $435. But if you can refinance at 4.50 percent, the monthly payment will drop to $382. This will save you $53 per month. That will also save you $9,540 over the course of the loan, which will be entirely interest.

You can check with your regular bank, and see if it offers student loan refinancing. Not all do, so you might have to expand the search into other banks. While you’re at it, don’t forget credit unions, either. Many participate in a national program aimed specifically at providing student loan refinances.

Among the more popular national lenders, SoFi offers student loan refinances with fixed rates as low as 3.375 percent. Common Bond offers student loan refinances with rates as low as 3.35 percent, also for fixed rates.

Pay some principal, then refinance

You can reduce the loan amount, and then refinance the lower balance, to get a lower monthly payment. While this might sound like a too-good-to-be-true situation, you just might be able to make it happen.

You can do it by accumulating any cash windfalls that you get, and using them to reduce the loan balance. The windfalls can be an income-tax refund, a bonus or commission check, the proceeds from the sale of a personal asset (like a car), or even a gift from a family member.

Let’s say that you have a $30,000 student loan balance outstanding. It’s a 10-year loan with a 5 percent interest rate, and a monthly payment of $318. If you can pay the loan down by $10,000, and then do a refinance at the same rate and term, your payment will drop to $212 per month. That will save you $106 per month.

Yes, it sounds far-fetched. But if you do have windfalls coming in, using them to pay down your loan balance, and then refinancing the loan, is a workable plan to reduce your monthly payment.

Extend the term of your existing student loans

Even if you can’t refinance into a lower rate loan, or there’s no way that you can reduce your principal balance, you can lower the monthly payment by extending the term of the loan. In fact, this can produce one of the biggest payment reductions possible.

Let’s say that you have a $50,000 loan at 6 percent for 10 years. That means that your monthly payment is $555.

By extending the term of the loan to 20 years – even at the same interest rate – you’ll see your monthly payment fall to $358. That will save you $197 per month, and that’s a lot of extra breathing room in a tightly stretched budget.

This should be fairly easy to do, since you’re lowering the monthly payment. If you’re fully qualified to carry a monthly payment of $555, qualifying at $358 should be even easier.

Direct consolidation loans

These are for federal student loans. A direct consolidation loan enables you to roll various federal student loans into a single loan. The interest rates and terms of the various loans will be averaged, so that you will have the same monthly payment.

The primary advantages to a consolidation are that it can enable you to convert variable-rate loans to fixed, and/or replace several loan payments with just one.

But you can lower the monthly payment by extending the loan term through the consolidation. For example, if you have three different federal loans, with an average term of 15 years, you can do a consolidation loan with a term of up to 30 years. That’s the maximum term offered under a consolidation, and it will reduce your monthly payment dramatically.

Income-Based Repayment (IBR) Plan (federal loans only)

The IBR enables you to reduce your monthly payment based on the level of your income. In order to qualify for the plan, you must meet established guidelines based on your income and family size.

Because of changes in the law, the IBR is handled in two tiers, as follows:

New borrowers on or after July 1, 2014:

10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount. The term of the new loan can be as long as 20 years.

Existing borrowers on or after July 1, 2014:

15 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount. The term of the new loan can be as long as 25 years.

Either scenario can substantially reduce your monthly payments, and make them more consistent with your actual income. And since the plan is income-based, your payment will be recalculated each year that you are in the program, based on changes in your income.

What’s more, your student loan debt will be considered fully satisfied at the end of the IBR loan term. That means that even if the monthly payment is insufficient to fully pay off the loan, any remaining balance at the end of the term will be forgiven.

This is one of those federal student loan benefits that you don’t want to give up by refinancing with a private lender.

The Pay As You Earn (PAYE) Repayment Plan (federal loans only)

There are actually two parts of this loan program, the PAYE plan, and the Revised Pay As You Earn Repayment Plan (REPAYE).

PAYE Plan specifics:

Your student loan payment is generally set at 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount. The maximum loan term is 20 years. Like the IBR, in order to qualify for the PAYE Plan, you must meet established guidelines based on your income and family size.

REPAYE Plan specifics:

Your student loan payment is generally set at 10% of your discretionary income. The maximum loan term is 20 years if you’re repaying loans that were received for undergraduate study, and 25 years for loans that were received for graduate or professional study. The primary advantage of the REPAYE plan is that any borrower with eligible federal student loans can make payments under this plan.

As is the case with the IBR plan, any existing loan balance at the end of the loan term will be forgiven.

Income-Contingent Repayment (ICR) Plan (federal loans only)

The ICR isn’t as generous as the IBR or PAYE/REPAYE plans, but it is more straightforward. Any borrower with eligible federal student loans can make payments under the ICR plan. This is also the only available income-driven repayment option for Parent PLUS loan borrowers.

The amount of your monthly payment is based on the lesser of either 20 percent of your discretionary income, or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income. The maximum loan term is 25 years. And like the other plans, any portion of the loan balance remaining at the end of the term is forgiven.

Short of paying off your student loan debt completely, these options are the best ways available to lower your student debt payments. Choose the one that will work best for you, and then make it your mission to make it happen.

Summary

You may be surprised to learn that there are many ways to lower your student loan payments if you can’t afford to make them.

With different repayment plans offered through the federal government, as well as refinancing options, lowering your payments can go a long way to helping your monthly budget.


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