A monthly student loan payment can be enough to put you in the red, making it difficult to pay for life’s necessities such as rent, a mortgage, utilities, and groceries. For many, lowering the monthly student loan payment is essential, and fortunately there are ways to do that.
Consolidation, income-driven repayment plans, and refinancing all represent viable options. Each one, however, comes with its own set of caveats and potential downsides. Determining which option is right for you is essential to making the best decision on lowering your student loan payment.
Lower Your Federal Student Loan Payment By Consolidating
If you have federal student loans, you might find you have to make several payments for different loans or to various loan servicers, making your monthly bill complex and often high. To address those two issues, many take advantage of a Direct Consolidation Loan.
This replaces multiple loans with a single loan through a single servicer, negating the need to make multiple payments every month. Additionally, a consolidation can decrease your monthly payment by increasing the amount of time you have to pay by anywhere from 10 to 30 years.
In theory, the new lower student loan payment is great, but over time, it can lead to a substantial increase in the amount you pay over the course of the loan. For example, if you have a loan balance of $57,000 and are making payments of about $632 a month at 6 percent annual percentage rate (APR), you will have paid $18,937 in interest over the course of the loan. If you extend your repayment term to 25 years, essentially dropping your monthly payment to $367, you will increase the total interest paid to $53,176, nearly doubling what you owed.
For that reason, it’s best to consider how your new repayment terms and interest will impact your overall payment as well as your long-term balance.
Enrolling in Income-Driven Repayment
Income-driven repayment plans, like Pay As You Earn Repayment Plan (PAYE) and the Income-Based Repayment Plan (IBR) offer federal loan borrowers the opportunity to adjust their payment to their current income. These plans limit payments to a certain percent of their discretionary income (10 percent to 20 percent), allowing borrowers to make manageable payments. At the end of the payment term (typically 20 to 25 years), the remaining loan balance is technically forgiven.
Though these plans do offer many borrowers the chance to secure manageable payments and be rewarded for consistent payments over the life of the loan, they do come with risks. For some, the payment, when paired with the loan’s interest rate, doesn’t put much of a dent in the overall principal. And, although the debt may be forgiven, it’s currently considered taxable income. This means if you have a remaining balance of $50,000, that balance can be considered taxable income once it’s forgiven. That’s a hefty IRS bill.
Additionally, income-dependent repayment plans each have their own set of requirements, and should you find you no longer qualify, you may be stuck with an even larger payment than you had before. This is particularly true if your payment was less than the monthly interest, meaning your loan was growing even though you were paying on it regularly.
Lower Your Student Loan Payment By Refinancing
Even if you have federal loans, you can move those loans into the private sector by refinancing with the lender of your choice (as long as you are approved by said lender). In many cases, this consolidation can lower your payments and make them more manageable. And, if you qualify for a low interest rate, you may even find you lower the overall cost of your loan.
For example, a federal borrower paying $138 a month on a $12,000 loan with a 6.8 percent APR may find that by refinancing through a company like SoFi could end up paying less on interest. This could currently be done by locking in their lowest APR – for example, 3.4 percent APR, extending repayment to 15 years, lowering payments to $84.21, and ultimately paying nearly $1,400 less in interest.
Student loan refinancing through a private lender can have great benefits, but it can also put borrowers at risk. Many of the benefits provided by the federal government, namely repayment plans, forbearance or deferment, and student loan forgiveness, will be lost. So, if you are taking advantage of those plans or are facing an uncertain financial future, be sure to weigh the pros and cons before moving your loans from the federal to the private sector.
How to Make the Best Choice for Lowering Your Student Loan Payment?
For many student loan borrowers, opportunities to lower monthly student loan payments are available. If you’re thinking about taking advantage of one of those opportunities, pay close attention to the loan details. Specifically, look at the new rates and terms as well as any benefits you may lose (or gain) should you make the switch.
Always review the total amount of interest you will pay over the life of the loan. Also, check the fine print to identify if you will lose access to repayment plans, hardship programs, and loan forgiveness opportunities. Loan payments may be high, but a hasty change in loan management can leave you with long-term repayment issues.