Student loan payments can drain your monthly budget and make it more difficult to reach other financial goals, like saving money for retirement or buying a home. Thankfully, there are ways to lower your student loan payments, whether you have federal loans, private loans or a mix of both. Here are five strategies for reducing student loan payments:
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Federal student loan borrowers typically start out under the standard 10-year repayment plan, but the Department of Education offers several alternative repayment plans that can result in lower monthly payments. You can compare your options and enroll in a different plan by signing into your account on the Federal Student Aid website. Here’s an overview of federal student loan repayment plans:
Income-Driven Repayment Plan
Income-driven repayment plans, or IDR plans, limit your student loan payments to a set percentage of your discretionary income – between 10% and 20%, depending on the plan you choose. Here’s the best part: After a repayment period of 20 or 25 years, the remaining balance of your debt is forgiven.
There are four types of IDR plans: Income-Based Repayment, Pay As You Earn, Revised Pay As You Earn and Income-Contingent Repayment. The plan you qualify for depends on the type of student loans you have.
Extended Repayment Plan
The Extended Student Loan Repayment Plan can increase your loan term to as long as 25 years, up from the 10 years under the standard repayment plan. You’ll need to have at least $30,000 worth of loans through the direct loan program or the Federal Family Education Loan, or FFEL, program to qualify for the federal extension.
Opting for a longer student loan repayment term will help lower your payments, but it will take you more time to get out of debt. Importantly, extending your student loan repayment term will cost you more money in the long run, since you’ll pay more in interest over time.
Graduated Repayment Plan
Under the Graduated Repayment Plan, your monthly payments start out lower and increase every two years. Your repayment period stays the same – up to 10 years if you have direct or FFEL loans, or between 10 and 30 years if you have consolidation loans.
A Graduated Repayment Plan can be a good option if your income is low when you first graduate but you expect it to increase over time. And unlike with the Extended Repayment Plan, you won’t stay in debt longer or pay more money in interest during repayment.
Income-Sensitive Repayment Plan
Low-income borrowers with FFEL loans who need to reduce their monthly student loan payments can enroll in an Income-Sensitive Repayment Plan. Under this plan, your payments can decrease or increase based on your annual income, with a maximum repayment period of 10 years. Keep in mind that Income-Sensitive Repayment isn’t available to borrowers with federal direct loans.
If you have several federal student loans, you can consider consolidating them into one loan with a single interest rate and monthly payment. Consolidation streamlines your student loan repayment and can potentially help you lower your payments by extending your repayment term for up to 30 years.
Federal student loan consolidation doesn’t require a credit check, and there’s no application fee. Additionally, moving your federal direct or FFEL loans can help you qualify for other programs, such as income-driven repayment plans and the Public Service Loan Forgiveness program, or PSLF.
If you have private student loans – or a mix of federal and private student loans – you can potentially consolidate them into a single private loan with a longer repayment term. Private student loan eligibility and interest rates depend on the borrower’s credit score, so it may be necessary to enlist the help of a creditworthy co-signer like a trusted friend or relative.
Keep in mind that moving your federal student loans into a private student loan means you’ll lose access to federal protections like IDR plans and certain student loan forgiveness programs. On the other hand, there’s less risk if you only consolidate private student loans. And while consolidating to a longer repayment term can lower your monthly payments, it will cost more in interest charges over time.
Student loan refinancing is when you take out a new private student loan to repay existing loans on better terms to save money, reduce your payments or pay off debt faster. You can potentially refinance to a longer term to lower your monthly payments, and you can save even more if you qualify for a lower student loan rate.
Again, private student loan lenders determine your interest rate based on creditworthiness, so it’s important to work on improving your credit score or finding a co-signer before applying. Borrowers with good credit and a steady income may qualify for a lower student loan rate by refinancing, while it may not be worth it for those with bad credit to refinance their student loans.
You can potentially refinance your student loans through your current private lender, but it’s important to shop around with multiple lenders to compare rates before applying. Most private student loan lenders let you prequalify to check your estimated refinance rates with a soft credit inquiry, which won’t impact your credit score.
Remember that refinancing to a longer student loan repayment term means it will take longer to get out of debt, and it could cost more money over the life of the loan. Plus, refinancing federal loans into a private student loan means you’ll lose eligibility to federal programs.
Most federal and private student loan lenders offer a 0.25 percentage point interest rate deduction when you enroll in automatic payments, typically through direct deposit from a bank account. The interest rate discount automatically applies to federal direct loans, but check with your lender to see if you can get an autopay discount on your private student loans.
Depending on where you live or work, you may be eligible for student loan repayment assistance that can be used to lower your student loan payments. Some private sector employers, such as Ally Financial and New York Life Insurance Co., will contribute a set amount toward your monthly payments. And in select states, including Iowa and Texas, you may qualify for student loan repayment assistance based on your occupation.