If you’re struggling to pay your bills, there are many options for lowering your monthly student loan payments. Depending on your situation, you may even qualify to stop making payments altogether — without being classified as delinquent or in default on your student loans.
These days, there are so many ways to lower your monthly student loan payment, that that the last thing you want to do is just let them go unpaid. Stopping payments without first contacting your loan servicer could lead to your loans being declared delinquent or in default, leaving a serious blemish on your credit that could take years to clean up.
If your monthly student loan bills are breaking your budget, the first thing to do is take inventory of your loans. Because your options will depend on what types of loans you have, you’ll need the following information about each of your loans:
- Whether it is federal or private
- What the interest rate is, and whether it’s fixed or variable
- What the repayment term is (how long you have to repay it)
- Who the loan servicer is (the company that collects payments on your loans)
You can get an inventory of all your federal student loans, and find out who’s servicing them, by logging into the official government website, My Federal Student Aid. If you’re not sure if you have private loans, or who the loans are serviced by, you can find out by obtaining a free copy of your credit report at AnnualCreditReport.com.
Now that you have the vital statistics on your loans, let’s look at the three most commonly employed methods used by borrowers to lower their monthly payments:
- Enroll in an income-driven repayment plan that caps payments at a percentage of income
- Extend the repayment term
- Get a lower interest rate
1. Income-driven repayment plans
More than 5 million Americans are paying back federal student loans in income-driven repayment plans like REPAYE, PAYE and IBR.
These plans cap your monthly payment at 10 or 15 percent of your discretionary income, and forgive any debt you still have after 20 or 25 years of payments (government and public service workers can qualify for Public Service Loan Forgiveness after making 10 years of payments).
For struggling borrowers, a great feature about these plans is that they use your discretionary income to determine your monthly payment. That’s your adjusted gross income minus 150 percent of the poverty guideline for your family size. If you’re single, the poverty guideline in most states is $12,060.
So if you make less than $18,090 (150 percent of the guideline), you have no discretionary income. If you have no discretionary income, you make no monthly student loan payments while you’re enrolled in an income-driven repayment plan.
Under IDR plans like PAYE and REPAYE, your monthly payment is equal to 10 percent of your monthly discretionary income. If you have only a modest paycheck, that’s not as big a burden as it might sound. Say your adjusted gross income is $40,000 a year.
After subtracting 150 percent of the federal poverty guideline, your discretionary income is $21,910 a year, or $1,825 per month. So your monthly payments under PAYE or REPAYE start out at 10 percent of that — $182 a month.
Cons of IDR plans
What’s not to like about income-driven repayment plans? Stretching out your loan repayments over a longer period of time means that your overall repayment costs could increase dramatically — particularly if you don’t end up qualifying for loan forgiveness (see comparison chart at bottom).
If you do qualify for loan forgiveness after making 20 or 25 years of payments, the IRS currently considers whatever amount is forgiven as taxable income (Public Service Loan Forgiveness granted to government employees and nonprofit workers after 10 years of payments is not taxed).
If you enroll in an income-driven repayment plan, you’ll have to recertify you income and family size each year. Every year, hundreds of thousands of borrowers enrolled in IDR plans fail to recertify and can be kicked out or see their monthly payments increase. If you fail to recertify, the clock for qualifying for loan forgiveness is not reset, but some or all of the unpaid interest that was accruing on your loan may be “capitalized,” or added to your loan principal balance.
The government IDR plans outlined above are only for federal loans, and not all federal loans qualify for IDR plans.
2. Extend your repayment term
Another way to lower your monthly payment is to stretch your payments out over a longer period of time. The standard repayment term on federal student loans is 10 years. If you enroll in an IDR plan, it will usually take longer than that to pay off your loans — anywhere between 10 and 25 years.
If you have more than $30,000 in outstanding federal direct loans, you can also enroll in an extended repayment plan with fixed or graduated payments and take up to 25 years to pay back your debt. If you have multiple federal loans, you can combined them in a federal direct consolidation loan and take 10 to 30 years to pay them back, depending on your loan balance. While a federal direct consolidation loan lets you combine multiple loans into a single loan with one monthly payment, you won’t get a lower interest rate.
As is the case when you enroll in an income-driven repayment plan, the problem with extending your repayment term is that spreading out your payments over a longer period of time means you may end up paying a lot more in interest (see table below).
The exception is if you’re able to refinance your loans with a private lender at a lower interest rate.
3. Lower your interest rate
Refinancing your loans with a private lender at a lower interest rate can help lower your monthly payment — particularly if you choose a loan that also stretches out your loan repayment term.
Because lenders offer the best rates on loans with shorter repayment terms, borrowers who are out to maximize their savings tend to choose a loan with the shortest repayment term that they can reasonably afford.
If you’re looking to drastically lower your monthly payments, you may need to refinance into a loan that extends your repayment term. If you are still able to lower your interest rate, your total repayment costs won’t increase as much as they would if you stretched out your payments in a government repayment plan.
8 strategies for paying down student loan debt
|Repayment plan||Monthly payment (first/last)||Repayment term||Total amount repaid|
|Extended fixed||$358||25 years||$107,358|
|PAYE||$268/$602||18 years, 2 months||$98,605|
|REPAYE||$268/$735||17 years, 8 months||$98,004|
|Refinance at 5% / 10 years||$562||10 years||$67,457|
|Refinance at 5.5% / 15 years||$433||15 years||$77,950|
|Refinance at 6% / 20 years||$380||20 years||$91,129|
The table above shows eight different approaches to paying off $53,000 in student loan debt at 6.3 percent interest (we’re assuming that most of this debt is made up of higher-interest grad school loans, and that the borrower starts out earning $50,000 in adjusted gross income a year).
The first five options are some of the most commonly used repayment plans for paying back federal student loans — standard, graduated, extended fixed, PAYE and REPAYE. The last three options show three different strategies for refinancing the same debt into loans with 10-, 15- or 20-year repayment terms.
The actual rates that borrowers can qualify for when refinancing depend on factors like their credit history and credit score. The rates used as examples in the table above are representative of rates offered lenders offering refinancing through the Credible platform in February, 2017. You can use Credible.com to see the actual rates you’ll qualify for.
Notice that when refinancing, the shorter the loan term, the lower the interest rate.
The approach above with the lowest total repayment cost — refinancing into a 10-year loan at 5 percent interest — saves nearly $5,000 compared to the standard government repayment plan, while also reducing the borrower’s monthly payment by $40.
Although refinancing into a 15-year loan doesn’t result in as favorable an interest rate in the example above, it cuts the borrower’s monthly payment more dramatically, to $433. Thanks to the interest rate reduction, repayment costs are in the same range as the government’s 10-year graduated plan. Under that plan, your monthly payments start out at $346, but rise pretty dramatically. By the time your final payment is due, you’ll be writing a check for $1,038.
Refinancing into a 20-year loan at 6 percent interest in the example above cuts your monthly payment almost as dramatically as spreading your payments out over 25 years in the government’s extended fixed plan. Better yet, you’ll save more than $16,000 in total repayment costs compared to the government’s 25-year extended fixed repayment plan.
The government’s 25-year extended repayment plan is the most expensive of all the options above. But in this scenario, borrowers enrolled in REPAYE or PAYE also pay more than they would if they chose any of the refinancing options.
Depending on the borrower’s income and debt load, income-driven repayment plans can be better options for borrowers who will qualify for loan forgiveness — particularly Public Service Loan Forgiveness.
After you’ve used Credible.com to check the rates you can qualify for refinancing, you can use the Department of Education’s repayment estimator and student loan calculators at finaid.org to run your own comparison. Remember that while they can be useful for getting your bearings, these calculators have some limitations.
If the rates you can qualify for don’t make financing worthwhile, see our articles:
- How to lower the interest rate on your student loans
- Improve your credit score and get better rates on student loan refinancing
Keep in mind that if you refinance federal student loans with a private lender, you’ll no longer be able to enroll in one of the government’s income-driven repayment plans, or qualify for loan forgiveness. Federal loans also tend to come with more lenient deferment and forbearance options than private loans.
Many borrowers decide the savings they can achieve by refinancing outweigh those benefits. Borrowers who have used the Credible marketplace to refinance into a loan with a shorter repayment term save nearly $19,000 on average. Those who increase their repayment term lower their monthly payment by $218. For more on different approaches borrowers take when refinancing, see the Credible Student Loan Refinancing Report.
Before refinancing, make sure you understand the difference between variable and fixed rates. Most private lenders offer both. Although you can get a lower initial rate on a variable-rate loan, you assume the risk of future rate increases.
Credible is a multi-lender marketplace that allows borrowers to get personalized rates and compare loans from vetted lenders, without affecting their credit scores.