The Ultimate Guide to Lowering Your Student Loan Payments

how-to-lower-student-loan-payments

“This is as much as my rent.”

“I could go on vacation every month with this kind of money.”

These are probably just a couple of the thoughts that have run through your mind as you make your monthly student loan payment. If only there was some way to lower student loan payments to a manageable level.

The good news: there is. You don’t have to be stuck with sky-high payments, especially if you’re struggling to meet them. There are a variety of ways borrowers can reduce student loan payments for good.

How to lower student loan payments

In this guide, learn how to lower student loan payments through a variety of options for both federal and private loans.

Option 1: Apply for an income-driven repayment plan

One of the best ways to lower student loan payments is by applying for an income-driven repayment plan.

Income-driven plans are specifically designed to help federal student loan borrowers reduce their payments according to how much they earn. There are several options to choose from:

REPAYE

The newly unveiled REPAYE plan is available to most federal student loan holders.

Highlights:

  • Monthly payments are capped at 10 percent of discretionary income.
  • Undergraduate loans are forgiven after 20 years of consistent repayment.
  • Graduate loans are forgiven after 25 years of consistent repayment.

Pros:

  • There are no income restrictions for this repayment plan.
  • Most federal student loan borrowers are eligible for this plan.

Cons:

  • There’s no cap on how high payments can go – if your income goes up, so do your payments. In some cases, you could end up paying more than if you were on the 10-Year Standard Repayment Plan.
  • If you’re married, your spouse’s income will be considered when determining your monthly student loan payment, even if you file taxes separately.
  • Loans forgiven will be considered taxable income and therefore, you may be hit with a tax bill.

Pay As You Earn

The REPAYE plan is the most recent iteration of the Pay As You Earn (PAYE) plan. While REPAYE extends benefits to more borrowers, it doesn’t replace PAYE, which is still an option.

Highlights:

  • Monthly payments are capped at 10 percent of discretionary income.
  • Loans are forgiven after 20 years of repayment.

The Pay As You Earn Plan is available to a smaller group of borrowers and has different pros and cons than the new REPAYE plan.

Pros:

  • Your payments will be capped at 10 percent of your income and will never be more than what your payments would be under the Standard Repayment Plan (a big difference from REPAYE).

Cons:

  • You must qualify for this plan based on your income. Typically, you’re eligible if your outstanding debt is greater than your annual salary.
  • In order to be eligible, you must be a new borrower as of Oct. 1, 2007 and have received a disbursement of a Direct Loan on or after  Oct. 1, 2011.
  • Any forgiven balance is subject to taxes.

Income-Based Repayment (IBR)

Another option when your current income doesn’t support your monthly student loan payments is applying for an Income-Based Repayment plan, often referred to as IBR.

Highlights:

  • Monthly payments are capped at 10 to 15 percent of discretionary income, depending on when you took out your loans.
  • Remaining loan balances are forgiven after 20 or 25 years of repayment, again depending on when you borrowed.

Pros:

  • If your income is truly getting in the way of making payments, your payments could be as low as $0 under IBR.

Cons:

  • You must qualify for this plan based on income, typically when your outstanding debt is greater than your annual salary.
  • In order to be eligible, you must be a new borrower as of Oct. 1, 2007 and have received a disbursement of a Direct Loan on or after Oct. 1, 2011.
  • Any forgiven balance is subject to taxes.

Income-Contingent Repayment (ICR)

Another option to lower your student loan payments is opting for the Income-Contingent Repayment Plan (ICR). This plan, similar to REPAYE, is available to most federal student loan borrowers.

Highlights:

  • Payments are capped at the lesser of two options: 20 percent of discretionary income, or what the payment would be on a fixed, 12-year payment plan, adjusted according to income.
  • Remaining loans are forgiven after 25 years of repayment.

Pros:

  • Most federal student loan borrowers are eligible for this plan.
  • Is the only income-driven option for Parent PLUS borrowers who consolidate their loans.

Cons:

  • Any forgiven balance is subject to taxes.

Helpful Hint: You can use this nifty Repayment Estimator to calculate your prospective monthly payments on any of the above plans.

Option 2: Graduated Repayment Plan

If an income-driven plan doesn’t seem like the right fit for you, you can consider a graduated repayment plan to lower student loan payments (at least for now).

The concept behind the graduated repayment plan is that your payments will start out small but increase over time, generally every two years. Most federal loans are eligible for this plan.

Typically, your payments will be spread over the course of 10 years. This option is good if you’ve just graduated and are confident that your income will increase over time.

Pros:

  • Can result in a lower total amount paid compared to income-driven repayment.
  • Maintains shorter repayment time period (compared to income-driven repayment) of 10 years.

Cons:

  • Often results in higher total amount paid compared to the Standard repayment plan.

Option 3: Extended Repayment Plan

If your payments under the Standard Repayment Plan are too much to handle, you can reduce student loan payments by opting for an Extended Repayment Plan, which lengthens the amount of time you have to pay back your loans.

Pros:

  • Under this plan, federal student loan borrowers can make fixed or graduated payments on their loans for up to 25 years.
  • Extending the repayment period helps lower payments to make them more manageable.

Cons:

  • Extending the repayment period means you’ll pay a lot more in interest over time.
  • Your loans will NOT be forgiven under this plan.

To be eligible for this plan, Direct Loan and FFEL borrowers must have more than $30,000 in student loan debt and must not have had an outstanding balance on or before October 7, 1998.

Option 4: Consolidate your loans

Do you have multiple federal loans? If so, you may want to consider consolidating your federal student loans in order to reduce student loan payments.

Through a Direct Consolidation Loan, borrowers can make repayment easier by streamlining and lowering student loan payments.

Pros:

  • One monthly payment instead of multiple payments.
  • Extend your repayment period up to 30 years.
  • Lower payments.

Cons:

  • Pay more in interest over time.
  • Lose borrower benefits such as interest rate deductions and loan forgiveness.

Option 5: Refinance your loans

Do you have private loans? You may be feeling a bit neglected up until this point, but there’s an option for you to lower student loan payments through refinancing.

Pros:

  • Federal and private student loan borrowers can consolidate their loans into one monthly payment.
  • Get approved for a lower interest rate, which could save you thousands of dollars.
  • Lower student loan payments by choosing a longer repayment period.

Cons:

  • Pay more in interest with a longer repayment period.
  • Forfeit federal loan protections such as income-driven plans and loan forgiveness.

When you refinance, you can opt for a repayment plan up to 20 years in most cases, which helps reduce student loan payments.

While getting approved for a lower interest rate could save you money on interest, you’ll still pay more in interest over the life of your loans if you opt for a longer repayment period and lower payments. It’s a trade-off you have to consider and decide if it’s worth it to you.

Option 6: Student loan help through your employer

Employers know that many workers are by student loan debt and are beginning to offer new perks to help employees pay back their student loans.

The global consulting firm PricewaterhouseCoopers (PwC) made an unprecedented move in 2015 by announcing it would help employees pay $1,200 per year toward their student loans for up to six years.

Chegg, an online textbook retailer, announced they will also help employees reduce student loan payments.

While this benefit isn’t mainstream yet, it appears the student loan repayment perk is catching on (we can hope, right?).

Pros:

  • It’s basically free money.
  • More employers are starting to offer this perk.

Cons:

  • Only a small percentage of companies currently offer this.
  • This form of aid is typically subject to taxation.

Option 7: Move to a different state

One unconventional strategy borrowers can take to reduce student loan payments is by moving to a different state. Some states are attempting to attract talent by offering to help with their student loan payments.

Currently, Kansas, Michigan, and New York are some of the states that have programs to help student loan borrowers pay back their loans. See our full breakdown here.

Pros:

  • Again, programs like these are more or less offering you free money.

Cons:

  • You (obviously) might not want to move for a variety of reasons.

Option 8: Sign up for auto-pay

Interest charges can make progress on paying down your loans feel like an uphill battle.

One easy way to lower student loan payments is to sign up for auto-pay through your loan servicer. Typically, you can qualify for a 0.25% interest rate reduction by doing so.

While your payments will remain about the same, you’ll lower how much you actually pay over time by saving some money on interest.

Pros:

  • You can save money each month as well as guaranteeing you never miss a payment.

Cons:

  • Dropping your interest rate 0.25% likely won’t have a huge impact compared to other items on this list.

Option 9: Join Upromise

Upromise is a free program through Sallie Mae that awards cash back on online purchases, dining out, travel, and more.

Simply create an account and link your debit and/or credit cards, as well as an eligible student loan account. Each month, Upromise will automatically transfer over your earnings.

Of course, it doesn’t make sense to spend more money just to earn cash back. But if you’re simply making your everyday purchases, using cash back from Upromise could be an easy way to put extra money towards your student loan payments and reduce the out-of-pocket cost each month.

Pros:

  • Can earn this reward for things you already buy.
  • Earnings are automatically applied each month.

Cons:

  • You have to spend money to earn rewards.
  • Rewards can be relatively small.

Option 10: Use credit card rewards strategically

In most cases, you can’t use your credit card to pay off your student loans. But that doesn’t mean you can’t put some rewards toward monthly payments.

Jacob Wade from I Heart Budgets paid down $1,100 in student loan debt using the Citi Thankyou Premier card. Using this particular card, you can convert your rewards into a check that they will send to your loan servicer. Score!

If you’re not in credit card debt, have good credit, and pay your balance in full each month, this may be a good option to put even more “free” money toward your student loans.

Pros:

  • Earn rewards on your everyday purchases.

Cons:

  • Risk of going into credit card debt if you’re not careful with your credit card use.
  • Must meet eligibility requirements to get these cards.

Final Word

If you’re wondering how to lower student loan payments, there are a variety of options to choose from. Unfortunately, there can be a lot of confusion around what options are actually available for student loan borrowers, but using this guide, we hope that you find what you need to successfully lower your payments and make them more manageable.

Before you choose a plan of action, fully understand what benefits you may give up and calculate how much additional interest you may pay over time. While lowering payments can feel like a quick win, it can also have long-term consequences, so choose wisely.

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Published in Federal Student Loan Repayment, Income Based Repayment, Pay As You Earn (PAYE), Private Student Loans