We get a lot of questions about how to lower student loan payments—and there are some legitimate reasons for wanting to do this. But in a variety of situations, it isn’t a good idea and can make repaying your loans more difficult and expensive.
The decision to lower student loan payments really depends on the reason behind it. So, why wouldn’t you want to lower monthly payments? The main reason is that you could end up paying more interest on your loans and increasing the amount of time until they’re paid off. But this isn’t always the case (more on this below).
Here’s when you might, or might not, want to consider reducing your monthly student loan payments.
Consider lowering student loan payments when…
1. Student loan payments eat up a large portion of your paycheck
Just as there are some people who can afford to pay more, others with student loan debts may have financial hardships that keep them from making standard payment amounts. Maybe you’re not earning enough to make your payments and still be able to pay for basic necessities. Or maybe you’ve lost your job or decided to go back to school.
If student loans are causing financial problems, lowering payments is likely the first step to getting things under control. And you can always increase payments later if you choose to.
While there’s no set amount or percentage of income that works for everyone, it’s good to think of payments in these terms. If you have a decent-paying job and can’t afford to pay at least 10 percent of your net income towards your student loans, you may want to reassess your spending before lowering payments.
Keep in mind: Paying more than 10 percent or paying the minimum is possible. Kristin paid off $12,000 in one year. Stephanie paid off about $35,000 in less than four years. Neither paid the minimum or tried to lower payments to pay off their loans.
2. You’re at risk for late payments or defaulting on your loan
To take the above example further, it’s likely to make even more sense to pay less on student loans when you’re at risk of missing payments or defaulting on your loans.
Missing student loan payments is never a good idea, especially if you’re able to change the repayment amount or schedule instead. Missing payments show up on your credit report and can kill your credit score. These late payments stay on your credit report for years.
Defaulting on your student loans is even worse. If you’ve missed many payments, you could end up in default and owe even more on your debt. In this case, you could see extra fees and charges tacked onto your student loan debt. These add to the cost, causing greater problems as you strive to repay your loans.
3. You’re likely to be eligible for forgiveness in the future
While every borrower will be eligible for the income-based Pay As You Earn plan later this year, only some might benefit from student loan forgiveness.
The Pay As You Earn plan caps your payments at 10 percent of your discretionary income. After 20 years of payments, you can have the remaining federal student loan balance forgiven. But the big question is: Will you have a balance left to be forgiven?
Let’s look at the example of what the U.S. Department of Education’s Repayment Estimator says is the average loan balance for the most expensive schooling options: a four-year private, for-profit university. In this case, you’d have an average balance of $34,722 with 3.9% interest.
Assuming a fairly low, starting adjusted gross income of $20,000, you’d have $38,877 forgiven after 20 years with Pay As You Earn. In total, you’d pay $22,928. This is about $19,000 less in total payments compared to the standard repayment ($41,988 total paid).
Besides the Pay As You Earn plan, there’s the Public Service Loan Forgiveness (PSLF) program. With this program, you can have select federal loans forgiven after 10 years of working at a qualified nonprofit or public sector job. In this case, you may be more likely to have debt forgiven since it’s 10 years instead of 20 until you’re eligible for forgiveness.
In any case, be sure to investigate your situation. Use student loan calculators, and do the math first before determining your eligibility to have loans forgiven.
4. When you can refinance to save money
Refinancing is one of the few instances where you can potentially lower student loan payments and save money. The reason? You’re typically lowering interest rates and reducing interest charges.
This is often the case when you refinance and consolidate to lower private student loan payments. However, this strategy can potentially work with some federal student loans too.
If you’re looking into reducing your payments, check out our student loan refinancing options, and see how your payments may change if you qualify.
Avoid lowering student loan payments when…
1. You can afford your current payments
While there are clearly some grads who need this kind of help, some don’t. But they may still be eligible for these reduced repayment options.
The real problem with these repayment plans, such as Income-Based Repayment? You’ll pay more interest and make more total payments as you repay your debt. It’s simple—any time you decrease payments without lowering the interest rate too, you’re going to accrue more interest.
This case should also be considered with the next one.
2. You likely won’t benefit from federal student loan forgiveness
I’ve seen many people get excited about student loan forgiveness. The idea is you make payments for 20 years, and after that your remaining student loan balances are forgiven. The problem is that, depending on how much debt you have, there might not be much left to forgive.
Let’s look at the previous scenario for forgiveness again ($34,722 balance with 3.9% interest).
This time, we’ll assume your adjusted gross income starts at $30,000 (rather than $20,000). Run the numbers in the Repayment Estimator again, and you’ll find you won’t have any debt left to be forgiven under Pay As You Earn.
Instead, you’ll have paid a total of $54,329 to repay your loans. This is about $12,000 more than if you had repaid your loans with the standard repayment plan ($41,988 total).
In this case, attempting to get forgiveness is a money-losing decision.
3. You’re waiting for outside help from the government
You’ve probably heard about the possibility of the government helping you to refinance loans. Senator Elizabeth Warren’s proposal includes reducing all federal student loan interest rates to the current lowest rate.
While it sounds great, don’t hold your breath. Congress has shown little willingness to pass this or any other bill, so you’re limited to the current repayment options and interest rates for the foreseeable future.
What do you think? Should you lower your student loan payments or not?
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