The average monthly student loan payment for borrowers between the ages of 20 and 30 is $351.
Although making that payment each month is struggle enough, your student loan payment can actually increase as time goes on. Find out which factors impact your monthly payment and what you can do to reduce or lock in your payment so you don’t pay more down the road.
Why did my student loan payment go up?
Here are the four most common reasons behind an increase in your monthly student loan bill.
1. You signed up for the Graduated Repayment Plan
If your income was low after graduation, and you couldn’t afford your federal student loan payments on a Standard Repayment Plan, you might have signed up for a Graduated Repayment Plan. With this option, your payments start off low and gradually increase over time.
Presumably, as you progress in your career, you’ll earn more money and be able to afford the higher payments later. However, your payments increase every two years with a Graduated Repayment Plan, whether you’re earning more money or not.
2. Your salary increased
For those struggling to keep up with their federal loan payments on a small salary, an income-driven repayment (IDR) plan can be a huge help. With an IDR plan, your monthly payments are capped at 10 to 20 percent of your discretionary income and your repayment term is extended. This reduces your payments to make them more manageable.
However, you must recertify your IDR plan each year. If you increased your income by getting a raise or taking on a second job, for example, the government would adjust the terms of your IDR plan. They recalculate your payment based on your new income, which can make your monthly student loan payment higher.
3. You have a variable interest rate
Federal student loans all have fixed interest rates, meaning the rate stays the same for the life of the loan. However, private student loans are different. When you take out private student debt, you can choose between a fixed interest rate or a variable interest rate.
Variable interest loans often have lower interest rates than fixed loans at first, but they can fluctuate over time depending on market trends. If your variable interest rate increases, your loan will accrue more interest, and you will have to make a larger payment each month.
4. You deferred your loans
Many people defer their loans, pausing their monthly payments while they go back to school, search for work, or deal with economic hardship. While temporarily deferring student loan payments can prevent you from becoming delinquent on your loans, it can also cause your loan balance to increase.
Depending on the type of loans you have, such as unsubsidized federal loans or private loans, interest will continue to accrue on your loan during deferment. That growing interest can cause your overall balance to increase. Once you start making payments again, you could end up with a bigger bill.
How to lock in your monthly payment
If monthly payment fluctuations make it difficult to manage your student loans, there are two ways to get a fixed interest rate and a set monthly payment.
1. Switch to a Standard Repayment Plan
If you’re on an IDR plan or Graduated Repayment Plan, consider switching back to a Standard Repayment Plan. The Standard Repayment Plan is the default, where your payments are spread out evenly over 120 months. While your payments might be higher initially, they’ll stay constant for the length of your repayment.
2. Refinance to a fixed-rate loan
If you have private student loans with a variable interest rate, you can refinance them into a new loan. By refinancing, you take out a new loan for the amount of your old one, paying your old debt off and working with a new lender.
When you refinance, you can choose a fixed interest rate loan and decide to extend or shorten repayment term. Depending on the terms you choose, refinancing your student loans can help you save money, too.
Managing your student loan payments
When you’re on a tight budget, there’s no room for fluctuating student loan payments. If you’ve ever wondered why your student loan payments went up, remember the different factors that can affect your bill. By switching your repayment plan or refinancing your debt, you can get financial stability.
For more information about managing your loans, here’s how to decide if refinancing is for you.
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