8 Strategies To Lower Your Student Loan Payments

According to the Federal Reserve, Americans owe $1.7 trillion in student loan debt. Around 45 million Americans have some form of student loan debt, and student loan debt is the second-highest consumer debt category after mortgage debt. Many borrowers struggle to make their monthly student loan payments. If you’re struggling to pay off student loan debt, you may want to look into lowering your student loan payment. Getting a lower monthly payment can help tremendously, and there are many options to do this.

The best option for you depends on your financial goals and the type of loans you have. Here are eight strategies you may be able to use to lower your student loan payments.

Sign Up for an Income-Driven Repayment Plan

Anyone with a federal student loan is automatically placed on the Standard Repayment Plan (SRP). Under this plan, borrowers have 10 years to pay off their loans. Compared to other repayment options, this is a shorter repayment period, which means your monthly payments will be higher. 

If you’re struggling to make your monthly payments on your federal student loans, you can apply for an income-driven repayment (IDR) plan. There are four income-driven repayment plans available to federal student loan borrowers. These plans cap your federal student loan payments at 10% to 20% of your discretionary income while lengthening your repayment term to 20 or 25 years. Both of these help lower your monthly payment.  

Also, under an income-driven payment plan, once you make payments for the 20 or 25 years, your remaining loan balance is forgiven. This means you don’t have to pay the remaining amount. Under current federal tax laws, the IRS will tax the forgiven amount as ordinary income. The tax laws could change, but this is still worth considering if you’re thinking about signing up for an income-driven payment plan. 

Depending on your income, family size, and loan balance, your monthly payment could be as low as $0 under an IDR plan. This still counts as payments made towards loan forgiveness. 

4 IDR Plans To Consider

The following four income-driven plans are available:

• Pay As You Earn (PAYE): Borrowers pay 10% of their discretionary income for 20 years.

• Repay As You Earn (REPAYE): Borrowers pay 10% of their discretionary income for 20 years for undergraduate student loans or for  25 years for graduate student loans.

• Income-Based Repayment Plan (IBR): Borrowers who took out loans on or after July 1, 2014, pay 10% of their discretionary income for 20 years. All other borrowers pay 15% of their discretionary income for 25 years.

• Income-Contingent Repayment Plan (ICR): Borrowers pay 20% of their discretionary income for 25 years, or they have a 12-year repayment plan adjusted to their income.

With income-driven plans, you must recertify your income each year or you'll be placed back on back on the SRP, which means your monthly payment will likely go up. The downside of income-driven plans is that you have a longer repayment period than the SRP’s 10-year repayment plans. This means you could end up paying more interest over the life of the loan. You may also have higher monthly payments as your income increases.

Remember, income-driven plans apply only to federal student loans, not private student loans. 

Use a Graduated Repayment Plan

If your income is too high to get a lower payment with an income-driven plan but you still can’t afford your monthly payment, consider getting a graduated repayment plan. Payments for graduated repayment plans start low and gradually increase every two years. Under a graduated repayment plan, you pay your loan off within 10 years. If your loan is consolidated, the payment term is 10 to 30 years.

Graduated repayment plans have some downsides. Because payments start low at the beginning, you pay more interest over the life of the loan than you would with the SRP. Also, payments increase every two years regardless of your income. So you still have to pay more every two years even if your income goes down.

Consider an Extended Repayment Plan

If you owe more than $30,000 in a Federal Family Education Loan (FFEL) Program or on a federal direct loan, consider getting an extended repayment plan. Federal direct loans are loans the U.S. Department of Education makes directly to lenders. FFEL loans are made by private lenders and guaranteed by the federal government. Check with the U.S. Department of Education to see if your loan qualifies for an extended repayment plan.

With an extended payment plan, you can take up to 25 years to repay the loan. With these plans, you choose between fixed and graduated payments. Because the repayment term is longer in an extended plan, your monthly payments will generally be lower than they would be under the SRP or a graduated repayment plan.

Extended repayment plans are not income-dependent, so you might have lower monthly payments with an income-driven plan. The downside of extended student loan repayment plans is that you could pay more in interest since the repayment term is longer than other plans. 

Enroll in Autopay

Consider enrolling in autopay. Most lenders offer interest rate discounts if you sign up for automatic payments. You can get up to a 0.25% interest rate discount on your federal student loans if you enroll in autopay. Private student loan lenders offer similar discounts for using autopay. Although the discount is small, it does reduce the total amount you pay over the life of the loan.

Refinance Your Student Loans

With solid income and a good credit score, refinancing your loan could get you a lower interest rate and lower monthly payments. When you refinance your loans, you can also shorten or lengthen the repayment term, depending on your financial goals. 

Both federal and private student loans offer refinancing options. Refinancing a federal student loan always transfers your loans to a private lender. So if you refinance a federal loan, you’ll no longer qualify for federal income-driven plans or other federal student loan protections.

Consolidate Your Federal Student Loans

With a Direct Consolidation Loan (DCL), you consolidate all of your federal student loans into one loan with one monthly payment. You can also extend your repayment term, which can lower your monthly payment. Depending on how much you owe, the repayment term can be from 10 to 30 years. The new interest rate for your DCL will be a weighted average of all of your federal student loans.

The downside of consolidation is that whenever you lengthen your repayment term, you end up paying more in accrued interest over the life of the loan. Also, consolidation is only available for federal student loans. If you have private student loans, consider refinancing. 

Look Into Loan Forbearance or Deferment

Federal student loans offer deferment and forbearance. You can use deferment or forbearance to temporarily pause your payments, usually in three, six, or 12-month increments, until your financial situation gets better. Federal student loan borrowers can get up to 36 months of unemployment deferment and up to 36 months of economic hardship deferment throughout the life of the loan. Deferments are also given to borrowers who are:

• In school at least half-time

• In graduate fellowships 

• In active military service

• In a rehabilitation training program for the disabled

• In treatment for cancer (They also qualify for up to six months after treatment.)

• Perkins loan recipients who qualify for deferment under the loan terms

• Parent PLUS loan borrowers with a student who’s enrolled at least half-time

Although forbearance and deferment temporarily stop your payments, interest on the loan continues to accrue during the no-payment period. The interest is added to the loan principal when payments restart. If your loans are deferred, the federal government pays the interest during the deferment. If your loans are in forbearance, you’re responsible for paying the accrued interest. 

Forbearance is either general or mandatory. Federal student loan lenders may choose to grant general forbearances if you’re facing:

• Financial hardship

• Financial strain because of medical expenses

• Employment changes

• Other reasons your loan servicer approves

Federal student loan lenders must grant a forbearance if:

• You have a medical or dental residency or internship.

• Your total student loan balance is more than 20% of your gross monthly income.

• You’re in an AmeriCorps program.

• You’re working in a job that qualifies you for teacher loan forgiveness.

• You qualify for partial loan repayment under the U.S. Department of Defense Student Loans Repayment Program.

• You’re in the National Guard called to service by a governor and don’t qualify for a military deferment.

Forbearance on a loan can be granted for up to 12 months at a time. If you’re still facing financial hardship after the forbearance period ends, you can ask for another forbearance. Forbearance can be renewed for up to three years.

Effective February 1, 2021, all federal student loans were paused and the interest rate for loans was set to 0% due to the COVID-19 pandemic. This relief is set to expire on January 31, 2022.

Some private student loan lenders offer forbearance for various reasons, including being in school or having an internship or medical residency. Private lenders may offer forbearance for financial hardship or unemployment, but they may charge an additional fee. Some private lenders allow you to make interest-only payments while you’re in school. With private loans, interest accrues during forbearance and it’s added to the principal balance unless you pay it as it accrues. If you have private student loans, contact your loan servicer to see what options are available. 

If You Have Private Student Loans, Request a Temporary Payment Decrease or Deferral

Some private student loan lenders allow you to stop or reduce payments temporarily. Contact your loan servicer to find out whether these options are available. 

Let’s Summarize…

Defaulting on a student loan can have severe financial consequences. Before you miss payments or let your loan go into default, look into strategies for lowering your monthly payments. These include signing up for an income-driven, graduated, or extended repayment plan; enrolling in autopay; refinancing your student loans; consolidating your federal student loans; applying for deferment or forbearance; and requesting a temporary payment decrease or deferral if you have a private student loan.