If you look at your student loan payment with dread or feel like it’s out of reach for your budget, you’re probably wondering how to reduce your payments. Although you can’t magically wipe away your student loan debt, there are five effective strategies to lower student loan payments.
1. Refinance student loans
One way to lower student loan payments is through student loan refinancing. This strategy can lower your loan interest rate, if you have good credit. It also offers various repayment terms to choose from that can lengthen your repayment period while also lowering student loan payments.
Pros of refinancing
- Potentially saves money on interest.
- Option to extend repayment term (note that this results in paying more over time).
- Streamlines repayment experience by combining multiple loans into one new loan.
- Work with a new loan servicer or refinancing lender, if you don’t like your existing one.
- Access to special perks, like a cashback bonus, to repay student debt faster.
Cons of refinancing
- Refinancing federal student loans are ineligible for federal benefits, like student loan forgiveness or income-driven repayment (IDR) plans.
- Extending your repayment term to lower your payment will result in paying more interest over time.
Verdict: A good short-term strategy that might cost more in the long run. Ideal for those with good credit and for borrowers who aren’t pursuing Public Service Loan Forgiveness (PSLF) or IDR-based forgiveness.
2. Get a student loan cash-out refinance
Using the equity in your home, you can get a new mortgage loan that helps pay off your student loan debt. Ideally, the cash-out refinance offers a lower interest rate than your existing student loan.
Although it’s a viable option, it means you’ll have a larger mortgage to pay off. This particular strategy isn’t for everyone. It might help you lower your interest rate and consolidate your debt, but puts your home at risk. Consider the pros and cons before proceeding.
- Streamlines your student debt, and combines your student loan(s) with your mortgage loan, creating fewer payments to track.
- Potentially lowers your interest rate, if you have good credit.
- Allows you to work with a new lender if you had a poor experience with your original loan servicer or lender.
- If you can’t pay your federal student loans, you can go on deferment, forbearance, income-driven repayment, or opt for student loan forgiveness.
- You have a bigger mortgage.
- Your home could be foreclosed on and taken from you.
Verdict: Not recommended for many borrowers, but can be an option if you have a solid income (a good benchmark is you’re not living paycheck-to-paycheck and no more than 50% of income goes toward necessities like housing, food, transportation, insurance), a good credit score (700 or above) and a big emergency fund (6 to 12 months of expenses). This strategy eliminates student debt in the short term but may add mortgage debt in the long term.
3. Enroll in an IDR plan or recalculate your IDR payment
If you’re a federal student loan borrower and want to lower your payments, request an income-driven repayment plan. IDR plans limit the amount you pay every month based on your income.
There are four different types of IDR plans, including:
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
Depending on the plan, your monthly payment amount will be capped at 10% to 20% of your discretionary income. If your payments primarily go toward interest, you might also get interest subsidies, which are most generous under REPAYE. These subsidies have the government pay a portion of your interest. As a bonus, if you have a remaining loan balance at the end of your 20- or 25-year repayment term, you’ll qualify for student loan forgiveness.
If you’re already on an IDR plan and your financial situation has changed, update your income and family size. Keeping this information up to date will cause a payment amount recalculation. You can use our IDR calculator to see your prospective payments.
Unemployed borrowers or those whose income is close to the poverty level, might qualify for $0 payments while maintaining good standing with their student loans. Remember, this option is only available for federal student loans, not private student loans.
- Lowers student loan payments and makes them more affordable.
- An option for student loan forgiveness down the line.
- If you’re already on an IDR plan, and switch plans or recalculate your payment, you could make your monthly payment amount more affordable.
- You need to request to enroll in a plan and recertify your income and family size annually.
- You’ll accrue more interest over time.
- You might have to pay taxes on the amount forgiven. Currently, student loan forgiveness is tax-free until 2025. Before this new legislation, forgiven amounts were taxable.
- If you’re married, an IDR plan could affect how your payments are calculated.
Verdict: Pursuing an IDR plan is a good short- and long-term strategy to lower student loan payments, particularly for those with lower income. See if you can save and invest the payment savings to prepare for potential taxes in the future.
4. Consolidate your federal student loans
If you’re struggling to keep track of your student loan payments, consolidating through a Direct Consolidation Loan might help. A Direct Consolidation Loan allows federal student loan borrowers to combine their loans so there’s a single monthly payment.
Unlike refinancing, you’re not guaranteed a lower interest rate. Instead, the consolidated loan rate is a weighted average of the interest rates on your original loans. Depending on the type of loans you have, this route might open various repayment options for you.
For example, if you have Parent PLUS Loans and consolidate, you’ll get access to the Income-Contingent Repayment (ICR) Plan. This offers an entry point to secure a lower monthly student loan payment. Additionally, consolidation offers an extended repayment term of up to 30 years, effectively lowering student loan payments.
- Access the income-driven ICR plan for an extended student loan repayment term, to lower payments.
- Streamline your repayment so you’re not making multiple payments each month.
- Might pay more interest, increasing the total cost of your consolidated student debt.
- If you’re working toward PSLF, consolidating erases any progress you’ve made toward forgiveness.
Verdict: This option is ideal for Parent PLUS borrowers, those who want to extend their repayment timeline, or who want to simplify their repayment experience for multiple federal loans. Just be aware of the disadvantages of a higher interest rate.
5. Put your loans into forbearance
If you can’t afford to make student loan payments right now, but think it’s a short-term issue, consider putting your student loans into forbearance. Forbearance puts your payments on pause, temporarily.
Federal loan borrowers who are experiencing financial hardship can request a general forbearance from their student loan servicer. This pause is available for up to 12 months at a time, for a maximum of three years.
Forbearance options for private student loan borrowers vary by lender. Some private loan lenders provide short-term forbearance to borrowers who qualify. Contact your lender ASAP to learn about your options.
- Legally pauses payments, temporarily, to avoid student loan default or delinquency.
- Loan accounts remain in good standing and don’t negatively impact your credit.
- Interest might accrue during this time, which increases the total cost of your loan.
- Forbearance isn’t an indefinite solution to long-term financial hardship.
Verdict: This is a viable last-resort option to lower student loan payments during a financial emergency or sudden loss of income, but it’s not a long-term solution. Contact your loan servicer or lender to explore your repayment options, if you’re struggling with affording your loan payments.
When student loan payments resume, it might cause stress and anxiety if your income is reduced or your expenses have increased. These five strategies can help you lower student loan payments to some extent. However, depending on your career goals and situation, the right repayment strategy might be more nuanced.
Reach out to Student Loan Planner’s consultants for guidance on paying back your student loans. We can help you design a student loan strategy that takes your financial situation, lifestyle and goals into account. Book a consult today.