Maybe you’ve recently graduated and you’re feeling trapped by your student loan payments. Maybe you’re unemployed or going back to school or trying to plan your financial future with your spouse. Whatever the reason — job loss, pay cut, unexpected expense, or not enough savings — paying off student loans can feel like trying to dig yourself out of a hole. Take a breath. Have a seat. And understand this: you’re not alone.
Four in 10 adults under the age of 30 have student loan debt, as well as thousands of others. Paying off student loans can be stressful, financially difficult, and simply confusing. We’re here to help you through the process and ensure that you learn how to reduce student loan payments. We will explain the different types of loans and repayment plans to consider, offer pros and cons for each, and suggest ways to start saving.
Read on to learn how to make your payments, prevent financial hardship, and improve your credit. For the best credit cards no or low credit, check out the student credit card options at Credit.com.
Understanding What Type of Loan You Have
Before you learn how to lower student loan payments, let’s start by understanding the type of loan you have. This will determine your repayment plan options.
If you have been granted a private (non-federal) student loan, by either a bank or a financial institution, there is no standard repayment plan. It will likely differ, depending on your lender. However, if you have received a student loan by the U.S. Department of Education, then you are repaying a “federal student loan.” Know that most federal loans come with a grace period, which means you shouldn’t have to start paying them off until after you graduate (but check with your lender to know for sure).
Even if you don’t get a job immediately following graduation, you will be required to begin paying off your student loans, and it’s important to understand how to reduce student loan payments.
You may notice that your loan is either subsidized or unsubsidized. This doesn’t affect your repayment options, but for clarity’s sake, the federal government will pay for the interest on subsidized loans, but for unsubsidized loans, the interest begins accruing as soon as the loan is given (and is not paid by the federal government).
If your federal student loans don’t fully cover your school costs, you might consider applying for a private student loan at Credit.com. Knowing how much you can afford to pay per month will be determined by your debt-to-income ratio.
Now that you understand the different types of loans there are, you’re probably wondering how to lower your student loan payment. Here are seven student debt repayment options and information on how to choose the right one.
1. Income-Driven Repayment Plans
First, we’ll start by explaining income-driven repayment options.
If you have federal student loans, income-driven repayment (IDR) plans can be a smart way to manage student loans payments. There are currently four IDR plans available for federal student loans (outside of the standard plan, which we’ll explain later on). Here’s what you need to know:
Income-Based Repayment (IBR)—Your monthly payment is based on your income and your family size. This option limits the payments to 10–15% of your income. The federal government will cover the difference between your payment and any remaining interest that is not covered by your payment for up to three consecutive years.
- Recommended if: You have direct federal student loans and Federal Family Education Loans, which are both covered under this option.
Pay As You Earn (PAYE)—Your monthly payment is based on a percentage of your income and is set at 10% of discretionary income. This is similar to the IBR plan, but applying and getting approved is easier. However, you must be able to show that you have a financial hardship. If your income increases, the PAYE plan will cap your monthly payments, so you aren’t paying more than you would on the 10-year repayment plan. If you are married and your spouse has a higher salary, then you would want to file your taxes separately. This plan would not calculate their salary into your decision. This is not true for the REPAYE plan.
- Recommended if: Your income varies month-to-month and have you a proven “financial hardship.”
Revised Pay As You Earn (REPAYE)—Similar to the PAYE option, this payment would be less than what you’d owe on the standard 10-year plan. It is calculated by 10% of the difference between your monthly income and 150% of the poverty line. The major difference between this plan and PAYE is the date that you became a “new borrower.” You’re not required to show financial hardship and, if you have graduate loans, then the forgiveness period under this plan is 25 years, not 20.
- Recommended if: You don’t have a “financial hardship,” but would benefit from this pay-as-you-go repayment plan.
Income-Contingent Repayment (ICR)—This plan isn’t determined solely by your income. The factors are your income, your tax filing status, and the number of people in your household. The monthly payment is capped at 20% or the fixed monthly payment on your 12-year loan term. If you choose this plan, you have to reapply every year.
- Recommended if: You have Parent PLUS loans, which are only covered under this plan, or if you don’t have a “financial hardship,” but can’t afford to pay the standard repayment plan.
Borrowers who enroll in income-driven repayment have their student loan payments lowered to a percentage of their income, typically 10–20%, depending on the plan. Payments can even be as low as $0 under IDR.
Some income-driven repayment plans also take local living costs into consideration when calculating the lower payment. This gives extra relief to payers living in expensive cities.
Income-driven plans also offer student loan forgiveness on any remaining balance after 20-25 years of consecutive loan payments, depending on the plan.
To enroll in an income-driven repayment plan, contact your federal student loan servicer. They can discuss your options with you and give you the correct forms to apply for IDR.
Pros: If you’re a new graduate and need a short-term option for managing your student loan debt, this is ideal. If you’re simply struggling to pay your student loans and feel that you don’t have enough income to afford the monthly federal student loan payment, then these are also good options for you. You would rather lower your monthly payment then get stuck missing a payment and hurting your credit score.
Cons: Although these are great options for new graduates or those with a very low income, you could end up paying more in the long run due to accrued interest. You might consider one of these plans for now, with the intentions of switching later. With income-driven repayment plans, you will not be able to negotiate the way the money is disbursed or how much is taken out of your account. This will be determined by the factors listed in your application.
2. Student Loan Refinancing
If you have private student loans, one of the only ways to lower payments is to refinance. To determine how much you have left to pay, use a loan calculator and plug in your loan amount (how much you have left to pay), your loan term (however long you have to pay), and your interest rate.
By refinancing, you replace your old student loan(s) with a new one through a private student loan refinancing lender. This allows you to lower your monthly payments by getting a lower interest rate, extending the repayment period, or both.
For borrowers who have older federal loans with high interest rates (such as Grad or Parent PLUS loans), it can be worth it to refinance to lower interest rates. Keep in mind you will lose federal benefits, like access to IDR, if you refinance with a private lender. Extending the repayment period can also result in lower monthly payments, but might end up costing more in interest over time.
If you’re not sure if student loan refinancing could benefit you, shop around and get some rate estimates from private student loan companies. Most will perform a soft credit check to pre-qualify you, which won’t affect your credit.
Pros: If you have excellent credit and want to refinance from a federal student loan to a private student loan to lower your rates and build up your savings, this might a good option. If you wish to refinance from a private student loan to another private loan with a lower interest rate (and find a better option with agreeable terms), go for it.
Cons: If you don’t have a good credit score, you may not qualify. If you change your loan from student to private, you may not be able to claim your student loan interest on your tax forms. You also want to check the terms of the loan. Refinancing might mean you’re changing from a fixed rate to a variable rate. A variable rate would increase or decrease depending on the market rates. If you refinance, you also won’t benefit from federal forgiveness, as well as other benefits.
3. Student Loan Repayment Assistance Programs
Another option to help with student loan payments is to go through a student loan repayment assistance program (LRAP). This is free help with your student loans. Many states, government agencies, nonprofits, and other organizations offer student loan assistance, usually as a way to attract qualified employees.
You can use financial tools to determine if this program is right for you and your budget. This student loan repayment assistance tool, for example, can help you filter LRAPs by your occupation, state, and type of assistance. It’s worth checking out to see if you can get free help with your student loans.
Pros: If you have private loans, then you don’t qualify for forgiveness income-based repayment plans, so an LRAP might be a good option for you. LRAPs have specific criteria that need to be met, so if you feel you are highly qualified, this might be a good option. Some programs offer funding that is not taxable, but some are taxable, so pay attention to the fine print.
Cons: Some LRAPs disburse the payments in a lump sum, which could be problematic. If you want the money disbursed in smaller increments on a monthly basis, you will need to negotiate that with the LRAP. Also, some require an up-front payment to apply, which is something to consider.
4. Deferment or Forbearance
You now know how to lower student loan payments. But what if you need a break from your student loan payments altogether? Deferment and forbearance can help by pausing payments.
Deferment can be a good option if you have federal student loans. It can be granted for disability, unemployment, financial hardship, or a return to college or military service. Subsidized student loans won’t accrue interest while in deferment.
Forbearance can also be granted to pause student loan payments. However, all student loans will continue to accrue interest while in forbearance.
With either option, make sure you understand how your loans will accrue interest. If necessary, consider making interest-only payments so your balance doesn’t grow to be bigger than when you started.
Pros: If you feel you can’t pay your loans, this is a good way to press “pause” on the payments. This is a good option if you have re-enrolled in a college or university, if you are on active duty, or if you have a disability which prevents you from paying at this time. If you’re enrolling in medical school, for instance, and expect to make a six-figure salary when you graduate, this is a beneficial option.
Cons: Pressing “pause,” means that as soon as the deferment or forbearance period ends, you will be expected to begin payments. Obviously, if you wait to pay your loans, they will take longer to pay off and you’ll be faced with higher interest payments.
5. Graduated Repayment Plan
A graduated repayment plan can help set payments low to start with, then increase every two years (hopefully as your income also rises) over 10 years (except for consolidated federal loans, which could take anywhere from 10–30 years, depending on how much debt you have).
This can be a good fit if you can’t afford full student loan payments now — but you expect to be able to afford to pay more later. If you want to stick to paying off student loans in 10 years, a graduated repayment plan can help you do it.
Pros: Almost all borrowers are eligible for this plan. It’s a good option, if you want to pay off your loans within 10 years and feel as though you will be able to do so.
Cons: You will pay off your loans quickly, but you may end up paying more in the long-run then if you chose another repayment plan. You may not be able to predict your income over the next 10 years, and may get stuck paying high monthly payments years from now.
6. Extended Repayment Plan
The standard student loan repayment schedule is 10 years. But if you stretch your student loan repayment out over more time, this will lower the amount you pay each month. However, with interest, you may end up paying more long term.
The extended repayment plan can help you lower student loan payments by extending repayment to up to 25 years, with either fixed or graduated payments. You’ll need to have more than $30,000 in student loans to get on the extended repayment plan.
This can be a good option if you want to extend your repayment schedule to anywhere from 10–20 years. However, if you expect to be repaying student loans for 20 or more years, the forgiveness that comes with IDR plans could make those a better option than staying on the standard plan.
Pros: The standard plan is the default plan for borrowers and it is, of course, less complicated than choosing another option. You don’t have to submit an application or reapply. You simply pay your monthly fees. The only way to lower monthly student loan payments on the standard plan is to extend the repayment schedule.
Cons: Again, extending the repayment period can also cost you more in interest over time, so consider this option carefully. If you can afford to pay within 10 years, you probably should. If you qualify for another plan or have a “financial hardship,” then it’s worth looking at plans outside of the standard one.
7. Consolidate Federal Student Loans
Federal student loan consolidation combines federal student loans into a single Direct Consolidation Loan. The new interest rate is a weighted average of the previous rates on your consolidated loans.
Consolidating also gives you the option to choose a repayment period of at least 10 years and up to 30 years, which can greatly lower your monthly payments. Some other repayment plans might also require you to consolidate federal student loans to make them eligible for participation.
Unlike refinancing, however, federal consolidation does not result in a lower interest rate or savings of any kind. It can, however, simplify the repayment process and help open up monthly cash flow with lower payments.
Pros: If you have multiple loans from different providers and are overwhelmed by the monthly payment structure, consolidating is an easy way to simplify the repayment process. Instead of paying multiple lenders, you would only pay one.
Cons: Although consolidating is a good way to repay your loans, it does not really save you any money. If you’re looking for an easier process, this could work for you. If you’re looking for ways to lower student loan payments, there are other options (which might require you to consolidate your loans anyway).
A financial tip: calculate the total amount of loans you have left to pay, draft a budget which includes your income, your monthly expenses, and your debt. You can use something as simple as a spreadsheet or a budgeting app to separate your budget lines and determine how long it will take to reach your financial goals.
Lower Student Loan Payments and Start Saving For Your Financial Future
Now that you know how to get a lower student loan payment, it’s important to evaluate where you are financially and choose the best option for managing private or federal student loans. Start by using a loan calculator and note how much money you’re planning to bring in each month compared to how much debt you have left to pay off.
Although student loans are overwhelming, the monthly payments are actually helping you build up credit. Yes, paying off your monthly student loans helps increase your credit score. This should give you even more incentive to pay them off quickly and become debt-free.
If you’re looking for easier ways to save — and become more financially secure — consider a personal finance app that can help you set aside funds for both your student loans and your savings account(s).
Also, consider opening a credit card to help you build credit (remember: having a high credit score will help you eventually get better interests rates on car loans, mortgage loans, small business loans, etc). Check out Credit.com’s recommended credit cards for building credit from our trusted partners* which will help you rebuild your credit and move closer to your financial goals.
Image: Jacob Ammentorp Lund