How Do I Lower My Student Loan Payments?
President Obama’s Pay As You Earn program has been in the news a lot. It’s an effective way for many student loan borrowers to lower their monthly payments -- but it’s not the only way. There are many options for relief from student loan debt, depending on what kind of loans you have, when you took them out, and what your financial situation looks like now.
Before you start exploring ways to shrink your monthly obligations, know that you should consider reducing or postponing your student loan payments only if the standard repayment plan (10 years for most loans) is truly out of your financial reach. When you lower or put off payments, you’ll end up paying more over the life of your loans. Below, we recommend a calculator that can help you compare how much you’ll have to pay under the different options available to you.
Can You Postpone Your Loans or Cancel Them Completely?
If you’re having trouble making your student loan payments because of severe financial difficulties such as disabling health problems or prolonged unemployment, you may be able to delay payments or cancel your loans altogether. You may also qualify for postponement, cancellation, or forgiveness if you work in certain public service jobs.
For more information about the programs that may help you postpone or permanently wipe out your loan payments, see:
Ways to Lower Your Monthly Student Loan Payments
Because most borrowers can’t completely cancel or discharge their loans, choosing a good payment plan is both inevitable and important. Here’s an overview of options for reducing monthly federal student loan payments. For more details about each plan or to apply for a plan, contact your loan servicer or visit the U.S. Department of Education website.
If you have a private student loan, read your loan contract and contact your loan servicer to see whether you have any options for lowering your payments.
Payment Plans Requiring Financial Hardship
The following payment plans require you to show that your payments under a standard repayment plan would exceed a certain percentage of your income, creating a financial hardship. Generally, you will qualify if your federal student loan debt is higher than your annual discretionary income. (Discretionary income is defined as the difference between your adjusted gross income and 150% of the federal poverty level.)
Pay As You Earn Repayment Program (PAYE). Beginning in 2015, the Pay As You Earn program is available for most types of Direct Federal Loans. If you qualify, PAYE caps your monthly payments at 10% of your discretionary income. The balance of your loan will be forgiven after you’ve made regular payments for 20 years. (If you work in public service, this period may drop to 10 years.) You may have to pay income tax on the forgiven amount.
Income-Based Repayment Plan (IBRP). If you took out your loans before July 1, 2014, the IBRP caps your monthly payments at 15% of your discretionary income. The balance of your loan will be forgiven after you’ve made regular payments for 25 years. If you took your first loan on or after July 1, 2014, the IBRP caps your monthly payments at 10% of your discretionary income, and the balance of your loan will be forgiven after you’ve made regular payments for 20 years. (If you work in public service, the 25- or 20-year period may drop to 10 years.) You may have to pay income tax on the amount forgiven under the IBRP. To learn whether your loans are eligible for the IBRP, see “Student Loans That Qualify for Income Based Repayment Plans.”
Hardship Repayment Plans for Perkins Loans. Perkins Loans are subject to unique rules. To learn your options for reducing monthly payment amounts on your Perkins Loans, contact the school you were attending when you received the loans. (Note that you can include Perkins Loans in a Direct Consolidation Loan to qualify for one of the income-driven repayment plans discussed above, but there are serious disadvantages to consolidating Perkins Loans with other federal student loans. To learn more, see “Consolidating Student Loans: Pros and Cons.”)
Payment Plans Without an Income Eligibility Requirement
Income Contingent Repayment Plan (ICRP). If you qualify for this plan, your payments are based on your adjusted gross income, family size, and the total balance of your Direct Loans. The payment will probably be higher than payments under the income-based plans described above, but may still be less than what you would owe under a standard repayment plan. And if you’re still making regular payments after 25 years, the balance of your loan will be forgiven. (If you work in public service, this period may drop to 10 years.) You may have to pay income tax on the forgiven amount. To learn whether your loans are eligible for the IBRP, see “Student Loans That Qualify for Income Based Repayment Plans.”
Income Sensitive Repayment Plan (ISRP). If you have older federal student loans --such as Subsidized or Unsubsidized Stafford Loans, FFEL Plus Loans, or an FFEL Consolidation Loan – you may qualify for an ISRP. Under this type of plan, you select a monthly payment amount that is between 4% and 25% of your monthly gross income. The payment must be equal to or greater than the interest that accrues on your loan each month. You can use ISRP for up to five years, and then your payments will increase -- sometimes dramatically. You may be better off considering an extended repayment plan, which will allow you to avoid ballooning payments toward the end of the loan’s term.
Graduated Repayment Plan. Almost all federal student loans qualify for graduated repayment. Under a graduated plan, you keep the standard 10-year repayment term, but your payments step up over time.
Plans for Borrowers With Multiple Loans
Extended Repayment Plan. Most federal student loans are eligible for extended repayment. If you have more than $30,000 in outstanding loans from either the Direct or FFEL Loan program, you can lower your monthly payments for those loans by stretching the repayment term up to 25 years.
Loan Consolidation. It is sometimes possible to lower monthly student loan payments by combining federal loans into a single Direct Consolidation Loan. If your consolidation loan payment is still too high, you may be able to bring it down with PAYE, discussed above. There are almost always disadvantages to loan consolidation, however, so be sure you understand the process before you proceed.
Compare Your Options and Calculate What You’ll Owe
The Federal Student Aid Repayment Estimator allows you to easily compare monthly and overall payment amounts. You can sign in to base the calculations on actual information about your loans or you can use the calculator without signing in, by providing your own estimates about loan types, balances, and income.