Gretchen’s Note: While I’m all for reducing your total debt load, sometimes you budget says it’s is necessary to reduce your monthly payment so you can stay afloat. Today, I’m welcoming Nate Matherson, co-founder of LendEDU, to give us some insight on ways to reduce your monthly student loan payment.
A staggering 43.3 million Americans now have student loan debt. The high costs of education has forced over 13% of the United States population to use student loan debt as a way to afford a higher education. Student loan debt doesn’t discriminate. There are 15 million student loan borrowers under the age of 30 and surprisingly 10.9 million student loan borrowers aged 30 to 39.
Paying down student loan debt isn’t an easy task. If you are a recent graduate or have low income, keeping up with monthly student loan payments might be overwhelming. If you find yourself struggling to save and budget around your student loan payments you are not alone. Luckily, there are a few options you can consider to reduce your monthly student loan payment.
Most student loan borrowers have federal student loan debt. In fact, about 90% of the outstanding $1.2 trillion in student loan debt is federal. The Department of Education offers federal student loan borrowers a number of benefits. One of the more popular benefits is called Income-driven repayment. As you may have guessed, income-driven repayment limits your monthly student loan payment to a factor of your monthly income. In general, your monthly payment will be capped at 10% to 20% of your discretionary income. The Department of Education put together a Repayment Estimator tool to help you explore the different repayment options based on your income.
Income-driven repayment is offered directly through the Department of Education and all federal student loan borrowers can apply for free online. Do not pay to apply for any of the repayment adjustment programs!
Please note that only federal student loans are eligible for income-driven repayment. Private student loans are not eligible.
Consolidation & Refinancing
You may have heard of federal student loan consolidation through the Direct Consolidation Loan Program. Unfortunately, the Direct Consolidation Loan program doesn’t actually lower your loan cost or monthly payment.
If you are looking to reduce your interest rate and monthly payment you need to look at private student loan consolidation. Over the last few years a number of private consolidation and refinancing lenders have entered into the student loan industry. When you consolidate through a private lender you are also able to refinance at a lower rate. Rates start at about 2% at most lenders. A lower interest rates equals a lower monthly payment. Furthermore, you will save yourself quite a bit of interest.
You can also lower your monthly payment by refinancing with a longer term length. Private student loan consolidation lenders offer term lengths from 5 to 20 years. By spreading your payments out over a longer term length you can dramatically reduce your monthly payment. However, you will end up paying more in interest over the long run. Don’t worry… there are no prepayment fees if you would like to pay your loan back sooner.
The most popular private student loan consolidation lender is SoFi. SoFi has refinanced and consolidated over $3 billion in student loan debt! Both private and federal student loans can be refinanced with a private lender like SoFi.
Forbearance is an option you can use to temporarily bring your monthly payments to a halt. As described by the StudentAid.ed.gov website, Forbeance is:
“A period during which your monthly loan payments are temporarily suspended or reduced. Your lender may grant you a forbearance if you are willing but unable to make loan payments due to certain types of financial hardships. During forbearance, principal payments are postponed but interest continues to accrue. Unpaid interest that accrues during the forbearance will be added to the principal balance (capitalized) of your loan(s), increasing the total amount you owe.”
You shouldn’t take forbearance lightly. Forbearance is a last resort option. Interest will accumulate during forbearance and will eventually capitalize. Capitalized interest equals trouble and a higher loan cost. You can put both private and federal student loans in forbearance. Either way, start by contacting your student loan servicer.
Income-driven repayment, consolidation & refinancing, and forbearance are all options you can use to lower your monthly student loan payment. Before jumping the gun on any one of these options, you should first put together a plan for your eventual student loan payoff.
Nate Matherson is a student loan borrower. Nate Co-Founded LendEDU to help student loan borrowers navigate the confusing and costly student loan industry. LendEDU is a marketplace for private student loan consolidation. LendEDU is free for student loan borrowers!