Lowering the monthly payments on your Federal Student loans

Michael Lux Blog, Lower Payments, Student Loans 1 Comment

The four main servicers of federal student loans are Navient, Nelnet, Great Lakes, and MyFedLoan.  Regardless of the company that services your loans, the approach will be exactly the same.  This is because the different alternatives that you have are guaranteed by law.  The great thing about federal loans is that there are specific plans set up so that everyone can afford their monthly payments.

Whenever you lower monthly payments on any sort of debt, there are typically two ways of doing it.  The first is to extend your length or repayment.  If you pay off your student loans over 25 years instead of 10, your monthly bills will be lower, but you will pay more in the long run because of interest.  The other way of lowering your monthly payments is to lower the interest rate.

First: A Word of Caution

Don’t fall into the trap of deferments and forbearances.  Delaying making any payment will just allow interest to accumulate, and you student loan problem will become a bigger one.  Deferments and forbearances should be a last resort used only after you have explored every other available option.

The best way to lower your federal student loan payments.

The easiest way save a bundle each month on you student loans is to sign up for an income based repayment plan.  The federal government (and therefore all of the federal servicers) offers four plans that base your monthly payments on your income.  They are IBR (Income Based Repayment), PAYE (Pay As You Earn), REPAYE (Revised Pay As You Earn) and ICR (Income Contingent Repayment).  While these four all sound the same there are some major differences between REPAYE, PAYE, IBR, and ICR.

Income Based Repayment (IBR): The most common plan based on your income and the best option for most people.  Under IBR, borrowers pay 15% of their discretionary income towards student loans.

Pay As You Earn (PAYE): This is one of the best income based plans, but not all borrowers qualify.  Under PAYE, borrowers pay 10% of their discretionary income, but this plan is only available to people who borrowed their first loan after October of 2007.

Revised Pay As You Earn (REPAYE): This plan was created to help the borrowers who don’t qualify for PAYE.  It is more strict than IBR and PAYE when it comes to spousal income, but it has special terms for borrowers who have loans than generate more interest than their monthly payments.

Income Contingent Repayment (ICR): This plan comes into play for certain federal loans that are not eligible for IBR or PAYE.  If you run into this issue, consider federal consolidation because it may qualify your for IBR or PAYE)

For a full explanation of these three repayment plans be sure to check out our Guide to Federal Repayment Plans.

Another option that many student choose to enroll in is the extended repayment plan.  Because of student loan forgiveness reasons, signing up for IBR is usually a better option than the extended repayment plan.

The standard repayment plan is the 10 year plan.  Of all the federal repayment plans, this one has the most aggressive repayment schedule.  The good part about this plan is that you pay the least in interest, but your monthly payments will be high.  If you haven’t changed your federal repayment plan, any change will likely result in lower payments.

Lowering your interest rate

The best way to save money in the long run is to lower your interest rate.  Unfortunately, there is not really a good way of doing this.  As of right now, an act of Congress is required to adjust interest rates.

The only other way to change your interest rates is to refinance your federal loans with a private lender.  This is a major risk because federal loans have many special protections not offered by federal loans, and once your loan becomes a private loan, there is no way of undoing it.  However, if you are certain you are willing to forgo the federal benefits in order to secure a lower interest rate, some private lenders offer significantly lower rates.

What if you can’t afford your student loan bills?

Odds are that if you explore the various plans offered by the federal government, you can find a way to lessen the strain on your budget.

The important thing is to focus not just on the next month or the next year, but to put together a plan that eliminates the debt as quickly as possible.  For some this will be aggressive repayment for others it may involve some sort of student loan forgiveness.

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Stu @ Poor Student

Nice info! It will be really nice to be able to lower the interest, especially for people who can pay back their loan quickly who probably don’t actually need protection from federal benefits for much longer.