Earlier this week we discussed the advantages of getting lower minimum payments, and how it can actually save you money on your student loans and get them paid off faster.
Today we will discuss some of the ways you can get your monthly minimum payment lowered.
One of the perks of federal loans is that they have many repayment plans. Another perk is that signing up for the right repayment plan is relatively easy. If you are willing to make a couple of phone calls and fill out some forms, you can get it done.
When it comes to federal loans the payment plan with the lowest minimum payment will vary from person to person.
For many people, the repayment plan that will result in the lowest monthly payment is an income based repayment plan. For those who took out their first student loan before October of 2007, the best plan is probably the IBR plan. On IBR, borrowers are expected to pay 15% of their discretionary income towards their student loans. Those with high balances or low incomes can see a huge reduction in their minimum payments by switching to IBR. For borrowers who took out their first loans after October of 2007, the difference can be even more noticeable. These borrowers are eligible for the Pay As You Earn Plan. On PAYE, borrowers are only expected to pay 10% of their discretionary income towards student loans.
Borrowers who have high incomes can get lower payments even if the IBR and PAYE plans don’t result in a savings. Any borrower who has a total federal student loan debt balance of over $7,500 can sign up for a graduated repayment plan. These plans start out with low minimum payments, that go up every other year.
A final option for those with balances above $30,000 would be the extended repayment plan. Under this plan, borrowers get 25 years to pay off their loans instead of the standard 10 years.
(Note: changing plans can effect your eligibility for programs such as student loan forgiveness, so it is important you look at the consequences of any repayment plan change.)
If you are confused about what repayment plan you are currently on, odds are it is the standard 10 year plan. This is the default plan for all student loans. If you haven’t changed plans at all, there is a very good chance that one of the previously mentioned plans could result in lower monthly payments.
Getting lower interest rates on your private student loans will likely require a little more work. There are three main ways to get lower payments on these loans.
Option 1: Ask your lender. This one is an option that many people forget about. Private loans occasionally have repayment options similar to the graduated or extended repayment plans offered by the federal government. Whether or not you have this option depends upon the terms of your original loan and/or your lenders willingness to change the repayment schedule.
Option 2: Switch to a plan for struggling borrowers. If you have low income relative to your debt, or have already fallen behind on your loans, your lender may have options for you to reduce your monthly payment. We recently discussed the rate reduction program offered by Navient.
Option 3: Take your business elsewhere. Switching student loan companies isn’t as simple as changing cable companies or cell phone providers, but it can be done. If you consolidate or refinance your loans with another company, you cease to be a customer of your old lender and deal only with your new lender. This process requires good credit and income, but can result in significantly lower monthly payments due to longer repayment plans and lowered interest rates. If your are thinking about going this route, be sure to check out our comparison of student loan consolidation companies.
A final tip
Lowering your monthly payments can be a very good thing, but be very careful not to make mistakes in the process. Temporary reductions such as a forbearance or a deferment might make things easier for a short period of time, but in the long run, they usually make things worse. Similarly, some private lenders may try to charge fees for switching plans. Paying any sort of “fee” to get a lower payment is likely a mistake. You don’t want to spend a bunch of money to save a little bit of money.