For those attempting to aggressively eliminate their student loans, asking for lower payments may seem like a step in the wrong direction.
However, getting lower payments has a huge advantage… flexibility. That flexibility can be used to eliminate high interest debt and lead to student loan freedom sooner rather than later.
Benefits to Lower Payments
The key advantage to getting lower payments is that the money freed up each month can be used to attack higher interest debt. Suppose a borrower has two loans, one with 5% interest and one with 9% interest. If that borrower is able to get a lower payment on the 5% loan and direct those same funds to the 9% loan, the total debt will be eliminated faster. This is because a larger portion of payments will be applied towards principal rather than interest.
Another way to take advantage of lower student loan payments is to attack high interest credit card debt. Freeing up some cash each month to lower balances with interest rates above 20% is an excellent strategy. The quickest way to debt freedom is to pay off the high interest debt first. Paying off credit cards first may cause student loans to last a bit longer, but it is the most efficient path.
A side perk is the improvement of the borrower’s debt-to-income ratio. When the lower monthly payments hit the credit report, lenders will see a borrower who is in a better position to afford new debts, such as a mortgage. This can be a huge benefit to anyone looking to purchase a house.
Downsides to Lowering Payments
This approach is not for all borrowers. If you are someone who only makes minimum payments and lacks the self control to use the savings to attack other loans, getting lower payments could be a mistake. If the savings from lower payments is used on anything other than existing debt, this strategy will backfire.
Lowering payments on federal student loans can also have additional consequences. Certain repayment plans such as the income-driven repayment plans IBR, PAYE, and REPAYE qualify for federal programs such as student loan forgiveness. Switching to the extended repayment plan could result in lower payments for some borrowers, but it definitely comes with risks.
Putting the Plan in Place
Federal Loans – Borrowers with federal loans should check out the federal student loan repayment estimator. This tool will help them identify the repayment plan that offers the lowest payment. After that, a call to their student loan servicer can get the enrollment process started. Changing federal repayment plans does not require a credit check
Private Loans – Getting a lower monthly payment on private loans can be more difficult. Calling lenders to request a lower payment will occasionally work, but it depends upon the lender and the loan contract. Borrowers with a good credit score and decent income should also consider refinancing with another private lender. The refinance company pays off the old loans and the borrower repays the new lender per the terms of a new loan. The refinance process can lower monthly payments and lower interest rates.
Once lower monthly payments have been secured, the money freed up then gets spent on the highest interest student loan. Once the highest interest loan is paid off, the next highest loan can be attacked. This process continues until all of the student loans are eliminated. From the perspective of the borrower, monthly spending on student loan debt remains constant. However, the student loans are eliminated much quicker due to the shift in strategy.
Getting lower payments on your student loans can actually get them paid off faster. The key is generating flexibility to make smarter, more efficient payments.