Like millions of other Americans, financial journalist Janet Alvarez was laid off from her job in 2009. She decided to ride out the recession by pursuing her MBA, racking up six figures in student loan debt along the way.
But when she graduated, the economy was still sputtering, and there were few jobs available for her, despite her advanced degree. Her credit score was in the gutter, and to top it off, she had tens of thousands of dollars in medical debt.
“I was really at a rock bottom,” said Alvarez.
But thanks to her professional background, she had the skills to dig up solutions to her massive debt problem. Through a combination of income-driven repayment and refinancing, she was able to lower her payments until she was in a position to aggressively tackle her loans. Today she is nearly debt-free, and as the executive editor of personal finance site Wise Bread, she helps others navigate similar difficulties.
Whether you’re barely scraping by or simply want to pay less per month on your student loans, there’s hope for getting those payments lowered.
1. Extend your repayment plan.
When you graduated from college, you were automatically enrolled in the standard repayment plan, the default plan for federal borrowers, which requires you to pay off your loan over 10 years. What you might not realize is that this plan is not your only option ― far from it, in fact.
One way to lower your monthly payments is to enroll in an extended payment plan. Adam Minsky, a lawyer whose practice is dedicated entirely to helping people with student loans, said this allows you to stretch out payments over up to 25 years. With more time to pay, the amount you have to hand over each month decreases.
The extended repayment option is available only to federal student loan borrowers (as are most repayment benefits). Additionally, you cannot have had an outstanding balance on any Direct loans or Federal Family Education Loan (FFEL) Program loans before Oct. 7, 1998, and you must have at least $30,000 in Direct or FFEL loans.
The drawback? The longer you take to pay off your loan, the more you’ll pay in total interest. It’s important to ask yourself whether lower payments now are worth spending more on your loans over time.
2. Opt for a graduated payment plan.
If your income is low now but you expect it to increase over the next few years, a graduated repayment plan might give you the breathing room you need.
Rather than fixed payments over 25 years, this variation of the extended repayment plan starts off with monthly payments that gradually increase. Most federal loans require a payment period of just 10 years. However, if you consolidated any loans through the Department of Education, you may have 10 to 30 years to pay off the consolidated loan, depending on how much you owe.
3. Enroll in an income-driven repayment plan.
“If you’re unemployed ... your payment might actually be $0.”
You also have the option of enrolling in one of four available income-driven repayment plans, which cap monthly payments as a percentage of your discretionary income.
In fact, according to Alvarez, “if you’re unemployed or your earnings dropped to a very low level, then your payment might actually be $0.”
These plans promise to forgive any remaining balance after the repayment period is up, though borrowers must pay taxes on the full forgiven amount the same year it’s discharged.
- Pay as you earn (PAYE): Payments are capped at 10 percent of your discretionary income and can never exceed what you would pay on the standard plan. Any remaining balance is forgiven after 20 years.
- Revised pay as you earn (REPAYE): Payments are capped at 10 percent of your discretionary income. However, there’s no cap on how high payments can go; if your income increases significantly, so can the payments. Additionally, if you’re married, your spouse’s income and student loan debt will be considered when determining payments, even if you file taxes separately. Any remaining balance is forgiven after 20 years for undergraduate loans and 25 years for graduate loans.
- Income-based repayment: Payments are capped at 10 to 15 percent of your discretionary income, depending on when you took out your loan. Payments will never exceed what you would pay on the standard plan. Any remaining balance is forgiven after 20 to 25 years, again depending on when you borrowed.
- Income-contingent repayment: Payments are capped at 20 percent of your discretionary income or what your payments would be on a 12-year fixed repayment plan, whichever is less. However, there’s no cap on how high payments can go. Additionally, the amount of student loan debt you have is considered along with your income when determining payments. Any remaining balance is forgiven after 25 years.
Another reason to consider an income-driven plan: You might get your debt forgiven sooner, tax-free.
“Certain loan forgiveness programs require that you be in certain types of repayment plans,” said Minsky. “For instance, the Public Service Loan Forgiveness program requires that borrowers be on an income-driven plan. So if you’re not in one of those plans, you might not be able to make qualifying payments toward that program.”
If you are considering one of these income-driven plans, be sure to fully investigate all the rules before committing. Then you can use the Department of Education’s repayment estimator to crunch the numbers and see which plan would work best for you.
4. Consolidate your loans.
If you have multiple federal student loans with varying interest rates, repayment terms and payment due dates, a direct consolidation loan is a convenient way to roll all those loans into one. Plus, borrowers with loan balances exceeding $60,000 can extend their loan term up to 30 years, according to Minsky.
Consolidating is often required to enroll in certain repayment and forgiveness programs, including those outlined above. But even if you don’t pursue one of these programs, simply consolidating and extending the repayment period beyond 10 years is another way to see lower payments.
Keep in mind that federal consolidation doesn’t save you any money. Not only will you pay more interest over time, but also the interest rate you pay on your new loan will be a weighted average of your old loans, plus a small percentage. Again, you’ll have to decide what’s more important to you: more cash now or more savings overall.
5. Refinance at a lower interest rate.
One of the few options available to borrowers who took out private loans is student loan refinancing.
The process of refinancing involves taking out a new loan through a private lender and using that money to pay off your old loans. The goal is to achieve better terms with the new loan, such as a lower interest rate or different repayment term. Since refinancing is available only through private lenders, you’ll be subject to a credit check and other eligibility requirements to qualify, all of which vary by lender.
“[With private loans,] basically, you owe what you owe, and you have to pay it.”
Although it’s possible to refinance federal and private loans, refinancing federal loans is generally ill-advised. That’s because refinancing with a private lender strips you of any federal protections, such as income-driven options, forgiveness programs, deferment and forbearance.
“Private loans generally don’t include any provisions to protect borrowers during times of unemployment or financial difficulty,” said Alvarez. “Basically, you owe what you owe, and you have to pay it.”
Even so, if you have older federal loans or high-interest PLUS loans, scoring a lower interest rate might be worth giving up those benefits.
“It comes down to the borrower’s risk tolerance ... whether they’re comfortable giving up those rights and protections that are inherently part of the federal loan system,” said Minsky.
6. Set up autopay.
If you have private student loans, be sure to opt into your lender’s autopay program. Most lenders will provide a rate discount in exchange for the guarantee that they’ll get paid on time and in full every month.
Usually, the discount is a small 0.25 percent. Even so, every bit helps, especially if you have a large balance. Some lenders will offer an additional discount if you’ve made consistent payments for a certain period, according to Alvarez.
You don’t have to be held hostage by student loans.
“Most of us will at some point encounter difficulties that are beyond our control,” said Alvarez. “A recession, we can’t control. Layoffs, we often can’t control.”
However, she said, after rebuilding her financial life from scratch, she felt much more empowered.
“I understood how the game worked,” said Alvarez.
The student loan system can feel like a game in which the odds are stacked against you. But if you know what tools are at your disposal, it’s a game you can learn to win.