Reducing Student Loan Payments Is Possible. Be Cautious of Your Options.

Depending on your current financial situation, it may be reasonable to ponder your options to reduce your monthly student loan repayments. Your course of action heavily depends on your student loan type. Here’s what you need to know:

Federal Student Loan Options

• Income-Driven Repayment (IDR)

An income-driven repayment plan calculates your monthly payment based on your discretionary income and family size. The monthly payment can be as low as $0 depending on your situation. A significant caveat is that your loan repayment will grow as your discretionary income grows.

Borrowers who need a lower monthly payment and a longer repayment duration may want to use this loan repayment option. Some of the income-driven repayment plans the federal government offers include the Saving on a Valuable Education (SAVE) Plan, Income-Based Repayment (IBR) Plan, and the Income-Contingent Repayment (ICR) Plan. Borrowers can inquire about these repayment plans on www.studentaid.gov.

• Consolidation

Consolidation is a helpful tool to consider if the income-driven repayment plans do not fit your financial situation. Borrowers with multiple loans can simplify their numerous payments into one each month. Although this option does stretch your repayment duration out even further than a standard repayment plan, it can result in more interest paid over the life of the loan. Consolidated loans do not always have a lower interest rate than your previous interest rates on separate loans, so reviewing the differences is essential to determine if it’s a worthwhile decision to pursue.

• Deferment and Forbearance

Borrowers experiencing short-term financial hardship can research their options for deferment and forbearance. Deferment usually happens when a student enrolls in school. Interest usually accrues for certain loans during deferment. Forbearance may offer a reprieve from loan payments. Interest always continues to accrue under forbearance, so while payments are not necessary, the additional interest accrued may make future payments even more challenging.

Private Student Loans

• Talk to your loan servicer.

Unlike federal student loans, private student loans do not offer the same generous terms as federal student loans. Because of a lack of protection, borrowers may need to directly speak with the loan servicer about options for reducing the monthly payment. Some private lenders offer short-term relief, such as forbearance or graduated repayment plans. Unlike their federal student loan counterparts, private student loans do not have a federal mandate to supply these opportunities.

• Refinancing

Borrowers with a decent credit score and stable income may consider refinancing their federal and private student loans with a private loan servicer. A lower interest rate on a refinanced loan product can significantly lower monthly payments. However, the duration of the loan period can increase the number of payments made overall, which can increase the loan’s overall cost. A huge warning for anyone undertaking this option: once you refinance federal student loans into a private loan, you lose all the advantages and protections of federal student loans.

Whether it’s an income-driven repayment plan, consolidation, deferment and forbearance, talking to a loan servicer, or refinancing, you can reduce your monthly loan payments. Careful research is necessary to prevent selecting an inadequate option that hinders your future financial self. Talking to a financial planner is also a sensible course of action.