How can I lower my student loan payments?

Student loan payments can be a source of financial stress for many borrowers who are struggling to repay their student loans. Every dollar sent for a student loan payment is a dollar less that is available for other priorities. So, borrowers sometimes seek to lower student loan payments.

There are several different ways of reducing student loan payments:

• Modifying your repayment plan. If you have a federal student loan you might want to choose a different student loan repayment plan, such as an income-based driven repayment plan which will base your loan payment on your income and could reduce your monthly payment If an income-drive repayment plan reduces your monthly payment you will likely increase the length of the repayment term. Another option would be to see if you qualify for an extended repayment plan, which will also lower your monthly payment. Unfortunately, a longer repayment term means you will end up paying more overall, also because the longer repayment period increases the total interest paid and total payments over the life of the loan. So, it is best to choose the repayment plan with the highest monthly payment you can comfortably afford.
• Get a Direct Consolidate Loan. Federal student borrowers can opt to obtain a consolidation loan to combine multiple loans into a single loan. Direct Consolidation Loans, which are available at www.StudentLoans.gov, do not reduce the cost of the loan, since the interest rate is based on the weighted average of the interest rates on the loans included in the consolidation loan. However, if you choose to combine your loans with a Direct Consolidation Loan, you may have the option to extend your repayment term to 30 years, based on the total outstanding education debt you have.  Longer repayment term will mean a cheaper monthly payment, but will also mean you have to pay more overall. 
• Refinance to get a lower interest rate. Refinancing may help you lower your student loan interest rate and the new loan will allow you to pick  a new repayment plan—which could be a lower monthly payment that you are paying. Interest rates on private loans are based on the current credit scores of the borrower and cosigner (if any). If you get a good job and manage your credit responsibly (e.g., by making on-time payments on all debts, not just student loans debt), your credit score should improve significantly within a few years of graduation which could qualify you for better loan rates. Be sure to review your credit report and credit scores at www.annualcreditreport.com (a free web site) and correct any errors before applying for a private student loans. Then, look for opportunities to refinance your student loans on our student loan refinance compare page.
• Claim the student loan interest deduction. The student loan interest deduction allows you to deduct up to $2,500 in interest on federal student loans and private student loans on your federal income tax returns. The deduction from federal and private student loans is claimed as an above-the-line exclusion from income, and so can be claimed even if you do not itemize deductions. Depending on your tax bracket, this can be the equivalent of cutting interest rates by a quarter (25%). While this may not lower your monthly payment, it’s a great benefit to be aware of. 
• Sign up for auto-debit. Sign up for auto-debit to receive an interest rate reduction. Borrowers who sign up for auto-debit agree to have their monthly student loan payments automatically transferred from their bank account to the loan servicer. Many lenders offer a slight interest rate reduction, typically by 0.25% or 0.50%, as an incentive. This also won’t lower your monthly payment, but it’s always a great idea to consider auto-debit if it will result in overall savings from a lower interest rate.  

Note that cutting your interest rate in half will not loweryour monthly payments in half. This is a common myth. Even if your interest rate were zero, you’ll still have to repay the principal balance of the loan. For example, cutting the interest rate in half on a 6.8% loan will reduce the monthly payment by about 14% on a 10-year repayment term and about 25% on a 20-year repayment term. The monthly payments on a 10-year, $35,000 loan are $402.78 at 6.8% and $344.46 at 3.4%, yielding only about $58 in monthly savings. The percentage reduction in the monthly loan payment is about double the interest rate on a 10-year term (plus or minus a few percentage points) and twice that on a 20-year term.