It’s that time of the month again: yep, the day when you grit your teeth and check your bank balance. Will there be enough left to make ends meet after you make your student loan payments?
Whether you’re paying off private or federal loans, there are several options that could improve your financial outlook. In fact, you might be able to pay less on your student loans each month—and end up with more for things like groceries or a vacation.
Consider these strategies to reduce your student loan payments.
1. Refinance for a lower interest rate
Refinancing to a lower interest rate can transform your loan payment from panic territory to completely manageable.
Private lenders offer interest rates as low as 2.8%. If you have current loans with 6% or 7% interest rates, that reduction in interest could save you hundreds of dollars each month. Over the life of the loan, you could save thousands.
If you choose to refinance multiple loans into one new loan, make sure you only refinance for an interest rate lower than the lowest of your current loans.
For instance, if you have loans at a 6.8% interest rate and loans at a 3.4% interest rate, don’t refinance the lot of them for a 3.5% interest rate. Instead, only refinance the loans that are currently at the 6.8% rate.
Use our calculator to find out what your monthly payment would be with a lower interest rate.
One important note: be careful about refinancing if you qualify for Public Service Loan Forgiveness (PSLF). After 10 years of on-time payments. PSLF will forgive the remaining balances of your federal student loans. But you won’t have that option if you’ve refinanced with a private lender.
2. Consider an income-driven repayment plan
Income-driven plans calculate your monthly payment based solely on your income. This is great news for new grads or anyone experiencing economic difficulty—but only if you have federal loans. Unfortunately, income-driven payment plans aren’t available for private loans.
If you’re eligible for an income-driven repayment plan, you’ll only pay 10-15% of your discretionary income whether your total debt is $40,000 or $200,000.
What’s discretionary income? It’s a measure the Department of Education uses to determine how much you can pay. Every dollar you make that is above 150% of the annual poverty line for a family of your size in your state is considered discretionary.
The most common income-driven repayment plans are IBR, ICR, REPAYE and PAYE [link to “4 Income-Driven Plans that Lower Monthly Payments” when it’s live]. Each has different eligibility requirements and terms.
To learn if you qualify for an income-driven plan, log in to studentloans.gov and review your options.
3. Consolidate your loans
If you have multiple federal loans, consolidating them through the federal government’s Direct Loan Consolidation program could lower your monthly payments, primarily by extending the payment term to 30 years.
This may be a good option if you’re unable to make payments under a standard repayment term and you don’t qualify for the income-driven repayment plans. But note that the longer repayment term means you may end up paying significantly more over the life of the loan if you only pay the minimum payment every month.
4. Extend your repayment term
Extended repayment—with a maximum term up to 25 years—doesn’t require you to consolidate. But like consolidation, you’ll benefit from lower monthly payments because those payments will be spread out over a longer repayment term.
That also means—you guessed it—you’ll pay more interest over the life of the loan.
Most federal student loan holders have the option to spread out payments. Private lenders may provide an extended repayment term as well.
Check out our Student Loan Refinancing Calculator to find out if you may be eligible for a lower monthly student loan payment.