- Congress suspended federal student loan payments for six months as part of a massive relief bill, but it may be a good idea to reduce your monthly student loan payment over the long term if your income has been affected by the coronavirus pandemic.
- There are several ways to lower your payment, including applying for an income-based repayment plan, consolidating or refinancing your loans, or extending your loan term.
- You can also pause your payments after the six months are over if you need additional relief, or set up a progressive payment plan that increases your monthly payment as your income increases.
- Learn more about personal finance coverage.
Many people have had their hours reduced or lost their jobs entirely due to the coronavirus crisis, which naturally squeezes monthly finances.
Congress passed a massive relief bill that freezes federal student loan payments for six months, but your finances might not be fully back to normal by then.
If you want to get a jump on reducing your monthly student loan payment now, you have a few options. Under certain circumstances, you could even reduce your monthly payments to zero while remaining in good standing.
Suspend monthly payments
Due to the disruption caused by COVID-19, President Trump announced Friday that beginning March 13, all Americans with federal student loans can suspend payments without accruing additional interest for the next 60 days. . (And potentially six months.) This benefit should come into effect automatically if the bill passes.
Consider a progressive payment plan
If you’re looking for a longer-term option that extends beyond the forbearance period, consider the Tiered Repayment Plan.
The federal government automatically places borrowers into the standard repayment plan, which consists of 10 years of fixed monthly payments. Switching to a graduated plan keeps the same time frame, but starts you off with smaller payments in the early years, which increase over time as you (presumably) start earning more money.
Extend your repayment plan
Those with $30,000 or more in federal loans can also opt for the Extended Repayment Plan, which retains the standard repayment plan’s fixed payments but extends the schedule.
Choosing this plan — and as a reminder, you can change plans at any time by contacting your lender — gives you 25 years to pay off your loans. This change lowers your monthly payments, but means you’ll pay more interest over time.
Link your monthly payments to your income
Income-contingent repayment (IDR) plans are of particular interest right now, when so many people face reduced hours or complete unemployment.
Each of the four different types of payment plan, which you can apply for through Federal Student Aid, takes your income and family size into account when calculating your monthly payments.
Each month, you will devote between 10 and 20% of your income to your loans. (Or potentially even qualify for $0 payments.) After 20-25 years of on-time payments, you will become eligible for student loan forgiveness for the remaining amount.
An IDR plan can be particularly attractive for people close to the poverty line, as it protects you from the risk of falling into delinquency or default, which can hurt your long-term credit.
But it is important to note that the interest will be continue to accrue and current tax law states that any balance returned is taxed as income. So be sure to do the math to see if this is a good option for you.
Opt for consolidation
If you are facing multiple federal loans, you can consolidate them by applying for a direct consolidation loan on StudentLoans.gov. This newly consolidated loan will have one monthly payment, which can help streamline your finances.
More importantly, it can lower your interest rate because it takes the weighted average of the interest rates on your formerly disparate loans rounded to the nearest eighth of a percent. (That said, unpaid interest on any loan given is applied to your director post-consolidation balance, so you might end up paying more over time.)
Look for refinancing
Many of the payment reduction strategies on this list only apply to federal loans, but refinancing can also be used for private loans. Typically favored by those with exorbitant interest rates, refinancing involves taking out a new loan with a lower interest rate from a private lender, like SoFi or Earnest, to replace your old loan(s).
This new loan will be a private loan, however, so if you originally had a mix of private and federal loans, you’ll forgo the benefits of the latter, including borrower protection and lower interest rates.