By Jason Anderson, CPA
Many borrowers are struggling with student loan debt. The National Center for Education Statistics reports that an undergraduate borrower has an average of $ 28,600 in student loans. However, this number can reach much higher for university and professional degree holders. High student debt has consequences beyond the pressure of high monthly payments: Many borrowers delay important financial milestones like owning a home, saving for retirement, or building an emergency fund for unforeseen setbacks.
Beyond deferring long-term goals, some borrowers do not have enough money to pay off student loan debt and pay for necessities like food, clothing, or shelter. For these borrowers, lowering their monthly payment can be a matter of survival. As you may know, student loans are not dischargeable in bankruptcy (except in relatively rare special circumstances – consult a lawyer for more information), so for most borrowers, debt is here to stay. Such a situation may seem hopeless.
So how can you reduce your monthly student payment? A common way to accomplish this for federal student loans is to enroll in an income-based repayment plan. Income-based repayment plans are designed to provide payment relief to borrowers with high debt relative to their income. Options currently include the revised pay-as-you-go repayment plan (REPAYE plan), pay-as-you-go repayment plan (PAYE plan), income-based repayment plan (IBR plan), and income-based repayment plan (PAYE plan) ICR). All of them use a percentage of your income to calculate your payment. To learn more about these plans, visit the financial aid website of the MinistÃ¨re de l’Ãducation.
If you’re already on an income-based repayment plan, lowering your Adjusted Gross Income (AGI) may lower your monthly payment. This is a fun strategy because the borrower can kill two birds with one stone. One way to reduce AGI is to use pre-tax accounts when planning for retirement or medical emergencies. For example, a family could increase contributions to a pre-tax retirement account or health savings account (HSA) and reduce their income used to calculate their monthly student loan payment. Check it out IRS website to see which other accounts might be best for you, or consult a qualified financial advisor or planner.
Another option is to refinance your student loans. This is a common option for private student loans if the credit rating is high, the income history favorable, and the profession desirable for a potential lender. However, be aware that refinancing federal student loans could reduce your payment, but at the cost of losing benefits such as advantageous repayment plans and loan cancellation options, among others. For some, this might not be beneficial at all. I would advise consulting a student credit professional before taking this route.
There are downsides to reducing your student loan repayment. Loans that are paid off slowly can earn more interest and take longer to repay, as opposed to an aggressive repayment schedule. In fact, federal student loans have the reality of negative amortization, which is quite rare in the debt world. In other words, if you pay on your federal student loans and that payment doesn’t cover all of the interest, that interest can accumulate (or increase). In some cases, it can even be added to the principal balance. As you can imagine, this can get unmanageable, quickly. Many frightening case studies emerge from the reality of negative amortization.
One final note: If your student loan debt exceeds your annual salary, it’s time to get help. Borrowers in this situation should seek a qualified professional who is familiar with the student loan landscape (federal and private), repayment plans, and loan cancellation options. There aren’t many of us, but engaging with a student loan professional could save you tens or hundreds of thousands of dollars over the life of your loans.
About the author: Jason Anderson, CPA, CFPÂ®
Jason Anderson is the owner of Gradmetrics, a student and student loan planning company. He is a Chartered Accountant (CPA) in the State of Kansas and a CERTIFIED FINANCIAL PLANNER â¢ professional.