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Should You Lower Your Monthly Student Loan Payments?

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You’ve probably heard the statistics about the student loan crisis in America. It’s not pretty. According to Federal Reserve data, at the end of 2018, Americans owed nearly $1.6 trillion in student loan debt. And that total is rising exponentially; student borrowers in 2018 owed almost two and a half times more than they did a decade prior.

This increase is partly the result of historically high numbers of young adults choosing to go to college, but it’s also the inevitable result of the rising costs of higher education. Though many rightfully caution students against borrowing excessive amounts for their educations, taking on at least some student loan debt seems to be unavoidable for many. According to the Institute for College Access & Success, as many as two-thirds of bachelor’s degree-holders in the class of 2017 graduated with student loan debt.

Why Student Loan Debt Is So Prevalent

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Many students are forced to borrow money because the costs of higher education have risen significantly faster than family incomes. The College Board, which has tracked costs at both public and private universities since 1971, reports that the costs of tuition, room, and board have more than doubled in the decades since then.

When The College Board first started monitoring prices, the average cost of one year at a public university was $1,410, which was 13.7% of the median income of $10,290 for U.S. families in 1971. Fast-forward to the 2018-19 school year, when the average cost of a public university rose to $21,370 per year. With a median household income of $57,652 in 2017, that means the cost of attendance at a public four-year institution now requires 37.1% of the median family’s annual income.

The cost of a higher education has become unaffordable for many students. To make up the difference, they are forced to borrow – sometimes significant amounts. In 2017, the average bachelor’s degree-holder graduated with $32,731 of student loan debt. And with the cost of a college education continuing to rise, that average debt load isn’t likely to shrink anytime soon.

The Consequences of Student Loan Debt

What matters even more than the total amount of students’ debt is the size of their monthly payments. Whatever that grand total may be, borrowers live inside their month-to-month budgets. According to the Federal Reserve, the average monthly student loan payment as of 2016 was $393. That can be a significant chunk of the average new graduate’s take-home pay.

A 2019 analysis of student survey data by LendEDU found that the typical starting salary for new grads is $48,400. According to the income tax calculator at SmartAsset, that means the take-home pay for a single graduate as of 2018 could be $38,737, or $3,228 per month, making the average student loan payment about 12% of the average grad’s net monthly income.

Income-driven repayment plans calculate that 10% of your take-home pay is an acceptable amount to pay, but these numbers don’t take into account your personal situation. Your student debt may be higher or lower than the average, as may your income. You might hit all the averages but have higher monthly expenses due to other factors, such as having one or more children, making 10% a difficult payment for you regardless of whether or not you “should” be able to afford it.

For many borrowers, this amount is a struggle. According to data from the Pew Research Center (Pew), almost half (about 48%) of student loan borrowers who are no longer in school claim that making their payments is a financial hardship. A 2017 Pew report found that only 27% of graduates with student loans said they were living comfortably.

Further, the struggle to make those monthly payments can affect graduates in other ways. For example, Pew found that student debt affected the career choices of 24% of borrowers. More than 80% of student loan borrowers ages 22 to 35 who haven’t bought a house yet blame their student debt, according to CNBC. And excessive debt can even affect your decision to get married and start a family, according to a 2018 poll of U.S. women.

It can also affect your retirement savings. A 2015 study by NerdWallet found that the average college grad may be required to delay retirement until age 75, thanks in part to rising student loan debt. While they’re busy making loan payments, grads may put off contributing to their retirement savings, potentially amounting to a loss of $684,474 in savings over a 50-year period, according to the study.

Student Debt Cash Coins

Should You Lower Your Student Loan Payments?

All of this begs the question: Should you lower your monthly student loan payments?

Unfortunately, there’s no easy answer. With the exception of refinancing, for most borrowers, all of the available programs for reducing monthly payments – consolidation, income-driven repayment, deferment, and forbearance – result in a longer loan term and more money paid into the loan as a result of interest paid over a longer period. Even the option of loan forgiveness probably won’t benefit the average borrower because the average borrower won’t be left with a balance by the time the 20- to 25-year clock runs out, even if they’re enrolled in an income-driven repayment plan.

On the other hand, there may be a small percentage of borrowers who could benefit from lowering their monthly payments.

So, if you’re considering lowering your student loan payments, here are a few suggestions for when it makes sense and when it doesn’t.

When You Should Lower Your Student Loan Payment

Even when lowering your monthly student loan payment may have you paying back more money in the long run, there might still be some occasions in which it’s nevertheless a good idea. There are also a few circumstances, although rare, in which reducing your monthly payment will actually save you money.

1. You Can’t Afford Your Monthly Payment

If you’re legitimately struggling to pay for basic necessities because of your monthly student loan bill, that’s a good reason to investigate ways to lower it, even if it might mean paying back a larger amount in the long run.

One of the effects of student debt is the lack of a financial safety net if you get hit with an unexpected expense. According to a 2019 report by Comet Financial, specialists on student loan refinancing, 41% of student loan borrowers say they wouldn’t be able to afford a $400 emergency expense. Even fewer would be able to manage a home repair or medical emergency, which could potentially cost into the thousands.

If you’re one of these borrowers who’s living paycheck to paycheck – or, worse, unable to even make ends meet – lowering your monthly payment can help you get your financial situation under control. And once you do, you can always choose to increase payments later.

2. You’re At Risk of Falling Behind

According to the Federal Reserve Bank of New York, student loans had the highest rates of delinquency among all consumer debts as of the third quarter of 2018; 11.5% of student loans were more than 90 days past due, in contrast with 7.9% of credit card payments and 4.3% of auto loans.

Though you may be trying hard to meet your student loan obligations, if you’re already struggling to afford basic necessities and an unexpected expense hits – especially if it’s an emergency – it can be tempting to put off your student loan payment. But the more you delay it, the harder it gets to catch up. Late fees, rising interest rates, and stacking payments can delay you even further, putting you at risk of default.

Instead, it’s far better to call your loan servicer, admit you’re struggling, and ask them to apply a temporary deferment or forbearance to help you catch up. Then, you can discuss the best plan for lowering your payments going forward.

3. You’re At Risk of Defaulting

You should avoid defaulting on your student loans at all costs. The repercussions can be immense. Your credit score takes a significant nosedive, potentially preventing you from ever doing anything that requires credit, such as buying a house, renting an apartment, and getting a car loan. Even worse, the federal government can garnish your wages without suing you first, as well as keep all your tax refunds forever. If you default on private loans, private lenders can also garnish your wages, but they’ll have to go through the process of suing you first.

With so many programs currently available to borrowers, you should never have to default on government loans. All of the income-driven repayment programs will work within your ability to pay, and if you currently have zero ability to pay because of an extreme situation such as unemployment or very low income, you could potentially end up with a $0 repayment. That happened for me during a brief period of unemployment and also during my first few years of teaching when my income was limited. Even better, those $0 repayments count on the clock toward loan forgiveness. As long as you’re enrolled in a qualifying income-driven repayment program, your loans are eligible for forgiveness in 10, 20, or 25 years, depending on the program.

If worse comes to worst, you can always pursue deferment or forbearance. If you qualify for economic hardship deferment, you’ll be able to postpone your payments without accruing interest. Interest will not stop accruing with a forbearance, but you’ll at least be able to postpone payments without going into default.

Things get a little trickier when it comes to private loans. Although most lenders have some payment assistance programs, none have the variety of programs offered by the federal government, nor are there any options for loan forgiveness. However, if you become unable to make your private loan payments, and you’ve already missed some payments, many lenders will work with you to avoid default. As a last resort, you can pursue a debt settlement with private loans.

4. You’ll End Up Paying Back Less Over the Long Run

There are some rare cases in which you could end up paying back less over the long run by lowering your payments. If you enroll in an income-driven repayment plan, such as IBR (income-based repayment), and your income is low enough and your loan debt high enough that you have a balance left after making the required 240+ payments, you can have that remaining balance forgiven. Depending on your income, your payments might be so low that you will have paid back significantly less than you would have on the standard 10-year repayment plan.

For example, after completing 10 years of higher education for my Ph.D., which enables me to teach at the college level, I had borrowed a grand total of about $200,000 in federal student loans. My meager starting teaching salary of $35,000 gave me a take-home pay of about the same size as my monthly student loan payment. So, to manage the situation, I enrolled in an IBR plan.

When I plug these numbers into the U.S. Department of Education’s (DOE) Repayment Estimator at StudentLoans.gov, it estimates that with the standard 10-year repayment plan, I would pay back a total of $266,449 with a monthly payment of $2,220. With the IBR program, on the other hand, I will pay back $155,980 – less than what I originally borrowed – with a starting monthly payment of $203. The remainder of my loan, which is projected to be $344,020 with accrued interest even after 25 years of monthly payments, would be forgiven.

My situation is unusual, though. According to the 2017 Pew report, only 7% of all student loan borrowers have student debt over $100,000, which is most common among graduate degree-holders.

Using the data for average borrowers and the same repayment calculator, the picture looks very different. In this case, the average borrower will end up paying back more money in the long run in all of the income-driven repayment programs, except for the Revised Pay As You Earn (REPAYE) program, where the payback amount is nearly identical. Further, they won’t have a remaining balance to be forgiven after 20 years on any of the eligible income-driven repayment programs.

Before making any decisions about your student loans, take advantage of repayment calculators, plug in your own numbers, and see what your repayment and potential loan forgiveness will look like and if it will really save you money in the long run. Revisit your numbers regularly as your income is likely to change over the years.

5. You Qualify for the Public Service Loan Forgiveness Program (PSLF)

For standard income-driven repayment programs, you can have your loans forgiven after 20 years if you borrowed money after July 1, 2014 or for 25 years if you borrowed before that date. There’s also the Public Service Loan Forgiveness Program (PSLF), which forgives qualified borrowers’ loans after 10 years. In order to qualify, you must work full-time for those 10 years in a public sector job or at a qualifying nonprofit. If you meet the criteria, you’re likely to benefit from forgiveness as the repayment term is significantly shorter than with other forgiveness options. However, qualifying for PSLF can be extremely tricky because there are a lot of very specific requirements.

6. You’re Able to Qualify For & Benefit From Refinancing

With student loan refinancing, a private lender pays off your current loan and issues you a new loan with new repayment terms and a new interest rate, which can be fixed or variable. Refinancing your student loans is one of the few situations in which you can potentially lower your student loan payments and also save money by lowering your interest rate.

Most other options that lower monthly student loan payments, such as loan consolidation and income-driven repayment plans, do so by extending the length of the term without lowering interest rates, which is why you end up paying back more in the long run. As of the writing of this article, some student loan refinance lenders are advertising interest rates as low as 2.54% (variable). According to the refinance calculator at Credible, an online resource for finding a refinance lender, if you’re carrying the average student loan balance of $32,731, you’ll get a new monthly payment of $309. That’s a savings of $84 over the $393 monthly payment of the average student loan borrower on a standard 10-year repayment plan. It also saves you a total of $10,039 over the life of the loan.

Refinancing has its drawbacks, though, starting with it isn’t for everyone. Many borrowers may not qualify. Refinancing requires a credit check, and if your debt-to-income ratio is too high – potentially because you have too much student loan debt – you owe too much on credit cards, or your credit score is too low for another reason, you may not be approved. The typical credit score of approved borrowers is 700+. Additionally, many lenders also require you to have a higher-than-average income.

Further, although you can refinance both federal and private student loans, if you decide to refinance your federal loans, you’ll no longer have access to federal repayment programs, such as loan consolidation or income-driven repayment. This is because you’ll be exchanging your federal loan for a new one with a private lender.

Generally, you shouldn’t attempt to refinance your student loans unless you are able to make your payments on the standard 10-year repayment plan. In this case, you’re not likely to benefit from any of the income-driven repayment plans anyway. Keep in mind, though, that if you decide to refinance you’ll also lose access to the DOE’s generous deferment and forbearance options should you hit a rough patch. Although some lenders offer forbearance for economic hardship, the allowable lengths of forbearance are typically much shorter than what are offered by the DOE.

Pro tip: If refinancing your student loans makes sense for your situation, start with Credible.com. You will receive multiple rate quotes within minutes. Plus, Credible.com is offering a bonus of up to $750 to anyone who refinances their student loans.

When You Should Avoid Lowering Your Student Loan Payment

Making those monthly student loan payments is unquestionably a struggle for many people. So why wouldn’t you want to lower those monthly payments?

The answer is that, in most cases, lowering your payment could result in paying back far more in the long run due to the interest that accumulates over a longer repayment term. Further, you’ll be stuck making payments for a much longer period, potentially tying up your money from being used for other things, such as saving for retirement, buying a home, or setting aside money to help fund your kids’ education.

If you can find ways to afford it, even if it might require sacrificing some things for a while, paying off your loans as quickly as possible is generally the best way to go. Here are the situations in which you should avoid lowering your student loan payments.

1. You Can Afford Your Loan Payments

While there are undoubtedly college graduates whose monthly student loan payments make it difficult to afford basic necessities, other grads aren’t struggling as much. You might be feeling a bit of a pinch, but if your monthly payment isn’t making it difficult to buy groceries, pay the rent, or afford medical bills, you should avoid lowering it, even if you could qualify for an income-driven repayment program.

That’s because income-driven repayment programs don’t lower your interest; they merely lower your monthly payments while extending the repayment term. Even loan consolidation, which brings all of your loans together into one payment, averages the loans with your lowest pre-consolidation interest rate, extends the length of your term up to 30 years without significantly lowering your interest. All of this means that, regardless of which program you choose, you’ll likely end up paying back far more, and paying for a far longer period, than if you had just opted for the typical 10-year repayment plan.

If you have a well-paying job and are struggling to put at least 10% of your income toward your student loans, you may first want to reassess some other areas of your monthly budget – such as the size of your rent payment, car payment, or standard grocery bill – before lowering your student loan payments.

2. You Have the Ability to Take on a Second Job

According to the 2017 Pew report, graduates with student loan debt are more likely than those without loans to have a second job. It may not be fun, and you may have to forgo having much of a social life for a bit, but the sacrifice can pay off exponentially when you pay your student loans off sooner.

Moreover, having a side gig these days isn’t all that unusual. A 2018 survey by Bankrate found that 37% of Americans have a side job. More and more adults find themselves taking on extra work to climb out of debt or save for financial goals, so if this is a possibility for you, you’ll be in good company.

3. You’ll End Up Paying Back More in the Long Run

Though government repayment programs can sometimes save you money on your student loans, in most cases, enrolling in one will set you back.

For example, according to the DOE’s Repayment Estimator, our “average” student loan borrower enrolling in an income-driven repayment program could end up paying $3,000 to $5,000 more than if they had opted for the standard 10-year repayment plan. That may not sound like a lot, especially in light of a reduced monthly payment, but the numbers can vary widely depending on your actual starting salary and loan amount. If, for example, your starting salary is $25,000, you’ll end up paying back nearly $10,000 more on the same amount borrowed than if you’d followed the standard 10-year repayment.

Everyone’s situation is unique, though, and playing around with the numbers can significantly alter the overall picture. For example, if you borrowed a larger amount – say, $40,000 – and started with a closer-to-average salary of $45,000, you’d end up paying back nearly $15,000 more with an income-driven plan than with the standard 10-year repayment plan. Not to mention that you’d be making those payments for an additional 10 to 15 years.

As you can see, in many cases, a lower monthly payment isn’t to your advantage. As long as it’s possible to swing your current payment, even if it’s a bit uncomfortable, you should stick with it and try to pay off your loan as quickly as possible.

Final Word

Although a college degree comes with its burden of loan debt for many students, statistics continue to show that the benefits outweigh the costs. A 2014 Pew analysis found that the median household income of those with student debt – and the education to go with it – was nearly twice that of households headed by a non-graduate. Further, 63% of young college graduates who borrowed money to pay for school said their investment had already paid off, while 84% of believed their investment would pay off in the near future if it hadn’t already.

Your potential lifetime earnings as a college graduate can far outweigh your total student loan debt. It’s just about finding the best ways for you to manage this debt and offload it as quickly as possible.

Are you struggling to make your student loan payments? What methods, if any, sound like they might help you manage this debt?

Sarah Graves
Sarah Graves, Ph.D. is a freelance writer specializing in personal finance, parenting, education, and creative entrepreneurship. She's also a college instructor of English and humanities. When not busy writing or teaching her students the proper use of a semicolon, you can find her hanging out with her awesome husband and adorable son watching way too many superhero movies.

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