Student Loans: Know About the Various Options for Lowering and Eliminating Monthly Payments
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Student Loans: Know About the Various Options for Lowering and Eliminating Monthly Payments

It's important to know about the many different options you have at your disposal when it comes time to repay your student loan debt

June 2, 2020

Student loans are complicated and many things can go wrong when inexperienced young people have to pay back the money. If you're a first-time borrower, you need to know the basics about paying back student loans and the different ways you can reduce or eliminate your payments. If you already have student loans, now is a good time to take a second look at your terms and the path to paying them off.

Know Your Loans

Keeping out of trouble with student loan servicers starts when you ask two questions. How much do I owe? Who do I have to pay? It's usually pretty easy to know how much you owe, but that figure can seem a bit out of reach as you approach your last year of school. Those small loans each semester may not have seemed like much, but it all adds up in the end.

The trickier question to answer involves knowing who your lender really is. Your loan servicer, the company that collects payments and handles the loan, is very often not the original lender. Adding confusion to the process, student loan servicers sometimes give bad advice that can cause you headaches when it comes time to repay. Most of the time this bad advice is unintentional, but sometimes can be deliberate when dealing with companies that don't have a great reputation.

The National Student Loan Data System can usually help you answer these questions regarding federal loans, which are the loans provided by the U.S. Department of Education. You'll need to set up an online account with the System to use it. But it can be more difficult to figure out your private loans, the ones that came from banks and similar entities. If you think you might have lost track of a loan, check your credit reports through

Communicate in writing

Do not call the loan servicers. Opt instead to send questions through the servicer's messaging system in order to create a paper trail. Call centers often rush their employees through their calls, which can leave you with incomplete or even inaccurate information that you won't be able to back up later if you find yourself in hot water because of their mistake. Having the company's response in writing will also make it easier to verify the information in case you make a mistake writing the information down or forget a key point.

Refinance your loan as soon as possible

It's always worth the effort to see if you can refinance your student loans. Refinancing not only lowers your monthly payment, but it also reduces the total amount of interest paid over the life of the loan. Depending upon the amount of your loan, the amount of money you can save over the life of the loan can be significant. It may also be worth looking into whether your loans can be combined into one loan, which makes the payment schedule easier to remember.

Whether you are refinancing a federal loan or a private loan, you will typically need a steady source of sufficient income, a credit score of at least 660, and a debt-to-income ratio of 40%-45% as a maximum. Keep in mind, though, that if you refinance a federal loan into a private loan you'll end up losing access to income-based repayment options. If you extend the term of the loan at the same time you are lowering your rate, you can end up spending more money in the long run. You also run the risk of losing borrower benefits, such as principal rebates and rate discounts, when you consolidate loans.

Income-Driven Payments

If you have a federal student loan, you might be eligible for a payment plan that will let you submit information about your income and family size and then reduce the amount of your monthly payments to affordable amounts. In some instances, you don't have to make any payments at all. Servicers of private loans likely do not have any income-driven payment plans, but there may be other options available. In any case, your loan servicer must be willing to cooperate with you if you want to enroll in one of these plans. Even if you don't have a loan that qualifies, you may be able to refinance or consolidate into a loan that is eligible.

The U.S. Department of Education has a repayment estimator tool that can let you know whether or not you're eligible, as well as a list of all income-driven payment plans and frequently asked questions.

If your new payment isn't enough to cover the accrued interest on the subsidized portion of the loan, the government will pay it for you for up to three years. Typical terms are between 20 and 25 years, after which the remainder of your loan balance is forgiven. Remember, though, that forgiven balances and subsidized amounts may be subject to taxation, which can leave you with an unexpected tax bill.

Stay Enrolled on your payment plan

It isn't enough to sign up for an income-driven payment plan. You have to re-qualify each year with updated financial information, and your servicer probably won't tell you this or even notify you of an upcoming deadline to re-qualify. When you sign up for income-driven payments, find out when your next deadline to re-qualify will be and make reminders so you don't miss it.

Avoid Forbearance Whenever Possible

If you start to have trouble repaying your loan and call your servicer for help, the servicer may offer forbearance, which lets you either reduce or eliminate payments for a certain period of time. It may seem like a good idea at first, but the interest on the loan will continue to accrue while you aren't making payments.

Loan Deferment

Deferment is similar to forbearance, but both payments and interest are suspended. Depending upon the loan, the government may make your interest payments for you during the deferment period. But because deferment is a better option than forbearance, the requirements are a bit more strict.

Extending the term of the loan

If you don't have the ability to switch to income-driven payments and you don't want to enroll in forbearance, take a look at modifying the loan term in order to lessen the monthly payment. Take a loan amount of $100,000 with a 5% interest rate and a ten year term as an example. Your monthly payment will be approximately $1,066 per month and you'll end up paying about $27,000 in interest. Increasing to a fifteen year term will mean you'll pay about $42,000 in interest, but it will also mean that you'll end up spending about $790 per month on payments. It's a trade off, but if monthly cash flow is important, it's something to consider. And many loans have no penalties for paying early or making extra principal payments if you find yourself able to pay more, which can lower the total interest paid.

Drop a Co-Signer

When you signed up for your loan, you probably needed a co-signer in order to qualify or to get a lower interest rate. As you get older and you find yourself earning more income, you may be able to release the co-signer from the legal obligation of paying the loan in the event you can't pay yourself. Not all servicers allow you to do this, but some will if you have a history of on-time payments. While releasing the co-signer from the obligation, you may be able to lower the interest rate of the loan due to your own credit worthiness and your income.

Settle Your Debt

If you have private loans, you have few options compared to those who have federal loans. There are currently no forgiveness options when it comes to private student loans. But you can attempt to settle your debts for less than the amount. Many lenders are willing to work with you if they are convinced that you can't afford to pay off the full amount of the loan.

Debt settlement involves negotiating with the lender for reduced payments or a reduced principal balance. You can work with the lender directly or with a debt settlement company. But it's not an easy process. It can take a long time and be a very demanding process, which is why many people choose to use a debt settlement company. But remember that no guarantee can be made regarding the outcome of the process.

The only downside to reducing your debt through the settlement process is that your credit worthiness often takes a hit. Depending upon the terms of the original loan and the settlement, the hit to your credit can be significant or none at all. Make sure to understand beforehand what information will be reported to the credit bureaus.

Re-Check Your Credit

By law, the three major credit reporting companies are required to give you a free copy of your credit report every year when you request it. If you want to check up on your loan servicer, request your reports and check for errors. This is very important if you are looking to refinance the loans or apply for other credit.