Want to Lower Your Student Loan Payments? You Might Want to Consider This
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More than 1 million student loan borrowers defaulted on their loans last year. Odds are, many will default again, even after they’ve cleared their name with debt collectors.
It’s great to get your loans out of default with a few small payments, stop the incessant calls from debt collectors and clear a nasty mark from your credit history.
But you can’t stop there.
You have to move forward with repaying your student loans. If you’re stuck with the standard payment plan you had before default, can you still make the monthly payments?
What to Do If You Still Can’t Afford Student Loan Payments
If you’re in default on your federal student loans and want to avoid collections — or you struggle with payments and want to avoid default — consider applying for a direct consolidation loan.
This federal loan lets you combine multiple loans into one new one and takes an average weighted interest rate. You’ll only have to make one payment each month, and you have more time to pay off your balance.
Cons? The longer repayment period means your balance will spend more time accruing interest. While it’ll make life easier each month, it could cost you more money over the next 10 or 20 years.
If you’re thinking, “Fine, I just want to make it to July,” read on.
How to Apply for a Direct Consolidation Loan
You can apply for a direct consolidation loan here. You’ll need to log in with your Federal Student Aid ID and password or create one.
You’ll either apply online, or print the forms and mail them in. Then, a consolidation officer will magically whip those multiple loans into one simple, tasty, consolidated loan pie.
Unless your loans are in deferment, forbearance or a grace period, make sure you keep making normal student loan payments while you wait to hear back about your consolidation loan.
Once you take out a direct consolidation loan, you can also automatically sign up for a better repayment plan that will set you up with more affordable monthly payments.
What’s an Income-Driven Repayment Plan?
Whether you’ve defaulted or not, you might want to consider an income-driven repayment plan for your federal student loans.
These plans set your monthly payment as a percentage of your discretionary income.
Now, this gets tricky, because you may have heard all of these terms:
- Pay As You Earn (PAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
- Revised Pay As You Earn (REPAYE Plan)
These names all sound like different ways to say the same thing, but they’re distinct plans. Most likely, you’ll want a PAYE or IBR plan, but check this chart to see what’s best for your situation.
“Income-driven repayment,” BTW, is an umbrella term for all these options. Someone please take away the DOE’s thesaurus.
Depending on your repayment plan eligibility, the main differences you’ll see among the plans are the percentage of your income allocated to the monthly payment (10%, 15% or 20%), whether your spouse’s income counts, and after how many years your balance will be forgiven (20 or 25 years).
Apply for income-driven repayment plans here. If you’re not sure which is best for you, you can let the loan service put you on the one with the lowest monthly payment.
One More Thing… What is Student Loan Refinancing?
How does this tricky term fit into the mix?
Refinancing works a lot like direct consolidation loans, except you do it through a private lender instead of the federal government.
Through a company like Credible, you can refinance federal and private student loans.
Credible replaces your multiple loans with a single loan, potentially with a lower interest rate and/or lower monthly payment, which could help you save money now and long term.
OK, Thanks for Clearing That Up
You’re welcome, and best wishes.
Disclosure: Here’s a toast to the affiliate links in this post. May we all be just a little richer today.
Dana Sitar (@danasitar) is a senior writer at The Penny Hoarder. She’s written for Huffington Post, Entrepreneur.com, Writer’s Digest and more, attempting humor wherever it’s allowed (and sometimes where it’s not).