Late on Student Loans? These 4 Strategies Can Help With Costs
The best investment you can make is in yourself, and that includes education. However, with interest rates for federal student loans ranging anywhere from about 6.5% to upwards of 9% (depending on loan type) and many private student loan borrowers facing double-digit interest rates, taking on such debt can be a hard pill to swallow.
As such, missing a student loan payment can feel overwhelming. However, falling behind doesn’t mean you’re out of options. Whether you're dealing with federal or private student loans, there are several ways to lower your monthly payments, avoid default and regain control of your finances.
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Here are four ways to avoid further lateness and potentially lower your student loan payments.
Income-Driven Repayment Plans for Federal Loans
Federal loans and private loans are different, and therefore have a few separate parameters to work within. Fortunately, there are options to lower your payments for both.
“For federal loans, the most powerful tool to lower a monthly payment is an income-driven repayment plan," said Jethro Adedeji, founder and CEO of Crowned Credit. "These cap your payment at a percentage of your income, and for some borrowers, that can drop the payment significantly — sometimes to a very low amount if income is low.”
Remember, nothing, not even your credit score, is permanent. Make sure you find the way that lowers your student loan payments that best fits your finances.
“If your hardship is temporary, deferment or forbearance can pause or reduce payments for a stretch, though interest may still build, so use those as a short-term bridge, not a long-term fix," Adedeji said. "Consolidation can also simplify multiple loans into one payment and open access to certain repayment plans."
Hardship or Modified Payment Programs for Private Loans
"With both federal and private student loans due monthly (and about 10% of Federal student loan borrowers have both), delinquencies and defaults on student loans continue to rise," said Jack Wallace, director of government and lender relations at Yrefy.
“For private loans, you have fewer built-in protections, but it is still worth calling the lender to ask about hardship or modified payment programs," Adedeji added. "Many have them and simply do not advertise them."
Consolidate Your Loans
“If you are behind, the worst thing you can do is go silent," said Adedeji. "The options shrink fast once you hit default, so act while you are only late, not after. Contact your loan servicer directly and tell them you are struggling, because they cannot help with what they do not know."
Wallace suggested consolidating your federal student loans into a single loan so you have a single monthly payment. "Go to the U.S. Department of Education website at studentaid.gov to consolidate your federal student loans," he said.
It's important to be aware of the following information from the Office of Federal Student Aid (FSA) if you're considering consolidating:
All of your federal loans do not have to be consolidated.
Although your monthly payment amount may decrease, you'll likely have to pay off your loan over a longer term.
Any unpaid interest on your loans will result in a principal balance increase.
A consolidation loan will generally be assigned a new interest rate.
Borrowers can lose credits for any payments made toward income-driven repayment forgiveness.
“Here is the credit piece people miss: "Late student loan payments get reported and can pull your score down hard, and default does lasting damage," warned Adedeji. "Getting into a lower payment you can actually sustain protects both your budget and your credit at the same time. The goal is a payment you can make every month without fail, because consistency is what rebuilds you."
If you're unsure if you should consolidate your loans, use FSA's Loan Simulator.
Take Advantage of Employer Benefits
Wallace also recommended checking with your employer to see if they offer the tax-free IRS benefit under Section 127 that pays up to $5,250 per year for tuition or student loan reimbursement and sign up for it. He also suggested that if your employer doesn't currently offer employer-provided educational assistance under Section 127, to encourage them to sign up and offer it as a corporate benefit.
Cynthia Measom contributed to the reporting for this article.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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