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 graduate and professional degree holders. High student debt loads have consequences beyond the strain of steep monthly payments: many borrowers delay important financial milestones like owning a home, saving for retirement, or building up an emergency fund for unexpected setbacks.
Beyond delaying long-term goals, some borrowers don’t have enough money to service their 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 might know, education loans are not dischargeable in bankruptcy (barring relatively rare, special circumstances – consult a lawyer for more information), so for most borrowers the debt is here to stay. Such a situation can feel hopeless.
So how can you lower your student monthly payment? A common way to accomplish this for federal student loans is to enroll in an income-driven repayment plan. Income-driven repayment plans are designed to give payment relief for borrowers with high debt loads compared to their income. Options currently include the Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), and Income-Contingent Repayment Plan (ICR Plan). All use a percentage of your income to calculate your payment. To learn more about these plans, visit the Department of Education’s financial aid website.
If you’re already in an income driven-repayment plan, lowering your adjusted gross income (AGI) can lower your monthly payment. This is a fun strategy because the borrower can kill two birds with one stone. One way to lower AGI is through utilizing pre-tax accounts when planning for retirement or medical emergencies. For example, a family could increase contributions to a pre-tax retirement account or a health savings account (HSA) and lower their income used to calculate their monthly student loan payment. Check out this IRS website to see what other accounts might be a best fit for your situation, or consult with a qualified financial advisor or planner.
Another option is refinancing your student loans. This is a common option for private student loans if the credit score is high, income history favorable, and the occupation desirable for a potential lender. However, please be aware that refinancing federal student loans might lower your payment but at the cost of losing perks like beneficial repayment plans and loan forgiveness options, among others. For some, this might not be beneficial at all. I would advise consulting with a student loan professional before taking this path.
There are downsides to lowering your student loan payment. Loans that are paid slowly can accrue more interest and take longer to pay off, as opposed to an aggressive repayment schedule. In fact, federal student loans have the reality of negative amortization, which is rather rare in the world of debt. In other words, if you’re paying on your federal student loans and that payment doesn’t cover all the interest, this interest can accrue (or grow). Given certain scenarios, it can even be added to the principal balance. As you can imagine, this can get unmanageable, fast. Many scary case studies emerge from the reality of negative amortization.
One final note: if your student loan debt exceeds your annual wage, it’s time to get help. Borrowers in this situation should seek out a qualified professional who knows the student loan landscape (federal and private), repayment plans, and loan forgiveness opportunities. There aren’t many of us out there 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, CFP®
Jason Anderson is the owner of Gradmetrics, a college and student loan planning firm. He is a Certified Public Accountant (CPA) in the State of Kansas and a CERTIFIED FINANCIAL PLANNER™ professional.