How To Lower Your Monthly Student Loan Payments

Imagine having over six figures in student loan debt, making less than $30,000 a year and supporting a spouse who is also in school.  The monthly payments alone could be well over $1,000 a month.  This was the case for a couple that I recently helped.  The good news is that they were able to cut their payments in half after I explained how income based repayment worked.  Unfortunately, they were struggling for months financially and thought that it was impossible to lower their student loan payments.

According to a 2012 study by FinAid.org, 1.5% of all undergraduate and graduate students finished school with over six-figures of student loans.  The majority of students with high loan balances were graduate and professional students; yet, undergraduates still represented a slim portion of the statistic at 0.2%

Before you stop making payments on your student loans and severely damage your credit score, consider applying for the Income Based Repayment (IBR) program.

What is Income Based Repayment?

Income Based Repayment is a way for you to manage your federal student loans by lowering the amount you pay each month.  In short, the IBR program extends your federal student loan from the typical 10-year repayment term to a 25-year repayment term.  Yes, a longer term means that you’ll end up paying more interest in the long run, but the program is based on income.  It’s designed to make your student loan payment more manageable during your lower income years and to increase the payments as you earn more.

How Does IBR Work?

For most eligible borrowers, the IBR loan payments will be less than 10% of your income.  The chart below shows how it considers family size and income when calculating eligibility.  A family of four making $60,000 would only have to pay 6.4% of their income towards their federal student loans.  If you earn below 150% of poverty level, your required loan payment would be $0.

The IBR has an interesting feature called the 25-year loan forgiveness period.  If, after making qualified IBR payments for 25 years, you still have a balance on your federal student loans, they may be eligible for forgiveness.  Yes, the government will forgive your federal student loans, but in order to qualify, your income would need to remain below the limits for 25 years.  Reaching the 25-year loan forgiveness period shouldn’t be a goal since you would be better off trying to earn more and paying off your loans earlier.

Loans Covered Under IBR

Not every loan will be covered under the Income Based Repayment plan.  Only certain federal loans will qualify, so your private student loans are not eligible for IBR.  The IBR program covers the following federal loans: Stafford, Grad PLUS, and consolidated loans with the Direct Loan program.  IBR does not consider Parent Plus loans as eligible.

Applying for Income Based Repayment

You can see if you would even qualify for the income based repayment option by using this IBR calculator.  Be prepared to input your total federal student loan balance as well as your estimated income for the year.  This will give you an estimate of your IBR payments.  To actually apply for the Federal Income Based Repayment program, contact your Federal loan provider.  If you’re not sure who that is, use the National Student Loan Data System website to locate your student loan provider.