If you're having trouble paying your student loans each month, taking action to lower your student loan payment can seem like the answer. The higher your student loan balance is, the higher your minimum payment will be.
A lower student loan payment can free up some additional income to meet other expenses in your budget or reduce some of the stress or burden student loans may be causing you. In other cases, a lower student loan payment can benefit you now, but hurt your finances long-term.
So how do you know whether you should lower your student loan payments or not?
Do Not Consider Lowering Your Payments If:
You Will Pay More Interest Over the Life of Your Loan
Lowering your minimum student loan payment can spread your payments out, causing you to pay more over the life of your repayment term even if you refinance your loans. For example, if your minimum student loan payment is $300, cutting that payment down to $250 or $225 and extending your term a few years can seem like a relief, but you'll still be paying the difference over the rest of your term plus additional interest.
By choosing to pay less now, you could be setting yourself up to pay more later when you can even out your payments and save money on interest by sticking with your current minimum payment amount.
You Can Afford to Make the Minimum Payment by Adjusting Your Budget
Sometimes not being able to make your student loan payments each month is due to a budget problem and not an income problem. To prioritize your debt payments, it's best to save and pay yourself first, then take care of your living expenses, and use whatever is left for non-necessities.
Before you consider lowering your student loan payment, consider cutting some of your expenses in order to free up your income and paying your student loans first each month. By slashing expenses like dining out, cable, gifts for others, entertainment, transportation, etc., and adjusting your lifestyle, you may find that you can afford your student loan payment after all.
Consider Lowering Your Student Loan Payments If:
You Can't Afford to Make the Minimum Payment
If you have a very low income or if you've already cut unnecessary expenses from your budget and still can't manage to come up with the money to pay your student loans, you might want to consider lowering your minimum payment.
Lowering your minimum payment and subjecting yourself to paying more interest over the life of your loan is better than allowing your loans to go into default. Defaulting on your loans can mess up your credit or even cause serious issues if your lender takes legal action.
If you have to refinance your loans or consolidate them to lower your interest rate and your monthly payment temporarily while you get on your feet, you can always pay extra on your loans when your income increases and your situation improves.
Your Student Loan Payment is Extremely High
Let's say you're bringing in a sustainable income but you have six figures of student loan debt and can hardly afford to make the extremely high payments each month. If your student loan payments are taking a huge chunk out of your income and leaving you with very little to live off of for the rest of the month, you should look into lowering the payment.
Refinancing would be your best option, because even though it allows you to lower your student loan payment and increase the length of the term and the payments you have to make overall, you may not spend much more than you are currently spending if your interest rate gets lowered. You could also choose to keep your term the same, and simply lower your interest rate and monthly payment.
You Might Qualify for Forgiveness Later On
If you have a lot of student loan debt and work in a field that is eligible for student loan forgiveness, it may be ideal to lower your overwhelming student loan payment if you are willing to wait several years for this debt relief option to kick in.
In order to qualify for public service student loan forgiveness, you need to make 120 qualifying payments on your qualifying federal loans and be hold a job with a public service, government funded, or non-profit employer. If you plan to take advantage of student loan relief options in the future, it might not matter that you may have to pay more on your student loans by lowering the payment since they will be forgiven. Keep in mind, though, that if you refinance Federal student loans with a private lender, you will not be eligible for loan forgiveness. To avoid this, leave your Direct Loans out of the consolidation.
Lowering your student loan payments may seem like an easy choice on the surface, but in reality, it is a big decision that can determine what your financial future looks like. Therefore, it's important to understand the financial implications of adjusting your student loan payments so you can decide whether the option will help you in the long run or deter you from becoming debt free.