How to reduce your student loan payment

There a three common ways to reduce your student loan debt. There is no magic wand or fairy dust that will just wipe your loans away or provide immediate removal of the loan balance or portions of it. Though not upfront, there are options to reduce to balance of your loan and the amount of money you will be required to pay back.

Loan Consolidation

Consolidating your loans with Department of Education can reduce the amount of interest you pay on you loans in a couple of ways. It will also allow you options in reducing the monthly payments to your loans. In some cases, the loan consolidation can increase the term of repayment. Depending on your situation the longer term with lower payments and a reduced interest rate may be a better option.

When consolidating a private student loan, the lender will usually require evidence of three pieces of criteria.

  1. You will need a credit score of at least 660 in most cases
  2. You will need to show a steady source of income to prove your ability to make steady payments on the loan.
  3. Lenders will usually want to see a debt to income ratio of about 40-45

Income Based Repayment Options

Take advantage of the Income Based Repayment Plans if you are experiencing difficulty covering your monthly payment amount or unable to make payments at all. These programs are options for those in repayment of Federal Student Loans and have proven very beneficial to many. These programs give the borrower the ability to have their monthly payments calculated by your income and family size, not by the balance of your loans. In most cases having no income or income that leaves your household below the federal poverty limit will allow a $0 monthly payment. The interest is bought back for subsidized portions of the loan when on some IDR’s. Income based plans will increase the term of your loan. In most cases the loans on IDR’s will have a term of between 20 and 25 years. It may not be appealing to have to be in the loan double the amount of time as a traditional payment, but the blow may be sweetened by the potential for loan relief.

To have your loan payments adjusted based on your income will generate a responsibility on the borrowers part to verify their income annually. An IDR will issue an anniversary date to the borrower. The borrower must verify their income, by specific means, every 12 months to remain in that program and keep the reduced monthly payment option and avoid being removed from the program. It is not the responsibility of the loan servicer to track your income each year. This becomes your responsibility and part of the requirements to continue with this benefit.

If you are awarded loan forgiveness at the end of your term, you should no that this come with tax penalty. The IRS will view the forgiven portion of the loan balance as taxable income. This means the borrower will have to pay taxes on the forgiven portion of the loan.

Debt Settlement

Although the forgiveness options are reserved for those with Federal Student Loans, there is a way to attempt to decrease the total amount one will pay on a Private Student Loan as well. This is known as Debt Settlement. This option is generally reserved for instances where the lender feels at risk of not receiving any payment on the loans unless they are able to work out a new arrangement with the borrower. In most cases this borrower will have a history of inability to make regular large payments, or the borrower will have offered a large one time payment to settle the debt and be done with the loan completely.

To complete to process of settling a debt, the borrower and lender will negotiate new terms of repayment. This could result in reduced monthly payments or a reduction to the total principal balance. If the borrower is unable to accomplish a settlement agreement with the lender, they may higher a debt settlement company to negotiate on their behalf.

Options In Debt Settlement

Settlement can be reached a few ways.

  1. In some cases the lender will accept the offer of a large one time payment to settle the debt for slightly less than the original balance. This is usually allowed in cases where the lender is afraid that they may receive nothing if a negotiation isn’t reached.
  2. In many cases the borrower is able to negotiate terms of a settlement with the lender themselves. However; if settlement was turned down by the lender, the borrower may need to seek the assistance of a debt settlement professional. This person or company will offer to negotiate the settlement on the borrowers behalf, for a fee. The process may require that the debt settlement company reach out to other lenders to refinance the loan from the original lender.

If you’re seriously struggling to manage the payments of your federal or private student loans, there are short-term and long-term options available. Be sure you understand all of your repayment options.