What to Do When Student Loan Payments Are Too High

Trying to manage high student loan payments can be a frustrating experience, impacting your financial stability and overall well-being. If your payments become too high, proactively addressing the situation and seeking solutions that align with your unique circumstances are crucial.

If you don’t proactively address the situation, you might fall behind on your payments. One of the consequences of becoming delinquent or defaulting on your federal student loans can include a reduced credit score. Worse still, the government can garnish your wages and earnings to repay the loan.

We’ll explore strategies, resources, and options available to help you navigate the complexities of student loan repayment, empowering you to make informed decisions and regain control over your financial journey. 

Understand your student loan payments

When understanding how your student loan payments are calculated, you must know the key factors influencing the amount you owe. The primary components are the principal amount borrowed, the interest rate applied to the student loan, and the chosen loan term. 

The principal is the student loan amount, and the interest is the cost of borrowing, usually expressed as an annual percentage rate (APR). The loan term refers to the agreed-upon duration over which you’ll repay the loan.

To illustrate, let’s consider an example. Suppose your student loan balance was $20,000 with a fixed 5% interest rate and a 10-year repayment term. The monthly payment is shown below, assuming the payment will remain the same over the entire repayment term. 

Student loan amount	$20,000
Fixed interest rate	5%
Repayment term	10 years
Monthly payment	$212.13

With this example, you’ll make the same monthly payment for the entire 10-year term. At the start, a larger portion of the monthly payment is applied to interest, but over time, more goes toward reducing the principal. This continues until the loan is fully repaid at the end of the repayment term.

Despite this structured approach to repayment, various situations can make student loan payments overwhelming. For instance, unexpected life events, such as job loss or health issues, can disrupt your financial stability, making it challenging to meet monthly obligations.

If you experience financial hardship, your lender or loan servicer may offer temporary relief via student loan forbearance or deferment. However, interest usually still accrues on your loans during these periods. The interest is added to the principal balance of your loan and must be repaid. 

Understanding these factors can help you proactively manage your student loan payments and explore strategies to mitigate potential challenges.

Assess your financial situation

As you consider your student loan payments, a critical step is assessing your financial situation to ensure a sustainable and manageable approach. Establishing a comprehensive budget is necessary to understand your income and expenses, as well as your ability to save and repay debt. 

By carefully examining your finances, you’ll empower yourself to make informed decisions about your student loan payments. With this understanding, you’ll be equipped to find a more strategic and realistic repayment plan. 

To assist with this process, consider utilizing various tools and methods specifically designed to track your monthly cash flow and focus on managing student loans. Popular budgeting tools like YNAB (You Need a Budget) and EveryDollar, amongst others, can help make this process more manageable. 

Some budgeting tools, like YNAB, offer features tailored to student loans, helping you visualize your repayment progress, anticipate future payments, and identify areas for savings. Fitting resources like these into your financial toolkit can enhance your ability to stay on top of your loans.

What are my options when student loan payments are too high?

When faced with high student loan payments, the options vary based on your student loan type. Federal and private student loans have different repayment terms and options. So, the first step in addressing high payments is to determine your student loan type. 

Tip

If you’re unsure whether you have federal or private student loans, check your loan documents and contact your lender or loan servicer for clarification. All federal student loans will be listed in the Federal Student Aid loan system, so logging into this system is also a great place to start. 

Federal loans often offer more flexible repayment plans and forgiveness options, while private loans may have less forgiving terms. If you have federal loans, options include income-driven repayment plans, loan consolidation, or deferment and forbearance in times of financial hardship. 

Private loans may have fewer alternatives but could involve renegotiating the terms with your lender or exploring refinancing options. 

Open communication with your lender or loan servicer is crucial regardless of your loan type. They can provide insights into available solutions and guide you toward a more manageable repayment strategy.

In some cases, it may make sense to consider refinancing federal loans into private ones if you feel confident you won’t need the repayment and forgiveness options provided by the government.

If a borrower has a federal student loan but has strong credit and a good income, I recommend they evaluate refinancing to a private student loan because they can significantly reduce their monthly payments via reduced interest rates or extended payment terms.

Rand Millwood

CFP®

Federal loan repayment plans

The two common types of student loan repayment plans for federal student loans are fixed and income-driven repayment (IDR) plans. The amount you’ll pay under a fixed repayment plan is based on your loan type and amount, with no regard to your income. Conversely, IDR plans consider your income.

There are three types of fixed repayment plans for federal student loans:

• Standard: The most common repayment plan for federal student loans is the standard repayment plan, which spreads the payments over a fixed period, usually 10 years (up to 30 years for consolidation loans, depending on your outstanding loan balance). 
• Graduated: With the graduated repayment plan, your payments start smaller and gradually increase. The payment is designed to help you repay your loan in no more than 10 years (up to 30 years for consolidation loans, based on your loan balance). 
• Extended: If you have more than $30,000 in Direct Loans or FFEL Program loans, you may be able to use the extended repayment plan. You can select standard or graduated payments structured to help you repay your loans in no more than 25 years. 

Unlike fixed repayment plans, income-driven repayment plans adjust your payments based on income and family size. This can help make your loan payments more manageable, particularly during periods when your income is low. 

There are four federal income-driven repayment plans you can choose to best fit your needs: 

• Saving on a Valuable Education Plan (SAVE) (previously called the REPAYE plan)
• Pay As You Earn Repayment Plan (PAYE)
• Income-Based Repayment Plan (IBR)
• Income-Contingent Repayment Plan (ICR)

You can apply for an IDR plan by logging into your Federal Student Aid account. Once logged into your account, you’ll choose the IDR plan you want and provide details about your family size and income (e.g., provide a copy of your tax return). The process takes 10 minutes or less to complete. 

While private student loan lenders do not offer income-driven repayment plans similar to those available for federal loans, it doesn’t mean your lender won’t work with you. Contact your lender to see if they might be willing to temporarily adjust your payments to an amount you can afford. 

Loan consolidation

When considering loan consolidation, it’s crucial to distinguish between federal and private student loans, as each comes with its own set of considerations. Federal loan consolidation is available for eligible borrowers and combines multiple federal loans into a single, more manageable payment. 

Conversely, private student loan consolidation, often called refinancing, is offered by private lenders. It allows you to refinance private loans, federal loans, or both into a new private student loan. Refinancing or consolidating your student loans can impact your payments by extending the term, meaning you pay more in interest.

Besides the possibility of paying higher total interest costs, another thing to consider is the benefits you’re giving up with the consolidation. If you refinance a federal loan into a private one, you lose all federal benefits, like access to IDR plans and loan forgiveness programs. 

It’s essential to carefully weigh the pros and cons of consolidation or student loan refinancing and consider your long-term financial goals before deciding.

Pros

• Simplified repayment

  Consolidating loans streamlines multiple payments into one, simplifying your monthly financial management.

• Possibly lower payments

  Extending the loan term can lead to lower monthly payments, making it easier to manage your budget.

Cons

• Extended repayment period

  While lower payments may be appealing, extending the repayment period can lead to paying more interest over the life of the loan.

• Loss of benefits

  Federal loan consolidations may result in the loss of borrower benefits, such as interest rate discounts or loan forgiveness programs.

Private student loan refinancing

Private student loan refinancing, or loan consolidation, involves combining multiple student loans into a new private student loan. You can combine federal loans, private loans, or both into a single loan with a new interest rate and repayment term.

You can refinance your student loans with private lenders, such as online lenders, banks, and credit unions. If you refinance your student loans with a private lender, shop around for the best deal, as the rates and terms vary by lender. 

Also, unlike federal student loans, you must meet the lender’s eligibility requirements to qualify for private student loan refinancing. For example, you can expect the lender to check your credit and evaluate your income to ensure you can repay the loan. 

While private student loan refinancing can offer benefits, particularly in securing a potentially lower interest rate or more favorable terms, there are notable downsides, especially when federal loans are involved. Some of the potential downsides of refinancing federal loans with a private one are:

Loss of federal benefits

Refinancing federal loans into a private loan means losing federal borrower benefits, such as income-driven repayment plans, loan forgiveness programs, and deferment or forbearance options.

Fixed vs. variable rates

While federal loans offer fixed interest rates, some private refinanced loans may have variable rates, which can increase over time. Depending on the interest rate environment, this could lead to higher overall borrowing costs.

When considering private student loan refinancing, carefully weigh the pros and cons, especially if federal loans are part of the equation. It’s essential to understand the impact on your long-term financial outlook and consider alternative strategies for managing your student loan payments.

Seek forbearance or deferment

If you face challenges repaying your student loans, loan forbearance and deferment are two potential financial relief options. While both options serve a similar purpose, eligibility criteria and the specifics of how they work differ. 

Forbearance allows you to pause or reduce student loan payments temporarily. In contrast, deferment temporarily postpones your payments. Whether the temporary help you receive is loan forbearance or deferment, interest will generally continue to accrue on your principal balance.

If you have federal student loans, there are specific loan forbearance and deferment programs your loan servicer may be able to offer you to provide temporary relief. The programs, if any, offered by private student loan lenders will vary by lender. You’ll need to contact them about your situation. 

Some examples of situations where loan forbearance or deferment may be appropriate include:

• Economic hardship: If you’re dealing with financial difficulties like unemployment or significant income changes, both of these temporary relief measures may be available to offer you a financial break. 
• Military service: If you are serving in the military on active duty and in certain other cases (e.g., National Guard service), forbearance or deferment may help provide you with financial relief. Contact your lender or loan servicer to discuss the available options. 
• Post-graduate training: If participating in a graduate fellowship program or engaging in a medical or dental residency or internship, you may be eligible for federal loan forbearance or deferment.
• Cancer treatment: If you’re undergoing cancer treatment, you may be able to get a federal student loan deferment. 

Even if you don’t think your lender or loan servicer can help you, contacting them to discuss your situation is a good idea. If you don’t communicate with your lender or loan servicer, they won’t be able to help you. So, let them know what’s going on and see what they have to say. 

Additional support and resources

You can use many additional resources and ways to get support beyond traditional student loan repayment options. Two potential options include nonprofit credit counseling and educational resources for managing student debt. 

Nonprofit credit counseling services can provide personalized financial guidance, helping you create a sustainable plan to tackle your debt. These organizations can offer expert advice on budgeting, debt management, and financial planning tailored to your unique situation.

Educational resources dedicated to managing student debt can also be valuable tools. The U.S. Department of Education offers many free educational resources for student loan borrowers. Even resources are available for those still considering whether college suits them. 

If you’re still unsure about the action you should take, don’t hesitate to seek professional advice. Remember, reaching out for support is a proactive step towards achieving financial stability and successfully managing your student debt.

Rand Millwood

CFP®

Typically we recommend starting with refinancing federal student loans into private loans, as this is the biggest help for most clients to reduce interest payments. If this isn’t an option or does not provide sufficient relief, we recommend evaluating all current expenses to see if there are areas to cut out or reduce to free up additional cash flow. Deferment or forbearance tends to be the last option because, while they may provide temporary relief, they tend to make things worse over the long term as interest continues to accrue and increases the overall amount of the loan and future monthly payments.

FAQ

What are the immediate steps I should take if my student loan payments are too high?

If your student loan payments are too high, an immediate step you should take is to assess your financial situation. Start by reviewing your budget, identifying areas where you can cut expenses and redirecting the funds to your student loans. 

At the same time, you should contact your lender or loan servicer to discuss your situation. They can provide information about the available repayment plans and temporary relief options you could consider. Contacting a finance professional is also good, as they may offer helpful ideas.

It’s essential to proactively address the issue, seek guidance from financial experts, and explore the various resources and support systems available to make your student loan payments more manageable.

Is bankruptcy an option if my student loan payments are too high?

Bankruptcy is only an option for federal student loans unless the court deems that repaying your student loans would place an undue hardship on you and your family. Getting your federal student loans discharged with a bankruptcy filing can be challenging, but it’s not impossible. 

How do I know whether I’m eligible for an income-driven repayment plan?

To learn if you’re eligible for an income-driven repayment plan, you can check to see if your income falls within the discretionary income thresholds for the IDR plan you’ve selected and your family size. 

You can also contact your loan servicer, who will provide free guidance and support. Not only can your loan servicer help you determine if you’re eligible for an IDR plan, but they can also help you work through the application process. 

Can refinancing my student loans lower my monthly payments?

Yes, refinancing your student loans can lower your monthly payments. Generally, your payment will be lower because the repayment term is longer (e.g., 20 vs. 10 years). Remember, even if your monthly payment is lower, you’ll pay more interest over the life of the loan with a longer repayment term. 

Are there penalties for adjusting my student loan repayment plan?

Federal student loans offer flexibility in switching between different repayment plans at any time, and no fee exists. This means you can adjust your student loan repayment plan by switching to an income-driven repayment (IDR) plan or changing the type of fixed repayment plan without a penalty. 

However, it’s crucial to note that while there are no penalties, changes in your repayment plan may have financial implications. For example, extending your repayment term may result in paying more interest over the life of the loan, even if your monthly payment is lower.

Before making any adjustments, consider the potential impacts on your overall loan cost and financial goals. If you have private student loans, it’s advisable to review your loan agreement and contact your lender to understand their policies, as they may have different terms and conditions.

Some private lenders require you to apply for a new loan if you want different terms and may charge a fee. Review the terms of your loans and consult with your loan servicer or lender to make well-informed decisions about adjusting your student loan repayment plan and any potential costs.

How can I avoid falling behind on student loan payments?

Avoiding falling behind on student loan payments requires careful financial planning. Start by creating a detailed budget for all your income, expenses, and debt obligations. Prioritize your student loan payments within your budget and consider alternative repayment plans. 

Explore options like automatic payments to ensure timely and consistent payments. Additionally, staying informed about your loan terms and seeking assistance early from your loan servicer in case of financial challenges can help prevent late payments and potential consequences.

Building a financial safety net through an emergency fund and exploring loan forgiveness can provide extra security. Proactive loan management and communication with your servicer are crucial to staying caught up on student loan payments and maintaining a stable financial position.

Where can I find free resources to help manage my student loan debt?

You can get free resources to help manage your student loan debt from the Federal Student Aid website, a U.S. Department of Education division. You can get comprehensive information about federal student loans, repayment plans, forgiveness programs, and more.

Many student loan servicers also offer free resources you can use to help manage your student loans. If you don’t know which federal student loan servicer helps manage your loans, you can find out by logging into your Federal Student Aid account. 

How often can I change my repayment plan?

You can apply to change your federal student loan repayment plan anytime. Private lenders each have their own requirements. Depending on the lender, you might be unable to change your private student loan repayment plan unless you apply and are approved for a student loan refinance. 

What happens to my student loan interest if I get forbearance?

Generally, if you’re approved for a student loan forbearance, the interest accrued during the forbearance period is added to your loan balance. So, even though the forbearance might give you temporary payment relief, you’ll pay more interest over the life of the loan. 

Can I negotiate my student loan payments with my lender?

You can negotiate your student loan payments with your lender. To negotiate the payments for a private student loan, your loan typically needs to be in default (generally, at least 90 days past due). Even if your loan isn’t past due, you should still contact your lender to discuss your options.

You should contact your loan servicer for federal student loans to discuss your options. The options available to you will depend on your specific circumstances and needs. Even if you don’t think the loan servicer can help, you should still contact them and try negotiating a payment you can afford.