It’s true that making higher monthly payments can save you money on a lot of things, like credit cards and auto loans. When it comes to lower student loan payments, however, your options get a lot more complex. The special repayment options for student loans make lowering these payments something you shouldn’t hesitate to consider.
Students loans have two unique payment plans that are especially appealing to people who need to enjoy lower monthly payments: Income-Based Repayment (IBR) and Pay As You Earn (PAYE). In these programs, your income helps determine monthly payment amounts. You might even owe $0 or just a few dollars each month.
Under the IBR program, you submit information from your last tax return or current documents to show that you’re unemployed or making less. Interestingly, IBR offers special guidelines that can eventually write off your remaining debt. After 25 years’ of IBR payments, your remaining debt gets cleared. The debt also gets cleared if you make 10 years’ worth of IBR payments while working in the public or non-profit sector.
In the PAYE program, your income and household size determine your payments, which are spread over 20 years (with leftover balance cleared at that time, or after 10 years of public or non-profit service). You never pay more than the 10-year standard payment plan, and some accrued interest can be paid for you on this plan.
So why hesitate in choosing lower student loan payments? Some fear it will hurt their credit, but that’s not true. Paying the balance faster helps your credit, but IBR and PAYE are not red marks on your credit report whatsoever.
People also fear that these programs will result in paying a greater total amount because of capitalized interest. You should definitely estimate how interest will affect your repayment deep into the future, but lowering your student loan payments doesn’t necessarily hurt in the long run. You can pay just the accrued interest or get it forgiven, and can look forward to the leftover debt being wiped clean after making payments successfully for years.