Make $75,000+ and have income-driven student loan repayments? You could be paying too much, study says

Posted: 27 October 2020 4:53 pm
News

Signing a check to make payment

Other options could help high-earning Americans lower their monthly payments.

More high-earning Americans are enrolled in income-driven repayment plans (IDRs) for their federal student loans than any other income level, according to a Brookings Institute report on Federal Reserve data.

Those making over $74,000 a year represent more people than those at any other income bracket, but high-income borrowers actually benefit the least from this repayment program. In some cases, you could be paying as much as 20% of your discretionary income toward your student debt. Here are three alternatives that give you a little more flexibility.

1. Refinancing with a private lender

Now is a great time to refinance if you have a high income. Interest rates are at record lows, so you might be able to qualify for a lower rate than you’re currently paying even if you only have federal loans.

If you think you can repay your debt within five years, you can take advantage of record-low variable rates, which currently start at under 2% APR with many lenders.

Lenders have recently made a shift to emphasize cashflow over credit scores when assessing refinancing applications during the coronavirus outbreak. If you make over $74,000, you might actually be in an even more favorable position to qualify for a loan than you were in March.

2. Switching to a standard repayment plan

One of the drawbacks of refinancing is that you won’t be able to keep federal benefits. These include the option to easily switch repayment plans or more comprehensive deferment and forbearance options.

If you’d rather keep the benefits, consider switching to a 10-year standard repayment plan on your federal loans. Depending on how much you earn and the type of plan you’re enrolled in, it might actually decrease your monthly repayments.

In that case, switching to a standard repayment plan will increase the amount of time it takes to get out of debt and the amount you pay in interest, but it can make more room in your monthly budget. And you also won’t have to go through the process of submitting paperwork to your servicer every year.

3. Switching to a graduated repayment plan

A graduated repayment plan starts low and increases every two years. It can be a good option when you’re starting a career where your salary regularly increases as you gain experience. While overall it’s sightly more expensive than a standard repayment plan, it gives you more room in your budget now.

When staying on an IDR makes sense

Refinancing may be a great way to save if you can qualify for a lower rate. And other repayment plans might give you a lower monthly cost. But there are a few situations where you might want to stick to an IDR.

You owe interest

One major drawback to IDRs is that it capitalizes any unpaid interest when you switch to another repayment plan. This means that your servicer adds that interest to your loan balance, meaning that you’ll pay interest on your unpaid interest.

Check your account before you switch. If you just owe money on the loan principal, you’re safe to switch. Otherwise, stick to the IDR until you’ve paid off your interest balance.

You’re enrolled in PSLF

If you have enough debt to benefit from Public Service Loan Forgiveness (PSLF) at your salary level, stay enrolled in your IDR. Any repayments you make through a different repayment plan won’t be counted as one of the 120 repayments required for the program.

You might take a pay cut or switch careers soon

An IDR can be useful if you expect to be making less money in the future — or are in an industry that is at risk during COVID-19. If you’re unemployed for a few months or decide to go back to school full-time, you won’t have to pay anything until you’re working again.

Other ways to save on student debt

Making extra repayments whenever you come across extra cash can be a great way to get out of debt faster without taking up a large portion of your monthly budget. Or making payments every two weeks gives interest less time to add up — without adding to the monthly cost.

But before you do that, make sure you have an emergency fund. This should be savings to cover at least three to six months of personal expenses. That way you’re set up to stay on top of all your debt obligations if the unexpected happens.

Photo: Getty Images

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and finder.com Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site