Why you shouldn't reduce student loan payments

Reducing student loan payments may be tempting, but it could cost you. (iStock)

Lowering student loan payments could provide financial relief for borrowers living on an already-tight budget.

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"Most people reduce student loan payments because they can't afford the payment," said Joseph Orsolini, president of College Aid Planners.

Income-driven repayment plans make it possible for federal loan borrowers. Income-driven options include:

  • Revised Pay As You Earn (REPAYE)
  • Pay As You Earn (PAYE)
  • Income-Based Repayment (IBR)
  • Income-Contingent Repayment (ICR)

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On average, the typical borrower pays $393 per month toward their student loans, with an average balance of $37,102, according to the U.S. Chamber of Commerce. While a student loan reduction could create a financial breathing room, there are some potential downsides to keep in mind.

Loan repayment can take longer

The 10-year Standard Repayment Plan is the default option for federal student loan repayment. Under this plan, payments are structured to allow a borrower to pay off their entire balance in a single decade. Lowering student loan payments can push back your end date for paying off loans.

"Reducing payments means that you are no longer making the full payment so the interest is added back into the loan," Orsolini said. "This means it will take longer to pay back the loan."

The income-driven repayment plans for federal borrowers can extend repayment up to 25 years, depending on the plan. Some borrowers may not feel comfortable being locked into loan payments for that long.

Lower payments can translate to more interest paid

One reason for lowering student loan payments via income-driven repayment is to qualify for student loan forgiveness. While this is one option for paying off loans, it can be costly for borrowers who don't meet the requirement for loan forgiveness. The same is true for borrowers who opt for income-based repayment because they need student loan help.

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Here's an example of how much more an income-driven repayment plan could cost. Assume you owe $37,000 in loans and are starting your first job with a $40,000 annual salary. Your student loan rates are 3.9 percent.

  • If you opt for the Standard 10-year Repayment Plan, your total repayment over 120 months would equal $44,742. 
  • If you choose Income-Based Repayment as a new borrower, you'd pay $50,840 over 179 months. 

The difference? Lowering student loan payments adds almost six years to your payoff time and $6,098 to the interest paid.

Payments can still fluctuate

Lowering student loan payments with income-based repayment doesn't guarantee you'll have the same payment for the entirety of the loan. Borrowers must recertify their eligibility for income-based plans each year.

As income increases, monthly payments could also increase. Eventually, you may be ineligible for income-driven payment if the amount would be the same as a 10-year Standard Repayment Plan.

Orsolini said borrowers who need student loan help should first look for ways to reduce expenses or increase income to make monthly payments more manageable. If all else fails, then lowering student loan payments may be something to consider.

"While not ideal, reducing the payment is preferable to missing a payment or paying late, which will impact your credit score," Orsolini said.