Most young professionals begin their careers with the massive financial burden of hefty student loans. These student loans can take numerous years, even decades, to pay off and sap any financial wealth you accumulate.
Professionals often struggle between mortgage payments, auto loans, utility bills, and demanding living expenses, which eat up monthly income. With rising inflation rates, there are numerous reasons why borrowers seek to reduce the burden of their student loan payments. For instance, some desire to save money and put it towards buying a home. Others struggle with financial difficulties and desire to save up to reduce their debt-to-income ratio so they can qualify for a hefty mortgage.
Lowering Your Student Loans
Luckily, there are numerous ways to lower your student loan payments so you can free up some of your income and put it to good use for a financially secure future.
You see, your monthly student loan payments are determined by:
- The loan balance,
- Your chosen repayment plan,
- Term of loan repayment, and
- The levied interest rate.
Altering all these elements can bring about a reduction in your student loan payments.
However, this is an endeavor that requires caution and consideration with extensive research. It is crucial to note that reducing your loan payment can save you money in the short-term, but also increase long-term costs. It is a choice some people make because it increases their financial flexibility.
If you have started falling behind on your student loan payments and you are unsure and overwhelmed about your finances, this article will help you explore some practical strategies to effectively lower your loan payments.
Here, take a look.
Student Loan Settlement
A student loan settlement refers to settling your student loans for less than the amount that you owe. If you have to default on your loan but have a sizable amount that you can pay immediately, your lender is likely to negotiate and settle.
However, the exact amount of the settlement depends on your lender. While some lenders are likely to settle for 50% of the total amount, others may ask for more. If you are continually falling behind on your monthly payments, a student loan settlement may prove a viable option. Just keep in mind that your lender might not be willing to agree to all your terms.
The process will not be instant and immediate. Plus, you won’t be eligible for this option if you’ve been making regular payments.
Federal Student Loan Settlement
Experts advise seeking a federal student loan debt settlement if you are unable to afford the loan. However, this requires you to establish un-affordability by providing recent bills or tax returns.
If you have defaulted on the same loan twice, you can look into other refinancing options, such as deferment, income-focused repayment plans, rehabilitation, and finally, a settlement.
If you’re falling behind on your loan and require more time, or you require a different loan repayment plan, a settlement is not the right option for you.
Private Student Loan Settlement
You can seek a student loan settlement from a private lender, much like a federal student loan. If your loans are in default, you are eligible to request a private student loan settlement. In the case of federal loans, the loan is considered defaulted when the borrower fails to make payment in over 270 days.
In the case of private loans, the loan can be considered defaulted as soon as you miss a payment. However, this depends entirely on the policies of your lender.
If you can verify your inability to pay back the loan, which can be proved if you do not have assets or a steady income, the lender will likely accept your offer for a settlement.
It is crucial to make an offer worth considering for the lender, which typically requires a lump-sum payment or a substantial amount that you can pay with flexible installments.
Negotiating Reduced Loan Payments
If you do not want to wait for your student loan settlement to come through to get a grip on your debt payments, negotiation is a viable option for you.
Here are some tips that will prove helpful:
Approach the Negotiation Table
Borrowers are strongly recommended to avoid waiting until the default and approach the negotiation table in good faith. You see, missing a loan payment can bring about a reduction in your credit score and diminish the quality of your credit report.
It is wise to contact your lender before waiting too long and inquire regarding the various income-focused repayment plans. Does your lender offer the option of refinancing your student debt? Are better interest rates available in the market for loan refinancing?
These are important questions that require close consideration. It is crucial to adopt a proactive approach rather than neglecting the issue and waiting for your loan to go into default.
Consult your lender about the various hardship programs available to you. If you are burdened by other financial obligations, have recently lost your job or are suffering from a massive business loss, it is strongly advisable to consult your lender without delay.
Most private student loan providers offer hardship programs to their borrowers. These programs provide borrowers the flexibility to delay their payments without facing any penalties. You may qualify for this option, but it will be a short-term solution, and you will have to pay off your loan eventually.
Borrowers with federal student loans are likely to be eligible for forbearance or loan deferment, which will temporarily stop your payments. This way, you can prevent your loan from entering delinquency and preserve your credit score effectively.
Settlement Best Practices
Before approaching the negotiation table, it is crucial to conduct your research on the various types of settlement offers available to you.
With private student loans, the settlement depends on the willingness of your lender to negotiate. Some lenders may require you to pay at least 70-80% of the total loan amount. In contrast, others can be more flexible and understanding of your circumstances.
With a federal student loan settlement, you can access various options.
- Paying the principal and half of the interest amount.
- Paying the remaining principal and interest without other charges.
- Paying 90% of the existing principal and interest balance.
Your lender may make a counteroffer or offer another settlement proposal.
Let the Lender Lead the Negotiations
It is wise to let your lender propose the initial offer. It is best to have an ideal number in mind, though. So, you know what you can afford.
As a borrower, it is crucial to understand all your options, but let your lender make the first offer. This way, you can either use it as a stepping stone to begin negotiating. If the offer is reasonable, you can accept it.
Ask for a Paid-In-Full Statement
Student loan debt settlements need to be handled carefully and tactfully. Keep in mind that this settlement is outside your payment plan’s boundaries, so it is crucial to hire a lawyer to review all the terms of the negotiation and provide arbitration services if needed.
You will require the lender to give you the offer in writing, and be sure to ask for a paid-in-full statement as part of your offer. Once your debt is paid, it is crucial to obtain a letter stating that the amount is paid in full. Otherwise, your credit report is likely to carry an outstanding loan balance, and the lender can still challenge you for the debt.
Lowering the Loan Balance
Here are some strategies to reduce your loan balance:
Private and federal student loans do not accompany any prepayment penalties. This allows borrowers to make additional payments on the principal amount of their loans. This will help you reduce the loan balance, but it won’t change your monthly loan payments.
What does a lower loan balance entail? It basically reduces the interest, and more of your payment is put towards the principal amount. This will help you pay off your loan faster, and you will save the money that will be spent on paying interest.
You can also consult your lender to re-amortize your loan, which will reduce your monthly payments to allow financial flexibility.
Loan Forgiveness and Student Assistance Plans (LRAPs)
Student loan repayment assistance plans and loan forgiveness are some other practical strategies to lower your loan balance. LRAPs refer to the monthly repayment assistance provided by an employer or an academic institution. Employers typically look into LRAPs as a lucrative strategy to acquire fresh talent and retain talented millennials.
Educational institutions also provide such assistance programs. For instance, Tufts University offers an LRAP that provides public service to forgive to encourage their graduates and alumni to adopt careers in the public service.
It is crucial to avoid being overwhelmed with the possibility of paying off hefty loan payments and start working towards resolving this issue immediately. If you’re looking into a settlement and lack the amount required to offer a lump-sum payment, consider reaching out to your friends and family. A crowdsourcing campaign can help you raise enough money to successfully pay off your loan amount and get your finances back on track.