Lana Oconnell
Paying off student loans with a low income can be challenging, but several strategies can help. Firstly, consider enrolling in an income-driven repayment (IDR) plan, which bases your monthly payments on your income and family size. If your income is low enough, your payment could be as little as $0 per month, and these payments still count toward loan forgiveness. The SAVE plan, for instance, is the most affordable student loan repayment plan, offering low monthly payments and reduced times to loan forgiveness. Additionally, you can increase your income through side hustles or freelance work, allowing you to make extra payments toward your loan principal and speed up your debt-free date. Downsizing your living situation, cutting back on non-essential expenses, and addressing any high-interest credit card debt can also provide financial relief. Finally, refinancing your student loans into a single private loan at a lower interest rate can help reduce your monthly payments, although this may extend your repayment period.
| Characteristics | Values |
|---|---|
| Federal student loan repayment | Begins six months after graduation or leaving school |
| Standard repayment plan | 120 monthly instalments spread over 10 years |
| Income-driven repayment (IDR) plans | Monthly payment based on income and family size; payment could be as low as $0 per month |
| SAVE plan | Most affordable student loan repayment plan; lowest monthly payments; accrued interest is forgiven |
| Income-Contingent Repayment (ICR) | Oldest IDR plan; payments are 20% of discretionary income or a fixed payment over 12 years, whichever is lower |
| Income-Based Repayment (IBR) | Payments are 10% or 15% of discretionary income |
| Public Service Loan Forgiveness (PSLF) | Designed for borrowers working full-time for the government or qualifying 501(c)(3) nonprofit organisations; remaining balance on federal student loans is forgiven after 120 qualifying payments |
| Refinancing | Replacing multiple federal or private student loans with a single private loan at a lower interest rate |
| Side hustles | Increasing income through freelance work, consulting, selling items, or renting out assets |
| Credit card debt | Consolidating or negotiating high-interest credit card debt |
| Lifestyle changes | Downsizing living situation, cutting back on non-essential services |
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What You'll Learn
Income-driven repayment (IDR) plans
Federal student loan borrowers are automatically enrolled in the 10-year standard repayment plan by the government. However, if you are unable to afford the monthly payments, you can opt for an income-driven repayment (IDR) plan. IDR plans are a good option for those with low incomes as they lower your monthly payment based on your income. The federal government offers four types of income-driven repayment plans: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR).
The specific features of each plan vary, but generally, your required monthly payment will be calculated as a percentage of your discretionary income. Discretionary income is the amount of money you earn that exceeds 100% or 150% of the federal poverty line, depending on the plan. For example, under PAYE, your monthly payment is 10% of your discretionary income. If your income is less than the federal poverty line, your payment will be zero.
While IDR plans can make your monthly payments more manageable, they also extend the repayment period. Under an IDR plan, you will be making payments for up to 20 or 25 years, depending on your loan type. At the end of this period, if you still have a remaining balance, it may be forgiven. However, the forgiven amount may be taxable, so it is important to consider the potential long-term costs of this option.
To apply for an IDR plan, you can fill out the updated IDR application at StudentAid.gov/idr. You will need to provide information about your income and family size to determine your eligibility and calculate your monthly payment. It is important to note that IDR plans are only available for federal student loans, and the terms of the plans may change over time due to legal and political factors.
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The SAVE plan
Under the SAVE plan, any interest that remains after a monthly payment is applied will be forgiven, and your loan balance will not grow. This is a significant benefit, as interest can quickly accumulate and increase the overall cost of the loan.
To enrol in the SAVE plan, you should visit ED's website to learn more and sign up. As part of the FUTURE Act, you can provide consent to ED to automatically recertify your IDR payment based on information from the IRS. This means your tax return information will be used to automatically adjust your monthly payment without the need for recertification each year.
It is important to note that your IDR payment is based on your adjusted gross income (AGI). Contributing to a tax-deferred retirement account, such as a 401(k) or 403(b), can decrease your AGI and, subsequently, your IDR payment. This could also increase the amount forgiven under loan forgiveness programs like PSLF or IDR.
Additionally, if your income decreases or your household size increases, you can renew your IDR income recertification early to have your monthly payment recalculated. This flexibility ensures that your repayment plan remains manageable, even with changes in your financial situation.
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Lower costs elsewhere
The federal government offers income-driven repayment (IDR) plans that lower your monthly payment based on your income. IDR plans can extend the payoff timeline, reducing your monthly payments but increasing the time it takes to pay off the loan. At the end of this extended period, any remaining debt may be forgiven.
You can also consider consolidating your student loans, which can stretch repayment to a maximum of 30 years. While this will make your monthly payments smaller, it will also increase the time it takes to pay off the loan.
Refinancing your student loan means trading in multiple student loans for one private loan with better terms. This could lower your interest rate and shorten the repayment term. However, you should be cautious when refinancing federal student loans, as you will lose the flexible repayment options and borrower protections they offer.
If you have a subsidized federal loan, the government will pay your interest while your loans are in a deferred status. This includes when you are still enrolled at least half-time in school or in your six-month, post-school grace period. The government will also pay your interest if your loans are placed in deferment due to a return to at least half-time enrollment, economic hardship, unemployment, cancer treatment, or military deployment.
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Side hustles
Taking on a side hustle can be an effective way to accelerate your student loan repayment and reduce the overall interest. It can be anything that earns you money outside of your primary source of income. While it may require extra work and discipline, a side hustle can provide a helpful income boost to put more money towards your student loans.
- Time and Expertise gigs: These include services such as babysitting, elder care, dog walking, or pet-sitting. Websites like Care.com, Rover, and WagWalking.com are great places to start.
- Transportation gigs: Driving for companies like Uber, Lyft, or delivery services like DoorDash and Grubhub offers flexible hours and the ability to choose your own schedule. However, keep in mind the extra costs for gas and vehicle maintenance.
- Freelancing: Freelance writing, graphic design, web development, and editing are in high demand. Websites like Fiverr, Upwork, Nexus Notes, and StudySoup are excellent platforms to start your freelance journey.
- Online teaching and coaching: Platforms like Udemy and TeachMe.To allow you to create and sell online courses or offer skills instruction in various fields, such as sports coaching.
- E-commerce: You can sell your own products or resell items on platforms like Etsy, Amazon FBA, or eBay. Print-on-demand services like Etsy and Amazon allow you to create designs for products without needing inventory or business experience.
- Social Media Management: If you have experience in social media management, you can offer your services to businesses or organizations looking to expand their digital presence.
Remember to set clear and specific financial goals for your side hustle income to ensure it aligns with your repayment strategy.
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Refinancing
To refinance, you will need to provide basic information such as your school, income, and loan amounts. You will also need to provide proof of income, such as a pay stub, W2, 1040, or 1099 form, as well as other documents like proof of residency, graduation, and government-issued ID. A credit check will also be performed.
If you have federal student loans, refinancing to a private loan means losing access to protections available only to federal loan borrowers, such as income-driven repayment plans. Therefore, think carefully before refinancing federal student loans.
You can refinance both federal and private loans, and it carries no fees or costs. However, to qualify for refinancing, you typically need a credit score of at least the high 600s and a steady income. If your income and credit score are not sufficient, you may need a co-signer with good credit and income.
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Frequently asked questions
If you have a low income, you can apply for an income-driven repayment (IDR) plan, which bases your monthly payment on your income and family size. Depending on your income, your monthly payment could be as low as $0, and you can still qualify for loan forgiveness.
The Public Service Loan Forgiveness (PSLF) program is designed for borrowers working full-time for the government or qualifying 501(c)(3) nonprofit organizations. After 120 payments (which equals ten years), the remaining balance on your federal student loans is forgiven.
Aside from IDR plans, you can speed up repayment by choosing a new loan term that is shorter than what's left on your current loans. You can also start a side hustle to increase your income, such as freelancing or renting out your car.
