Why did your student loan payment increase? The answer may lie within the fine print of your loan agreement … or it could be due to a rising interest rate environment.
Depending on your repayment plan and the structure of your loan, your student loan payment can go up for various different reasons. But the good news is that there are ways that you can manage — and even reduce — your monthly bill.
- Why did my student loan payment increase?
- How to lock in your monthly payment
- Managing your student loan payments
Why did my student loan payment increase?
Here are four of the most common reasons why your monthly student loan payment may go up:
1. You have a graduated repayment plan for federal loans
If your income was low after graduation and you couldn’t afford your federal student loan payments on a standard repayment plan, you might have signed up for a graduated repayment plan. Like the standard plan, it allows you to pay off your loan over 10 years — but unlike the standard plan, the payments start off low and gradually increase over time.
Presumably, as you progress in your career, you’ll earn more money and be able to afford higher payments. However, your payments increase every two years with a graduated repayment plan, whether you’re earning more money or not.
2. Your salary increased
For those struggling to keep up with their federal loan payments on a small salary, an income-driven repayment (IDR) plan can be a huge help. With an IDR plan, your monthly payments are capped at 10% to 20% of your discretionary income and your repayment term is extended to 20 to 25 years, depending on the plan. This can reduce your monthly payments to make them more manageable.
However, the amount of your payments can rise or fall, based on changes to your net earnings.
You’re required to recertify your IDR plan every year, and that includes providing proof of your current income and any updates on your number of dependents. If you get a raise or a new job with a higher salary, or if you take on a second job, your income will go up and the government will adjust the terms of your IDR plan. This could cause your monthly student loan payment to increase.
3. You have a variable interest rate
All federal student loans have fixed interest rates, meaning the rate stays the same for the life of the loan. However, private student loans are different. When you take out private student debt, you can usually choose between a fixed interest rate or a variable interest rate.
Variable interest loans (also called “floating interest loans”) might have lower interest rates than equivalent fixed loans at first, but the interest rate can change over time, depending on market trends. If your variable interest rate increases, your loan will accrue more interest and you’ll probably have to make a larger payment each month.
LendingTree’s student loan repayment calculator can help you estimate how much interest you’re paying each month, as well as how much of your monthly payment is actually going toward the principal of your loan.
4. You deferred your loans
In some instances, people defer their loans, pausing their monthly payments while they go back to school, search for work or deal with economic hardship. While temporarily deferring student loan payments can prevent you from becoming delinquent on your loans, it can also cause your loan balance to increase.
Depending on the type of loans you have, interest will continue to accrue on your loan during deferment. This is the case with unsubsidized federal loans and most private loans, for example. That growing interest can cause your overall balance to increase and result in a higher total loan cost — once you start making payments again, you could end up with a bigger bill.
How to lock in your monthly payment
If payment fluctuations make it difficult for you to manage your student loans, you can consider ways to get a fixed interest rate and a set monthly payment:
1. Switch to a standard repayment plan
If you have federal student loans and have an IDR or graduated repayment plan, you could still switch back to the standard repayment plan. This will return your monthly bill to a set amount every time.
While your payments might be higher, they’ll stay constant, and since you’re paying off your loans faster, less interest will have time to accrue.
2. Refinance private loans to get a fixed rate
If you have private student loans with a variable interest rate, you can refinance them into a new loan — if you qualify. With student loan refinancing, you take out a new loan for the amount of your old one, paying your old debt off and working with a new lender.
When you refinance, you can choose a fixed interest rate loan and decide to extend or shorten repayment term. By shopping around, you may be able to find a student loan refinance lender willing to give you a better rate, helping you save money.
For more information about managing your loans, see our guide on how to decide if refinancing is for you.
Other options to lower payments
If you’re looking to save money on your student loan payments, there are some small things that you can do that, over time, could add up to appreciable savings.
- Enroll in auto-payments: Many lenders — including the federal government — will reward you for enrolling in auto-pay by offering a small reduction on your interest rate, usually 0.25%. Along with saving money on your interest rate, automatic payments also relieve you of having to remember to pay your bill every month and getting hit with steep penalties if you forget to send it in on time.
- Get rewarded for on-time payments: If you’re diligent about paying your loans on time every month, some lenders will offer a small interest rate reduction, typically between 0.25% and 0.50%. This is another way to develop positive financial habits and reap a benefit at the same time.
Managing your student loan payments
When you’re on a tight budget, there’s no room for fluctuating student loan payments. If you’ve ever wondered why your student loan payments went up, consider those factors that can affect it.
By switching your repayment plan, securing a fixed interest rate or refinancing your debt, you can keep your monthly bill stable. And once you’re happy with your arrangement, you could look into other ways to get out of student loan debt more quickly.
