On average, Class of 2020 graduates who took out loans left college with $29,927 in student loan debt. That in itself is a lot to digest. But with an interest rate of 5.8% (the average student loan interest rate among all existing borrowers) and a 10-year repayment plan, you’ll end up paying a total of $39,510 for your student loan.
With thousands of dollars at stake, learning how to get a lower interest rate on student loans could save you a lot of time. Options may vary depending on the type of student loan you have and your current rates. Keep reading to learn more about your choices.
Federal vs Private Student Loans
First, it’s important to understand that your options for getting a lower interest rate on your student loan will depend on the type of loan you have.
With federal student loans, for example, consolidating them through the Department of Education will result in a slightly higher, not lower, interest rate. In effect, the new rate is the weighted average of the interest rates on the consolidated loans, rounded to the nearest eighth of 1%. Additionally, rates are set by Congress, so there is no wiggle room for negotiation. For the most part, your best bet is to refinance your loans with a private lender.
Even then, federal student loans generally have lower interest rates, especially for undergraduate students. So unless your credit history is excellent and you have a high income, you might be stuck with what you have. Additionally, if you refinance your federal loan with a private lender, you waive any federal loan forgiveness or loan forbearance programs.
With private student loans, on the other hand, you’ll have more options to work with your current lender or a new lender to save on interest, reduce student loan payments, and more.
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How to Lower Student Loan Interest Rates
Getting a lower interest rate on student loans will not only save you money on interest charges, but it can also help you lower your monthly payments and even pay off your student loan debt more. early. Here are some of the best ways to lower your student loan interest rate.
Set up automatic payments. On private and federal student loans, lenders and loan servicers often offer a rate reduction if you set up automatic payments. Most discounts reduce your rate by 0.25 percentage points, but some go as high as 0.5.
It may not seem like much, but the savings can add up over time. For example, paying an interest rate of 5.55% on $29,927 of student debt instead of 5.8% will save you $447 over 10 years.
“It’s a no-brainer, and it will make your life easier since you won’t have to worry about missing a payment,” says James Lambridis, Founder and CEO of DebtMD. “Just make sure you have enough money in your bank account each month to cover the payment.”
Look for other discounts. Depending on the lender, you may be eligible for further discounts on your student loan interest rate.
For example, MPower Financing offers a 0.5 rate discount after making six consecutive payments on time via autopay, and this is in addition to its 0.5 autopay discount.
Other lenders, including Citizens Bank, may offer a 0.25 (or more) loyalty discount if you have an existing relationship, such as a bank account or other loan.
Negotiate with your lender. If you have private student loans, you may be able to negotiate a lower interest rate with your lender. This is especially true if you’re struggling to meet your monthly payments or if you’re considering refinancing and want to give your lender a chance to match you.
Of course, there’s no guarantee that your lender will accept a lower interest rate for student loans, but it’s worth a try. “Borrowers who are experiencing financial difficulties may be able to obtain a reduction in short-term interest rates in extreme circumstances,” says Mark Kantrowitz, an independent financial aid expert. “The lender is more likely to offer forbearance or partial forbearance than to reduce the interest rate.”
Refinance your student loans. One of the best ways to maximize your savings on your student loan repayment plan is to refinance your debt with a new lender. Depending on the health of your credit and your financial situation, you could significantly reduce your interest rate.
To give you an idea of the potential savings, let’s say you qualify to reduce your interest rate from 7% to 4%. With a principal balance of $29,927, you’ll save $5,338 in interest over 10 years.
“You also have the option of opting for a variable rate loan, as opposed to a fixed rate,” says Lambridis. “Variable rates are generally lower than fixed rates, but they carry the risk of an increase.” As such, most people are better off with a fixed interest rate.
If you want to know what your savings might look like, most of the best student loan refinance companies allow you to be prequalified before submitting a formal application. This process does not involve firm credit checkand no commitment is required to get a quote.
You can even seek help from companies like Juno, which aggregate student loan borrowers and negotiate with lenders on their behalf for lower refinance interest rates.
Get a co-signer. If you can’t qualify for a lower interest rate through refinancing on your own, consider asking a loved one to apply with you as a co-signer. If that person’s credit and income is in excellent shape, it can increase your chances of being approved and getting a low rate.
In many cases, lenders even have co-signer release programs, allowing you to remove your co-signer from the loan after meeting certain payment and credit requirements.
Remember that if a parent or partner co-signs your loan application, the loan will show up on the co-signer’s credit report and could potentially hurt their chances of getting credit if needed. Also, if you miss a payment, your co-signer is legally responsible for paying what you owe. If the co-signer fails to do so, it could hurt both of your credit scores.
Build your credit. If you don’t have someone who can or wants to co-sign, take the time to work on improve your credit report so that you can benefit from a lower interest rate.
This process can take time, especially if you have negative items on your credit report. Use a free credit monitoring service like the one offered by Experian to review your credit report to get an idea of what improvements you can make.
Possible actions you can take include paying off credit card balances, catching up on past due payments, disputing inaccurate credit report information, and adding as Authorized user.
How to reduce student loan payments
Lowering your interest rate may automatically lower your monthly payments, but it’s not always possible to qualify for a lower rate.
If you want to know how to reduce student loan payments with or without lower interest rates, here are some options:
- Opt for an income-driven repayment plan. If you have federal student loans, you may be able to get one of four income-based repayment plans. These plans reduce your monthly payment to 10% to 20% of your discretionary income and also extend your repayment term to 20 or 25 years. After your term ends, any remaining balance will be forgiven.
- Refinance with a longer repayment term. Even if you can’t get an interest rate lower than what you’re currently paying, refinancing your longer-term student loans can significantly lower your payment. For example, if you were to refinance $29,927 in student loans at the same rate of 5.8% with a term of 20 years instead of 10 years, your monthly payment would drop from $329 to $211. Of course, you’ll also end up paying $11,122 more in interest, so consider all of your options carefully before deciding on this one.
- Request a loan modification. If you have private student loans and are having trouble making your payments, you can request a change to your payment plan to stay current. Loan modifications can include lower payments, lower interest rates, or both, and while you end up paying more in the long run, it can make your life less stressful while you work to get back on your feet financially. .
Plus, while it won’t reduce your monthly payment, take advantage of the student loan interest deduction on your tax return each year can save you money.
“The student loan interest deduction is a superior exclusion from income, meaning you don’t have to itemize to claim the deduction,” Kantrowitz says. “It’s actually a discount on the interest rate, equal to the borrower’s marginal income tax rate.” You can deduct up to $2,500 in student loan interest paid throughout the year on qualifying loans.
Whether you’re looking to get a lower interest rate, payment, or both on your student loan, the important thing is to be proactive in researching your options and finding the one that best suits your current financial situation and to your long-term goals.