Are your student loans making your pockets hurt?
There are probably a million other things you’d rather put your money toward than student loans.
Many graduates don’t realize that a large portion of their monthly student loan balance goes to paying off accrued interest rather than eliminating the debt on the actual loan.
By lowering your interest rates, you can cut down on your monthly payments and get closer to paying off your student loan debts.
But how do you lower student loan interest? You came to the right place for the answer.
How Low Can You Go? A Note on Fixed Interest Rates
Federal student loans come with fixed rates, and these rates are the same for everyone. There’s very little you can do to adjust the interest rate without refinancing, though some lenders do offer discounts if you sign up for autopay. If you set up automatic monthly payments from your bank account to your lender, you may get a small reduction of 0.25% or 0.50%.
Luckily, federal student loan interest rates tend to be on the lower end.
For the 2022 – 2023 school year, federal student loan interest rates will be set at 4.99% for all undergraduates. Congress sets the interest rates each year. So, if you have subsidized or unsubsidized student loans, grad PLUS or parent PLUS loans, you can’t request a lower rate from the federal government.
On the other hand, this means that Congress could set a lower interest rate, but you never know when that could be.
How To Lower the Interest Rate on Private Student Loans
Private student loans get a bad rap, but they’ve got some perks.
If you’ve taken out private student loans, you have a lot more flexibility when it comes to lowering your interest rates. The initial rate you get for your private student loans will depend on a number of factors, including:
- The borrower’s credit score (or the co-signer’s credit score)
- The length of the repayment term
Even though private student loan interest rates are flexible, you can’t just haggle with your lender to get a lower rate. Instead, stick to one of the following methods to score a lower interest rate:
Choose Your Loans Wisely: Power Up
Getting a lower interest rate all starts with choosing the right loans.
Besides picking a major and waking up in time for that 8:00 a.m. calculus class, figuring out which loans to take is one of the harder parts of college.
To find the lowest interest rate before you borrow, take the time to compare multiple lenders.
While a difference of 1% – 2% may not look like much on paper, it can add up to thousands of dollars in the long run. That’s not pocket change!
Have a loan eye for the wise buy: Research your lenders
Shopping for a private lender is never going to be as fun as shopping for a new fall wardrobe, but here are some tips to make the search easier:
- Research the lender’s reputation by using a third-party tool, such as the Better Business Bureau
- Take advantage of prequalification offers. You’ll be able to see what interest rate you qualify for without the lender doing a hard check on your credit report
- Make sure the lender accepts your school
- Browse special benefits that will make your loans more manageable after graduation (For example, your lender may offer discounts on automatic payments.)
Set up auto payments for a discount
Setting up auto payments might be the easiest way to lower your student loan interest rates. Like we said, if you agree to set up auto payments with your private lender, you can score a lower interest rate by 0.25% or 0.50%. And don’t forget that you can do this for both private and federal student loans.
Another huge benefit of setting up automatic payments? It’ll ensure that you never accidentally miss a payment. Just make sure you have enough money in your bank account each month so you don’t get hit with overdraft fees.
Refinance your student loans to make them cheaper
If you’re employed, have a solid credit foundation and plan to pay off your student loans quickly, refinancing is another great option for lowering your interest rate.
When you refinance, you’ll work with your current lender to trade your existing student loans for private ones. This new loan will be completely different from your old loan. You’ll have a new interest rate, a new repayment term and a new monthly payment amount.
To qualify for student loan refinancing, you’ll need:
- A good to excellent credit score: At a minimum, your credit score should be in the high 600s.
- A decent income: You’ll need to have enough money coming in to afford your student loans and other bills without feeling too much of a pinch in your wallet.
The better your financial situation is, the lower the interest rate your lender will likely offer. If you decide that refinancing is the right move, the next step is to compare student loan refinancing companies to find out the lowest rate you qualify for.
Make use of loyalty discounts
While most lenders offer discounts for setting up automatic payments, loyalty discounts are a bit harder to come by. To qualify, you typically need to have taken out a loan with the company in the past.
For example, your lender may offer you a loyalty discount if you took out a personal loan with them previously to pay for a medical bill or take care of a home repair. If you have an investment or savings account set up with your lender, this may also qualify you for the discount.
Even if you haven’t worked with your lender previously, some companies will apply the loyalty discount if your co-signer has worked with them in the past. To learn which options are available, check with your lender.
Work with a co-signer
If you don’t have any credit built up and you have a low credit score, consider working with someone (such as a parent or relative) who’s in a better financial position.
If your co-signer has a good credit score, your lender may offer you a lower interest rate. Keep in mind that your co-signer will hold equal responsibility for paying back the loan. So, if you fail to make timely payments, it could cause their credit score to suffer.
Improve your credit score
Having a solid credit score will set you up for financial success across the board, but it’s especially helpful when you’re borrowing student loans from private lenders.
While you can still get a private student loan with bad credit, your interest rates are going to be a lot higher. Here are some quick tips to help boost your credit score:
- Pay all of your credit card bills on time
- Maintain a balance on your credit line of 30% or less
- Review your credit report to make sure there aren’t any errors
- Catch up on past due accounts
- Limit how frequently you open new accounts
Negotiate with your lender: Worth a shot, right?
Okay, we know we mentioned earlier that haggling with your lender isn’t the best strategy to get a lower student loan interest rate. But negotiating a lower rate is possible if you approach it the right way.
Shop around for a more competitive rate, and if you find one, present it to your lender. While there’s no guarantee, your lender might be willing to match the rate so they don’t lose you as a customer.
Student Loan Interest Rate Blues: Other Ways to Save Interest
While all of these tips are great ways to get a lower interest rate, sometimes they don’t work for all borrowers. If these options aren’t panning out, you can still save on interest by:
Optimizing your budget
Okay, we know how annoying it can be when people tell you to “just save more money!” while you’re struggling to pay off your student loans.
BUT, there are a couple of tricks you can use to optimize your budget, allowing you to save money without having to cancel your favorite subscription service.
Here are two methods you can use to optimize your budget:
- The debt avalanche method: Focus on paying off your high-interest rate loans first while still paying the minimum on your lower interest rate loans. Once you pay off one high-interest loan, move onto the next one.
- The debt snowball method: Pay off your smallest debts first and then tackle the bigger ones. Many people prefer this method because it gives them a quicker sense of progress and motivates them to keep chipping away at their debt.
Choosing the right repayment plan
For federal student loans, the standard repayment plan length is ten years. While you may be tempted to switch to an income-driven repayment plan, keep in mind that these often lead to higher interest rates.
For private student loans, consider refinancing to a shorter loan term to qualify for a lower interest rate.
Paying off your loans faster
We realize this is a lot easier said than done. But if you pick up a side hustle or rework your budget, you can pay off your loans early and save on interest while you do it.
If you pay more than the minimum monthly amount, ask your lender to apply the extra payments to your outstanding balance instead of your next payment.
Make Low Interest a High Priority
You don’t have to settle for your current student loan interest rate.
By putting these strategies to use, you can chip away at your interest and save some money on your student loans.
The Short Version
- While federal student loan interest rates don’t allow for much wiggle room, private student loan interest rates are more flexible
- Using certain strategies, you can get a lower interest rate on your private student loans
- If you don’t qualify for a lower interest rate, there are still things you can do to make your student loan debt more manageable
Federal Student Aid Information Center. “Understand how interest is calculated and what fees are associated with your federal student loan.” Retrieved January 2023 from https://studentaid.gov/understand-aid/types/loans/interest-rates
Federal Student Aid Information Center. “Choose the federal student loan repayment plan that’s best for you.” Retrieved November 2021 from https://studentaid.gov/manage-loans/repayment/plans