If you already have a private student loan, there are even more ways to reduce your rate, though some may take time. For example, improving your credit score may take several years. But you can also opt to apply with a creditworthy co-signer, choose a shorter repayment term, take advantage of loyalty programs, and negotiate with your lender.
Millions of people take out student loans to pay for college. And unfortunately, whether you borrow from a private lender or the U.S. Department of Education, they all come with interest rates.
A higher interest rate could mean your loan costs you thousands (or even tens of thousands) more over the life of the loan. But a lower rate could lower your monthly payment or help you pay off your loans faster.
Your options vary depending on whether you have or are getting federal or private student loans. But with thousands of dollars on the line, it’s worth investigating your options for lowering your interest rate.
Ways to Lower Student Loan Interest Rates
Those with private loans have far more options for lowering their interest rates than those with federal loans. They can lower their interest rates from the beginning or take steps while in repayment.
Congress sets the interest rates for federal student loans, and you can’t negotiate them, though there are some ways to lower them once you get into repayment. And for the vast majority of borrowers, federal loans start with lower rates than they could qualify for anyway.
Regardless of the loan type, many of these methods for lowering your interest rates will positively impact every loan you borrow. So it’s a good idea to do them even if you have a federal loan.
1. Improve Your Credit Score
It’s possible to get a student loan with a poor credit score. The federal government doesn’t check your credit at all for federal student loans.
And while they do a credit check for PLUS loans, it’s only to ensure you haven’t defaulted on any prior loans. Your credit score doesn’t affect approval or the interest rate.
But private lenders are very concerned with your credit score. You may still be able to get a loan with an average score, but your interest rate will be much higher.
To score the lowest rates, you must have excellent credit. So if your credit isn’t great or you don’t have a credit history, you need to work on boosting your credit score. Don’t worry. If you’re under 18, you can still take steps to build credit.
Start by checking your credit report to see what’s negatively impacting it. Once you have an idea, you can address any issues.
For example, if you have any past due payments, get caught up. If you have high balances on your credit cards, work on paying them down. As a general rule, you want to maintain balances of no more than 30% of your credit limit on each of your cards.
If you’re a teen just starting to build credit, get a job. It won’t directly impact your creditworthiness, but it does make you look good to creditors.
Then, open a teen-friendly checking account and high-yield savings account and start squirreling away a certain percentage of your weekly pay. You can even ask your parent or guardian to put a bill or two in your name.
Once you’ve saved enough money (or with the help of a responsible adult), you can open a secured credit card. Just make sure you pay the balance in full each month.
Wherever you are on your credit-building journey, you can use a credit monitoring service like Credit Karma or Credit Sesame. Both help you monitor your credit score and give you helpful tips to improve it.
The credit-building process can take time, especially if you have negative actions on your report, such as late payments, missed payments, or defaults. These can take anywhere from two to seven years to fall off or otherwise stop impacting your credit report, even after you’ve caught up or paid off the debt.
But the sooner you get started, the sooner you’ll qualify for lower interest rates.
2. Make Automatic Payments
The easiest way to lower the interest rate on your student loans is to enroll in autopay, which applies to both federal and private loans.
All federal loan servicers and most private lenders offer a 0.25% interest rate reduction for making automatic payments.
While a 0.25% interest rate reduction doesn’t sound like much, every little bit adds up. For example, if you borrowed $40,000 at 6% interest, a 0.25% reduction would save $600 in interest over the life of the loan on a 10-year repayment plan. That’s more than a whole payment.
Autopay is something almost everyone can do. Plus, it ensures you never accidentally miss a payment, potentially getting hit with late fees.
Just ensure you always have enough money in your bank account to cover your monthly payment. Otherwise, you could end up with an overdraft fee.
3. Pay Your Bill on Time
A handful of lenders reward customers for good money habits.
For example, MPower Financing, a private student loan company that specializes in lending to international students, offers a 0.5% rate discount after you’ve made six consecutive on-time payments via autopay. And that’s in addition to its 0.5% autopay discount.
But most lenders don’t automatically lower your interest rate just for being a good customer. That said, if you consistently pay your bill on time, it puts you in an excellent position to negotiate a lower interest rate later.
4. Refinance Private Loans
Refinancing is the process of exchanging your current loans for a new loan with a better interest rate, terms, or both. To qualify, you typically need good credit (a credit score in the high 600s to 700s) and a comfortable cash flow. In most cases, you also need to have graduated.
But it can still be difficult for recent graduates without an established credit history or good-paying job to qualify for the lowest rates. If you’ve been out of school for a while and had time to establish yourself financially, you stand a much better chance.
The best financial situations lead to the best interest rates because lenders see you as less of a risk.
The very lowest rates offered are always variable interest rates. But if you opt for one, you’re the one taking a risk. Variable rates fluctuate with market conditions, so the rate could go up (but it could also go down).
Thus, if you accept a variable-rate loan, you’re gambling the rate won’t rise past what you could have gotten on a fixed-rate loan.
If you want to take the gamble, do a little research first. Search online for the average private student loan interest rates for the current academic year. Then search backward. Are the rates trending up or down?
If you’re borrowing in a high-interest year, a variable rate could be a good idea since you’ll be getting a lower rate than the current fixed rate. But if it’s a low-rate year, rates will likely rise soon.
For example, the 2020-21 rates were at historic lows thanks to emergency measures taken by the Federal Reserve during the coronavirus pandemic. But economists predict rates could be on the rise soon. So it may be wiser to lock in a fixed rate given current market conditions.
Fortunately, you can refinance student loans as many times as you can get approved. Most refinance lenders don’t charge origination fees (a type of processing fee). So you can always refinance again in a few years if you can get a better rate, which is possible if your credit or income improves.
Although you can refinance federal student loans, once you do, you no longer have federal loans. That means you may lose access to federal student loan benefits like:
For that reason, it’s usually best not to refinance federal student loans.
Also, federal interest rates have been historically low over the last decade, especially for undergraduate borrowers. Thus, unless your credit is truly excellent, you’re unlikely to find a better deal than the rate on your federal loans unless you borrowed any loans over 6% interest.
However, if you have private student loans, there’s no reason not to refinance if you can get a better rate.
But compare rates from multiple lenders to ensure you find a loan with the best interest rate and terms you can get. To speed up the process, you can use a tool like Credible, which matches you with prequalified rates from up to eight lenders without it affecting your credit score.
5. Apply With a Co-Signer
Private lenders use formulas to determine the interest rates for refinance loans. Those are based on the student loan borrower’s credit score, history, and income.
If your personal factors don’t qualify you for the best rates, you can up your chances of scoring a low rate by applying with a creditworthy co-signer.
If your co-signer has a higher credit score or significantly higher income than you, the lender is likely to offer you a lower rate. From the lender’s perspective, it makes the overall loan a lower risk.
Just remember your co-signer is equally on the hook for the loan. So if you miss payments, their credit score could suffer. And if you default, the lender will come after them for the balance.
Fortunately, many lenders have co-signer release programs. That allows you to apply to remove the co-signer from the loan contract after you make a required number of consecutive on-time payments, such as 36.
6. Choose a Shorter Repayment Term
If you can swing it, one way to lower your interest rate is to opt for a shorter repayment term. Most refinance lenders offer terms as short as five years — half the length of the standard 10-year repayment plan for federal student loans.
Lenders offer lower interest rates on shorter repayment terms because it’s less risky than longer loan terms. There’s less chance borrowers will default because they’re in debt for a shorter period.
And with a shorter-term loan, lenders aren’t locked into it for as long. That’s especially the case with a fixed-rate loan. They can’t raise the rate on you no matter what happens to market interest rates. So if rates go up in the future, they’re leaving less money on the table.
However, a shorter-term loan means higher monthly student loan payments. To pay off the same sum of money in half the time, you have to pay significantly more each month, even with a lower interest rate.
For example, if you borrowed $20,000 at 6% interest, your monthly payment would be $222 on the standard 10-year repayment plan. If you’re able to refinance at 3% interest on a five-year term, you’ll save $5,083 in interest. But your monthly payment will jump to $359.
So run the numbers and make sure you can afford the payment without stretching your budget too thin. But if you can do it, you’ll save considerable money and be rid of your loan balance twice as fast.
Be aware that although you can’t alter the interest rate on your federal student loans using the same strategy, sticking to a shorter repayment term will still help you save considerably on interest. That’s because the longer you take to repay, the more interest will accumulate.
For example, if you repay $40,000 at 6% over the standard 10-year repayment term. You’ll repay a total of $13,290 in interest. But if you adopt a 20-year repayment term, you’ll repay $28,777 in interest.
7. Take Advantage of Loyalty Discounts
Some lenders, especially those who offer other financial products, offer loyalty discounts. Loyalty programs reward borrowers who have other accounts with the lender, such as a checking or savings account or another loan.
So keep an eye out for this perk when shopping around for refinance lenders. Note these discounts are always on top of the typical 0.25% autopay discount.
A few refinance lenders that offer loyalty discounts include Citizens Bank and Laurel Road, which offer 0.25% interest rate discounts if you have another account, and SoFi, which offers a 0.125% discount if you’re an existing loan customer.
8. Negotiate With Your Lender
While you can’t negotiate your federal student loans, you can do so with a private loan.
And just as you would if you were attempting to negotiate your credit card interest rate, shop around for better rates. Once you have a few offers in hand, call your lender to see if they’ll budge. They might be willing to match rates to keep your business.
On the other end of the spectrum, you may be looking to lower your interest rate because you’re struggling to make the payments. Fortunately, even if you’re unable to qualify for a refinance loan, there may still be hope.
That’s especially true if you’ve missed payments or are in default. If you’re facing such financial hardship the lender is unable to collect the full amount due, it’s likely to work with you to ensure it gets at least something on the loan.
Explain your situation and be clear about what you can afford to pay. Negotiating with lenders isn’t easy, but you may even be able to stop the interest altogether and settle your debt for considerably less than you owe (potentially over 50% less).
Final Word
These interest rate reduction moves aren’t options for all borrowers, especially if all your student loans are federal. But don’t worry. There are still plenty of ways you can cut your student loans costs, even if you keep the same interest rate.
When it comes to student loans, stick to a few basic rules of thumb:
- Always max out scholarships and grants before turning to student loans
- Borrow lower-cost federal direct loans before higher-rate private and PLUS loans
- Don’t borrow more than you anticipate earning as your annual salary your first year out of school
- Stick to the standard 10-year repayment schedule
- Whenever possible, make more than the minimum payment, including putting any cash windfalls toward your loans
That should help ensure you can avoid overwhelming student debt and pay off any existing loans quickly.
Source: moneycrashers.com