Ways to Lower Your Student Loan Interest Rate

On average, class of 2021 graduates who took out loans left college with $29,719 in student loan debt. On its own, that’s a lot to stomach. But with a 5.8% interest rate (the average student loan interest rate among all existing borrowers) and a 10-year repayment plan, you’d end up paying a total of $39,235 for your student loan.

With thousands of dollars on the line, learning how to get a lower interest rate on student loans could save you big time. Options can vary, depending on the type of student loans you have and what your current rates are. Keep reading to learn more about your choices.

Federal vs. Private Student Loans

First, it’s important to understand that your options for securing a lower student loan interest rate will depend on the type of loans you have.

With federal student loans, for instance, consolidating them through the Department of Education will result in a slightly higher interest rate, not a lower one. That’s because the new rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. Also, rates are set by Congress, so there’s 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 tend to have lower interest rates in general, especially for undergraduate students. So unless your credit history is in stellar shape and you have a high income, you may be stuck with what you have. Plus, if you refinance your federal loan with a private lender, you forgo any federal loan forgiveness or forbearance programs.

With private student loans, on the other hand, you’ll have more opportunities to work with your current lender or a new one to save on interest, lower student loan payments and more.

How to Lower Student Loan Interest Rates

Scoring a lower student loan interest rate will not only save you on interest charges, but it can also help you reduce your monthly payments and even pay off your student loan debt sooner. Here are some of the top ways to lower your interest rate on student loans.

Set up automatic payments. On both private and federal student loans, lenders and loan servicers often offer a rate discount if you set up automatic payments. Most of the discounts lower your rate by 0.25 of a percentage point, but some go as high as 0.5.

That might not seem like a lot, but the savings can add up over time. For example, paying a 5.55% interest rate on $29,719 in student loan debt instead of 5.8% will save you $443 over 10 years.

“This is a no-brainer, and it will actually make your life easier since you won’t need 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 able to qualify for other discounts on your student loan interest rate.

For example, MPower Financing 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 automatic payment discount.

Other lenders, including Citizens Bank, may offer a 0.25 loyalty discount if you have an existing relationship, such as a bank account or another loan. You can earn another 0.25 discount when you set up autopay.

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 keep up with your monthly payments or if you plan to refinance and want to give your lender a chance to match.

Of course, there’s no guarantee that your lender will agree to a lower student loan interest rate, but it’s worth a try. “Borrowers who are experiencing financial hardship may be able to obtain a short-term interest rate reduction in extreme circumstances,” says Mark Kantrowitz, an independent financial aid expert. “The lender is more likely to offer a forbearance or partial forbearance than reduce the interest rate.”

[CALCULATE: Use Our Free Loan Calculator to Estimate Your Monthly Payments.]

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 your credit health and financial situation, you could reduce your interest rate significantly.

To give you an idea of the potential savings, let’s say you’re eligible to reduce your interest rate from 7% to 4%. With a principal balance of $29,719, you’d save a whopping $5,300 on 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 typically lower than fixed rates but do come with the risk of increasing.” As such, most people are better off with a fixed interest rate.

If you want to find out what your savings might look like, most of the top student loan refinance companies allow you to get prequalified before you submit an official application. This process doesn’t involve a hard credit check, and there’s no commitment required to get a rate quote.

You can even enlist the help of companies like Juno, which pool student loan borrowers together and negotiate with lenders on their behalf for lower refinance interest rates.

[Read: Best Student Loan Consolidation and Refinance Companies.]

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 are in excellent shape, it can increase your odds of getting approved and qualifying for a low rate.

In many cases, lenders even have co-signer release programs, allowing you to remove your co-signer from the loan after you meet certain payment and credit requirements.

Just keep in mind 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 his or her chances of getting credit when needed. Also, if you miss a payment, your co-signer is legally responsible for paying what you owe. If the co-signer doesn’t, it could damage both of your credit scores.

Build your credit. If you don’t have someone who can or wants to co-sign, take some time to work on improving your credit history so that you can qualify for 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 Experian offers to review your credit report to get an idea of where you can make improvements.

Possible actions you can take include paying down credit card balances, getting caught up on past-due payments, disputing inaccurate credit report information and getting added as an authorized user.

[Read: Best Starter Credit Cards for Building Credit.]

How to Lower Student Loan Payments

Reducing your interest rate can automatically lower your monthly payments, but it may not always be possible to qualify for a lower rate.

If you’re interested in learning how to lower student loan payments with or without a lower interest rate, here are a few options:

Get on an income-driven repayment plan. If you have federal student loans, you may be able to get on one of four income-driven 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 is up, any remaining balance will be forgiven.

Refinance with a longer repayment term. Even if you can’t get a lower interest rate than what you’re paying right now, refinancing your student loans with a longer term can lower your payment significantly. For example, if you were to refinance $29,719 in student loans at the same 5.8% rate with a 20-year term instead of 10 years, your monthly payment would drop from $327 to $209. Of course, you’d also end up paying $11,044 more in interest, so carefully consider all of your options before choosing this one.

Request a loan modification. If you have private student loans and you’re having trouble making payments, you could request a modification to your payment plan to stay current. Loan modifications can include lower payments, lower interest rates or both, and while you’ll end up paying more in the long run, it can make your life less stressful while you work on getting on your feet financially.

Also, while it won’t reduce your monthly payment, taking advantage of the student loan interest deduction on your tax return every year can save you some money.

“The student loan interest deduction is an above-the-line exclusion from income, meaning you don’t have to itemize to claim the deduction,” says Kantrowitz. “It’s effectively 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 eligible loans.

Whether you’re looking to get a lower student loan interest rate, payment or both, the important thing is to be proactive about researching your options and finding the right one that best fits your current financial situation and your long-term goals.

[Read: Know These 7 Above-the-Line Tax Deductions.]

More from U.S. News

Private Student Loans vs. Federal Student Loans: What’s the Difference?

Survey: Nearly a Third Owe More Than $30,000 on Student Loans

Do Student Loans Count as Income?

Ways to Lower Your Student Loan Interest Rate originally appeared on usnews.com

Update 03/03/23:

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