For the tens of millions of Americans who borrowed money for college, chipping away at student loan debt probably seems high on the financial priority list. A good place to start is lowering the interest rate you pay on those loans.
If you’re trying to snag a lower interest rate on your student loan, financial experts have a number of tips in their toolkit – from automating your payments to refinancing. Here are seven ways to score a lower interest rate on your student loans and other money-saving tips to help you trim your student loan payments in general.
7 ways to lower your student loan interest rate
The best method for lowering your student loan interest depends on your overall financial picture. Some of the most common ways to lower interest rates are:
- Consider refinancing
- Automate your payments
- Negotiate with your lender
- Boost your credit score
- Work with a co-signer
- Choose your loans carefully
- Borrow equity from your home
1. Consider refinancing
If you have a solid credit foundation, are employed and plan to pay off your loan quickly, you should consider refinancing into a lower rate. Refinancing costs have come down markedly due to the coronavirus pandemic, with fixed rates as low as 2.78 percent and variable rates as low as 1.89 percent.
Don’t be afraid to get strategic and refinance multiple times. “There are no prepayment penalties on federal or private student loans. And most private student loans do not charge any kind of a fee to originate a new loan. So, nothing stops you from refinancing your student loans into a private refinance multiple times,” says Mark Kantrowitz, publisher of PrivateStudentLoans.guru.
However, if you have federal student loan debt, be sure to weigh the pros and cons of refinancing into a private loan. By doing so, you give up federal borrower protections, like the automatic forbearance period through the end of 2020. That trade-off may not be worth it.
Takeaway: With the decrease in interest rates, it’s possible to save quite a bit of money on student loans by refinancing. But weigh your options carefully before proceeding, particularly if you have federal student loans. By refinancing into a private loan, you’ll lose many key protections.
Who this helps the most: Those who have a solid credit score, are employed and are seeking to pay off their loan quickly.
2. Automate your payments
One of the simplest ways to lower your interest rate is by automating your payments. Many lenders offer discounts of 0.25 percent to 0.5 percent if you set up autopay from a checking or savings account.
It might not sound like much, but it can all add up in the end, saving you about $25 a year if you have an interest rate of 5 percent on a balance of $10,000.
“This may be the simplest and quickest way to realize a reduction in interest and requires little effort on the borrower’s part,” says Jon Long, an attorney with Long, Burnett, and Johnson who specializes in student loan debt.
Takeaway: This is a straightforward option for borrowers with no downside. The first step is to check with your loan servicer to see if your loan qualifies.
Who this helps the most: Borrowers who are confident that they’ll have enough money in their bank account each month when the payment will be deducted.
3. Negotiate with your lender
If you borrowed at the private level or have already refinanced, you might be able to shop around for a more competitive rate and present it to the lender you’re already working with. Although it’s not a guarantee, the lender might be willing to match that rate to keep your business.
Takeaway: Negotiation with your lender for better interest rates is possible for those who have private student loans.
Who this helps the most: Those who obtained their student loans during times of higher lending rates.
4. Boost your credit score
Having a solid credit score is an important foundation to any type of financial goal. That’s especially true when it comes to student loan borrowing, particularly from private lenders. You may still be able to get a student loan with a bad credit score, but your rates will be higher.
“For private loans, the higher your credit score, the lower the interest rate,” says Michael Micheletti of Freedom Financial Network. “For federal loans, however, boosting your credit score will not matter, because most of these loans do not require a credit check. That includes all federal loans for undergraduates. And while federal Direct PLUS loans require a credit check, rates are not affected by credit scores.”
To boost your credit score, be mindful of paying all of your credit card bills on time and maintaining a balance of less than 30 percent of your credit line.
Takeaway: A good credit score can help you lock in a lender’s most competitive rate.
Who this helps the most: Those taking out a private student loan or refinancing their student loans with a private lender.
5. Work with a co-signer
If you have no credit built up or if you have a low score, consider working with a parent or relative who has a more established record. Adding a co-signer who has good credit improves your overall credit picture and may help you score a lower rate.
“From the lender’s perspective, if one of the two people is low risk because he or she has good credit and the means to repay, the overall loan is lower risk,” says Long.
Just keep in mind that your co-signer will be equally responsible for the loan, meaning their credit score could suffer if you fail to make timely payments.
Takeaway: Having a co-signer can be helpful if your credit is less than ideal and you want to obtain the best interest rate possible. However, both you and the co-signer need to be fully aware of the responsibility involved.
Who this helps the most: Those whose credit score is not strong enough to obtain the most competitive interest rates on their own or who have minimal credit history.
6. Choose your loans carefully
For federal borrowers, there are generally three types of loans: Direct Subsidized and Direct Unsubsidized, which are sometimes referred to as Stafford Loans and Direct Stafford Loans, and Direct PLUS Loans (which also includes parent PLUS loans). Direct Subsidized and Unsubsidized Loans have lower interest rates than Direct PLUS Loans, but most colleges and universities cap how much you’re able to take out. Private student loans may also have caps, and your interest rate is determined by your credit score.
Deciding which loans to take out to fund your education is one of the hardest parts about starting school. Review the terms and interest rates associated with each loan option available to you and be sure to max out the loan with the lowest interest rate first, which will help minimize the amount of debt you accumulate to pay for your education.
“A smart borrower will maximize the amount of the loan with the lower interest rate before moving to one with an increased interest rate,” says Long. While a difference of 1 or 2 percent may not seem like a lot on paper, remember that you will typically make 120 loan payments — which means that borrowing as much as you can with the lowest interest rate could save you thousands of dollars.
Takeaway: Take the time to methodically review the interest rates associated with your loan options and plan strategically how you’ll borrow money, relying as much as possible on the funds from the loans with the lowest interest rates.
Who this helps the most: Those who are just beginning their college education and still have the opportunity to compare various loans offers.
7. Borrow equity from your home
This is perhaps one of the trickiest options for lowering your student loan interest rate. If you own a home and have student loan debt, it is possible to “refinance” that debt with a lower interest rate by taking out a home equity line of credit (HELOC) and using the cash to pay off the educational debt.
HELOCs and mortgage rates have come down significantly in 2020 from what were already record lows a year earlier. Still, it’s important to look carefully at your finances and determine whether this is the right step for you, as there are many drawbacks.
“If you do not pay, the lender can take the collateral and sell it to pay the loan,” says Long. “Carefully consider the risk to your home that you’re undertaking. If you don’t pay a private student loan, it is very unlikely and a lot more difficult for the lender to threaten your home. If you don’t pay a home equity line or second mortgage, your home may be lost.”
Takeaway: It is possible to obtain a lower interest rate by paying off your student loan debt using a home equity line of credit, but it’s important to weigh the benefits and drawbacks first.
Who this helps the most: Those who have significant equity in their home and a reliable source of income to make the HELOC payments.
What to do if you can’t get a lower rate
Sometimes these money moves aren’t a viable option for student loan borrowers. But don’t fret – there are still ways you can trim your student loan costs in general, even with the same interest rate.
Deduct interest payments from your taxes
You might be able to deduct a portion of your interest payments from your topline earnings, which would therefore reduce your income and ultimately how much you have to pay in.
For individuals whose adjusted gross income (AGI) is less than $70,000 (or married filers whose income is less than $140,000), you can deduct $2,500 worth of interest payments, according to the IRS. Phaseouts occur for single filers who make between $70,000 and $85,000 and joint filers earning between $140,000 and $170,000.
Check for cash back specials or rebates
Though it’s not knocking down your interest rate, cash back specials and refinancing rebates offered through many servicers and lenders in the private space could help you spend less money in the long run – if you use the cash right.
Credible, for instance, will offer you a $200 gift card if you’re able to find a lower rate than what it offers you.
Adjust your payment plan
Experimenting with different payment plans is a sure way to maximize your money and pay less in interest over time, even if the rate at which you’re borrowing stays the same. That can include steps such as selecting a shorter repayment plan or making multiple payments a month. Be sure to also prioritize paying off the loans with the highest interest rate.
By reducing the loan in regular increments, over time you’ll lower how much interest you pay in each installment.
“Many people find a way to bring in extra income, anything from online tutoring or yard work to a traditional part-time job to put toward student loan debt,” says Micheletti. “If you can pay more, make sure to contact your lender or servicer and request that your extra payments go toward the outstanding balance, versus your next payment.”
Lowering your student loan interest rate is just one way to maximize your payments; it’s not the be-all and end-all. Being savvy with your money is what ultimately saves you money in the long run.
And even though student loan debt feels like a heavy burden, don’t let it derail your other financial goals, such as saving for retirement and building up an emergency fund.
If, despite all your efforts, you can’t seem to obtain a lower interest rate than you have, it’s a good idea to try and figure out why.
“Maybe you already have a great rate. Maybe it’s because you have a dinged credit report or poor earnings,” says Long. “Once you understand the why, you can choose a course of action to either mitigate the cause — perhaps by rehabilitating your credit or seeking a co-signer — or accept you have the best you will get.”