For the tens of millions of Americans who borrowed money for college, chipping away at student loan debt is probably high on the financial priority list. A good place to start is reducing 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. You can also sign up for a Bankrate account to see how rates are trending with our daily rate trends.
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:
- Refinance your student loans
- Automate your payments
- Take advantage of loyalty discounts
- Negotiate with your lender
- Boost your credit score
- Work with a co-signer
- Choose your loans carefully
1. Refinance your student loans
Best for: Those who have a solid credit score and want to pay off their loan quickly
If you have a solid credit foundation, are employed and plan to pay off your loan quickly, you should consider refinancing your student loans into a lower interest rate. Refinancing costs have come down markedly due to the coronavirus pandemic, with fixed rates as low as 2.25 percent and variable rates as low as 1.88 percent. The higher your credit score, the lower rates you’ll be offered, so take steps to improve your credit score before refinancing.
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 Sept. 30, 2021. That trade-off may not be worth it.
2. Automate your payments
Best for: Borrowers who have predictable income
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 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.
3. Take advantage of loyalty discounts
Best for: Those who have taken out loans with a company in the past
While almost all major lenders offer discounts for autopay, loyalty discounts are harder to come by. However, combined, these discounts can lower your APR significantly. Loyalty discounts reward borrowers who have other accounts with the lender — for instance, a savings account or another student loan. SoFi is one lender that offers a “member discount” if you take out a student loan after taking out a personal loan or an investment account.
Even if you don’t hold another account, some companies will apply the loyalty discount if your co-signer does. To learn what’s available, check with your lender.
4. Negotiate with your lender
Best for: Those who got their student loans during high-interest-rate environments
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.
5. Boost your credit score
Best for: Borrowers shopping around with private lenders
Having a solid credit score is an important foundation for 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.
6. Work with a co-signer
Best for: Those with a low credit score or a short credit history
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.
7. Choose your loans carefully
Best for: Those who are just beginning their college education
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 there is a cap on 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.
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.
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 reduce your income and ultimately how much you have to pay.
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 up to $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. The student loan interest deduction is an above-the-line exclusion from income, so you can claim the deduction even if you don’t itemize.
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. If, despite all of your best efforts, you can’t seem to obtain a lower interest rate than you have, it’s a good idea to find out why. Your credit score may be holding you back, and improving that score will help you not only with your student loans but also with other types of credit in the future.