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? Lowering the interest rate you pay on those funds.
“For millennials, much more so than Generation X and baby boomers, student loans have been a huge impediment to getting access to other areas of wealth building,” says Megan Gorman, managing partner at Chequers Financial Management. “You want to try to find that balance of mitigating the debt and not having it take over your life.”
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 tips on how to score a lower interest rate on your student loans, including how to determine whether it’s the right path for you, and other money-saving tips to help you trim your student loan payments in general.
How student loan interest rates work
Student loan interest rates are in their own little world compared to other types of borrowing. How much you pay to take out your educational loan depends on a number of factors, including whether you borrowed funds at the federal or private level and whether your interest rate is fixed or variable.
The majority of student loan borrowers have federal debt, which comes with a fixed interest rate set by Congress once a year. Lawmakers determine that interest rate based on a margin on top of the 10-year Treasury yield.
Private lenders have more leeway when it comes to setting their borrowing rates. Many adjust them depending on broader macroeconomic forces, such as the Federal Reserve’s decisions (which currently have rates pegged at near-zero until 2022). The prime rate can also influence how much you pay to borrow, as well as the 10-year Treasury yield. But at the heart of the rate you’re given is your credit score and history. Private lenders typically reserve the cheapest costs for those who appear more established and reliable.
How to get a lower rate on your student loan
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 your student loans
Even if you borrowed funds for your education a little over a year ago, you can likely stand to save a significant chunk of money in interest by refinancing.
Borrowing costs have come down markedly over the past year, even for student loans, as the benchmark 10-year Treasury yield tumbled to record lows. If you’re carrying student loan debt, you can refinance into a fixed rate for as low as 2.88 percent. That would save you about $217 a year if you have a $10,000 loan balance and initially borrowed those funds at an interest rate of 5.05 percent (where rates were in 2018), for example. Variable rates are trending as low as 1.99 percent.
Don’t be afraid to get strategic and refinance multiple times, says Justin Chidester, CFP, founder of Wealth Mode Financial Planning who specializes in helping clients maximize their student loan payments for a faster payoff. Student loan refinancing has few or no origination fees, meaning it won’t cost you as much as refinancing a mortgage multiple times would, he says. If you have a solid credit foundation, are employed and plan to pay off your loan quickly, you should also consider refinancing into that lower variable rate.
But for those with federal student loan debt, be sure to weigh the pros and cons of refinancing into a private loan. “If you consolidate federal student loans onto a secured and private loan, where you have actual collateral and perhaps a co-signer, that’s not apples-to-apples,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “Even in doing that, you give up a lot of the protections that federal loans have that no form of borrowing does.”
If you’re thinking about refinancing right now but have little to no credit history built up, you might not be able to find a lower student loan rate than what you already have, McBride says. But he adds that if you borrowed when rates were higher and “now have established income and credit to the point where you can get a private loan at a very low interest rate,” it might be worth refinancing.
2. Automate your payments
One of the simplest ways to lower your interest rate is by automating your payments. Federal borrowers can shave 0.25 percentage points off of their student loan interest rate when they automatically link to their checking account. Many private lenders also offer similar deals.
3. Negotiate with your servicer, 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, Chidester says.
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: It can help you lock in a lender’s most competitive rate.
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.
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 with good credit improves your overall credit picture and may help you score a lower rate. 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.
6. Choose your loans carefully
Deciding which loans to take out to fund your education is one of the hardest parts about starting school. But if you’re a federal borrower, be sure to max out the loan with the lowest interest rate first.
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 then 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.
7. Borrow equity from your home
Though it’s perhaps one of the trickiest options, Gorman says that some of her clients who own a home and have student loan debt have been able to “refinance” their loans with a lower rate by taking out a home equity line of credit (HELOC) and using the cash to pay off their educational debt. HELOCs and mortgage rates have come down significantly in 2020 from what were already record lows a year earlier.
Look carefully at your finances and determine whether this is the right step for you. If you’re married, for example, you would be held responsible for your spouse’s student loan debt if you refinanced them through this method.
“The downside to this is that the student loan debt might’ve been for a shorter period of time, so you might be paying the debt over a longer period,” Gorman says. “But you might be able to get the debt at a lower rate, based on where mortgage rates are today.”
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 manage to trim your student loan costs in general, even with the same interest rate.
1. 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.
2. 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 bonus if you’re able to find a lower rate than what it offers you. Sometimes bloggers in the personal finance space can even get you a cash bonus if you apply to refinance through their link, rather than directly through the lender, Chidester says.
“The best thing is to turn it around and pay it toward your loan,” he says.
3. Adjust your payment plan
Experimenting around 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.
“If you’re knocking them down in little, fast increments, you’re actually lowering overtime how much interest is involved in each payment,” Chidester says.
The bottom line
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 hundreds of dollars 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.
“True financial planning is about taking all of your financial issues and prioritizing appropriately so you’re maximizing,” Gorman says. “There’s so much rhetoric about paying down debt, and it’s important because debt is horrible, but certain debt – mortgage and student loan – you can afford to be strategic on.”
Featured image by Monkey Business Images of Shutterstock.