- There are many strategies to use to get a lower interest rate on your student loans.
- Some strategies work well for those struggling, while others are best for those with a good job and credit score.
- Options exist to get lower interest rates on federal and private student loans.
No matter what your financial circumstances are, chances are pretty good that one of the tips described below will help you get a lower interest rate on some or all of your student loans.
If you have just been paying your student loan bills as they arrive, the odds are pretty good that the tactics outlined below can save hundreds or even thousands of dollars on your student loans with minimal effort.
Sign Up for Auto-Debit or Monthly Automatic Withdrawal
Auto payments are easy to sign up for… but do you trust your lender?
This route is the low-hanging fruit. Signing up for automated payments saves .25% interest with pretty much every student loan company. Some lenders even offer a .50% reduction if you open a checking account. Saving a fraction of a percent in interest may not seem like much, but it can add up. If you have $40,000 in student loans, that quarter percent savings is worth $100 per year. Not exactly huge savings, but a decent reward for minimal effort.
Even though this is an easy move that pretty much every borrower can do, we don’t recommend it for everyone. There are a couple of circumstances where it is best to stick with manual payments.
You can’t trust your lender – The automatic payments give your lender the green light to take money out of your checking account. There is an element of danger here. This is especially true if you are on a variable-rate repayment plan, or your monthly payments may change for some other reason. Taking out a fixed amount each month is one thing, but if there is a chance your lender takes out more than what you planned for, be cautious. Once that money is removed, it is hard to get back.
You can’t trust yourself – Smart student loan repayment is all about paying extra when you can and targeting high-interest student loans. The savings from this approach will far exceed the potential savings from a .25% interest rate reduction. If signing up for automated payments will cause you to be lazy when making extra payments, stick to manual payments. Lenders maximize profits when borrowers pay the minimum each month over the life of the loan. Don’t let a slight interest rate reduction bait you into maximizing your lender’s income.
Lender Rate Reduction Programs
Interest rate reduction programs are seldom advertised or publicized, but they do exist. Private lenders created these programs to help borrowers who had fallen behind on their debt. It is typically only available to those with an income insufficient to keep up with payments. A rate reduction program is rarely a term of the loan contract, and as a result, lenders can change the requirements whenever they want.
Getting into a rate reduction program can be a major headache, but it is an excellent way to save.
The nice thing about rate reduction programs is that they can help. Most borrowers who cannot make a monthly payment are usually given the option of a forbearance or a deferment. Delaying payments is typically good for the lender and bad for the borrower. During this time, the balance on the account will grow due to unpaid interest. Once the deferment or forbearance ends, the borrower now has a bigger student loan problem. Continuing to make payments with a lower interest rate allows a borrower to put a dent in the principal balance.
Perhaps the most notable rate reduction program is with Sallie Mae/Navient. Over the years, they have changed the requirements and tweaked terms several times. At present, borrowers can sign up for an interest rate reduction that lasts for six months. Qualifying requires a borrower to provide Navient a detailed accounting of their monthly expenses so that they can decide whether or not to offer the help. Generally speaking, the further behind a borrower is in repayment, the more likely Navient is to help. We have also found that the quality of assistance depends upon whom you talk to you. If one call attempting enrollment is unsuccessful, a second or even third try might make a difference.
Pay Down High-Interest Debt First
On the surface, paying down high-interest student loans first might not seem like a method of lowering interest rates. We would argue that it does.
The math is relatively easy. If you have two loans, at $10,000 each, one with an interest rate of 8% and one with an interest rate of 2%, your combined debt is $20,000 at an average interest rate of 5%. If you pay off the loans with equal payments, your average interest rate will stay at 5%. However, if you start to pay off the high-interest loan faster, your average interest rate will drop. Eliminate the high-interest loan first, and your average interest rate is now a very favorable 2%.
Many people are savvy to the fact that paying extra on your student loans is a great way to pay off loans faster and to save money on interest. We like to call these people responsible borrowers. However, we found that when these responsible borrowers don’t focus on the high-interest debt, it can cost over $1,000.
Finding just a bit of extra money to attack high-interest debt can save a lot of money in the long run. Utilizing this approach doesn’t require an excellent credit score or enrollment in any program. Just pay extra towards your highest interest rate student loan, and as time passes, your average student loan interest rate will drop.
Enroll in the Revised Pay As You Earn Repayment Plan
The Revised Pay As You Earn plan, also known as REPAYE, is an excellent way for some federal student loan borrowers to save money on interest.
Unlike all of the other federal income-driven repayment plans, REPAYE has a special interest forgiveness provision.
For some borrowers, REPAYE is by far the best available federal repayment plan.
Suppose your federal student loans generate $300 in interest each month, but your required monthly payment is only $100 based upon your income. This means that your federal student loan balance is growing by $200 every month. Because the federal government doesn’t capitalize the interest each month, many borrowers think that their balance is just staying the same. Once an event that triggers interest capitalization happens, the balance can jump by hundreds or even thousands of dollars.
Signing up for REPAYE reduces this problem. Going back to our example, instead of growing by $200 each month, REPAYE cuts the extra interest in half, meaning our example borrower would save $100 per month in interest. For borrowers with large student loan balances and smaller incomes, REPAYE is an excellent option.
Many of the borrowers who could benefit most from REPAYE are also the borrowers who plan on getting student loan forgiveness, so they don’t care what happens to the balance. This approach is dangerous. First, this borrower might not qualify for student loan forgiveness. Failing to sign up for REPAYE could mean that they are stuck with a larger balance to pay back. Second, some forms of forgiveness are treated as a taxable event by the IRS. For example, if your loans are forgiven under the standard income-driven forgiveness program, the money forgiven is taxed as income the year it was forgiven. REPAYE can keep the balance smaller over time and reduce a potential tax bill.
Unfortunately, REPAYE is not a one size fits all option. Couples who have one spouse with federal student debt and one spouse without can opt to file their taxes separately so that only one income is considered for IBR and PAYE calculations. Sadly, REPAYE does not exclude spousal income, regardless of how taxes are filed. As a result, REPAYE may not be the best choice for some couples.
For most, however, REPAYE is a great way to reduce interest spending on federal student loans. Monthly payments are capped at 10% of discretionary income, and REPAYE will minimize the damage caused by the excess interest each month.
Join the Military
Choosing to serve your country can be a big boost in student loan repayment. For starters, numerous student loan forgiveness programs exist specifically for the military, such as the Military College Loan Repayment Program.
In the realm of interest rates, enlisting has immediate benefits as well. Military service can lower your student loan interest rates in two ways:
Servicemembers Civil Relief Act (SCRA) Interest Rate Cap – The SCRA limits all student loan interest rates for active-duty members of the military to 6%. This limit applies to both federal and private student loans. In fact, this interest cap applies to all debt, so long as the debt was in place before you start active duty. If you acquire new debt after active duty starts, it does not qualify for the interest rate cap. Getting this rate is guaranteed by federal law, but you will probably have to contact your loan servicer to get things set up.
0% Interest for Service in a Hostile Area – Anyone serving in a hostile area that qualifies for special pay does not have to pay interest for up to 60 months on their federal direct student loans. This applies to all federal direct loans issued after October 1, 2008.
Enlisting is obviously a major commitment, but anyone in the military or considering it should be aware of the potential opportunities to lower their interest rates.
Get Congress to Act
If you have student debt, it probably means that you don’t have millions of dollars to pay lobbyists or contribute to campaigns. However, borrowers as a group still wield enormous power in Washington.
Over the years, there have been proposals that would allow federal borrowers to lower their interest rates to the same levels that banks get when they borrow from the government.
Showing up to vote each November is critical to influencing DC. Think about the AARP. Seniors on Medicare and Social Security don’t have a ton of money to spend on campaign contributions, but they vote, and everyone in Congress knows it. Student loan borrowers currently number over 40 million. If they all voted for candidates who pledged to make a difference on student loans, lower interest rates could be just the beginning.
Refinance Student Loans at a Lower Interest Rate
Student loan refinancing is another excellent way to get a lower interest rate on your student loans.
When student loans are refinanced, a new lender pays off some or all of your old student loans in full. The borrower then agrees to repay the new lender according to new terms. The downside to this approach is that old terms and perks are eliminated with the old loan, so if you like having income-driven repayment plans or loan forgiveness, it is best to skip refinancing and stick with federal loans.
The big advantage of refinancing is the enormous potential interest savings. College students without a job or a degree are risky bets and usually get charged higher interest rates by lenders. Graduates with a job and a degree are far less risky and generally able to get much better interest rates.
The more savvy a borrower is about the refinance process, the more they can save by refinancing.
There are many different ways that refinancing can be used to get lower interest rates…
Pick a Shorter Repayment Term or Loan Length
By refinancing student loans on a shorter-term loan, borrowers can get significantly lower interest rates.
As an example, take a look at the best rates currently available on 5-year fixed-rate loans.
If we stretch things out to 20 years, the lowest possible rates jump considerably:
To see rates available for 5, 7, 10, 15, and 20-year loans, be sure to check out our best refinance rates by category page. These rates are updated monthly to provide a good idea of the best available rate for any given loan type.
Variable-Interest Rates Always Start Lower
When refinancing, opting for a variable-rate loan comes with a bit more risk than a fixed-rate loan. As market conditions change, the interest rate can also change… up or down.
The variable-rate loans start lower than the fixed-rate loans, but they can move significantly over time. The gap between the best variable-rate loan the best fixed-rate loan can also fluctuate. If lenders expect interest rates to go up considerably, they might be more generous with variable-rate loans. If lenders think rates are headed downward, the gap between the fixed-rate loans and variable-rate loans might drop.
By way of example, take a look at the current lowest rates on a 7-year fixed-rate loan:
If we keep the repayment length the same but opt for a variable rate loan, the rates drop to the following:
The obvious danger with a variable rate is that the rates could jump. One protection that borrowers should investigate is whether their lender has a cap on the variable-rate loans and how high they can go.
The longer the loan repayment length, the riskier a variable rate loan becomes. We typically suggest that all borrowers avoid variable rate loans longer than ten years. Should interest rates ever reach extreme highs, a longer-term variable rate loan might make more sense.
Shop Around to Find the Best Rate
In the realm of student loan refinancing, the surest way to get the lowest possible rate is to shop around.
All lenders offer a range of loan types and loan options. What they don’t advertise is that all lenders evaluate applications differently. A borrower with a high credit score and average income might get far different results than a borrower with an average credit score but a high income. Lenders may put different weights on the college you attended, how long you have been in your job, and your profession.
This means that the companies advertising the best rates may not be the company that actually offers the best rate. Because there are so many variables in play, it is essential to check rates with several different lenders. We typically suggest investigating 5-10 lenders out of the many student loan refinance companies.
The good news about shopping around is that it takes very little time. Most borrowers can get a rate quote within 5 to 10 minutes.
Fortunately, shopping around does not hurt your credit score. The credit agencies treat multiple applications within the same window as a single application. This allows borrowers to shop around without fear of negative credit consequences. To be safe, try to keep your shopping around confined to a one or two-week window.
Get a Cosigner
This one is a pretty lousy way to get a lower interest rate when you refinance. It can help borrowers with less than perfect credit qualify, but it is a massive obligation for the cosigner.
Getting a cosigner to help pay for college is one thing. Getting a cosigner to refinance is another story. Refinancing for some is more of a luxury. Obtaining lower interest rates is nice, and saves money, but does it justify the risk that your cosigner is taking on?
Many people use refinancing as a workaround to get their cosigner released from the loan. If the cosigner is on the original loan but not the refinanced loan, when the refinance goes through, the cosigner has no further obligations.
That being said, borrowers who are struggling to get approved may be able to successfully refinance with the help of a cosigner. If that cosigner was on the original loan, this move might make even more sense. The cosigner’s obligation doesn’t change, but the borrower’s ability to pay it off faster is improved, which is a win for both parties.
Pay Off Existing Debt First
When refinancing, the two most significant factors are your credit score and your Debt-to-Income ratio (DTI).
Eliminating a debt completely can have a considerable impact on your DTI. Lenders don’t usually care about your current debt balances. If you have a car loan, it doesn’t matter if you owe $20,000 or $5,000. The impact comes from monthly payments on your credit report. Lenders care about the $300 per month that you owe on your car loan. If that monthly payment is eliminated, your DTI improves, as does your chances at scoring the best possible interest rate.
If you are about to eliminate a monthly payment, be sure to let a bit of time pass so that when lenders check your credit report, the debt is gone.
Fix or Improve Your Credit Score
Credit score is clearly an essential consideration to lenders. Anything that can be done to improve your credit score will help your cause.
Correcting errors on a credit report is a quick way to get a big bump, but it isn’t the only way to improve things. The impact of negative items on a credit report drops with time.
For an idea of what lenders expect from a credit score perspective, be sure to check out our article on the minimum credit score required for refinancing.
Find a New Job or Get a Raise
This tip probably falls into the easier said than done category, but it can make a big difference in your debt-to-income ratio.
Different lenders have different requirements for documenting income and time required at a job, but a recent paystub is sufficient proof of income for many.
The option to refinance a second or third time is something that many borrowers fail to consider.
The good news for consumers is that there is no rule or limitation on refinancing multiple times.
If you have had the good fortune of getting a higher-paying job, improving your credit score, or eliminating some old debt, there is a good chance that better rates may be available. Similarly, if the first time through the refinance process you skipped out on shopping around, a second bite at the apple might be an excellent opportunity to lock in the best deal.
With many lenders offering refinancing services, jumping around a few times can be an effective strategy.
Lowering Student Loan Interest Rates
The fourteen different approaches that can be used to get lower interest rates represent an opportunity for nearly all borrowers to get some help on their student loans.
Different strategies require different levels of effort, but for many, a minimal investment of time can result in major savings.