Ways to Lower Student Loan Interest Rates ; If you already have a private student loan, there are even more ways to reduce your rate, though some may take time. For example, improving your credit score may take several years. But you can also opt to apply with a credit worthy co-signer, choose a shorter repayment term, take advantage of loyalty programs, and negotiate with your lender.
Millions of people take out student loans to pay for college. And unfortunately, whether you borrow from a private lender or the U.S. Department of Education, they all come with interest rates. A higher interest rate could mean your loan costs you thousands (or even tens of thousands) more over the life of the loan. But a lower rate could lower your monthly payment or help you pay off your loans faster.
Your options vary depending on whether you have or are getting federal or private student loans. But with thousands of dollars on the line, it’s worth investigating your options for lowering your interest rate.
Ways to Lower Student Loan Interest Rates
Those with private loans have far more options for lowering their interest rates than those with federal loans. They can lower their interest rates from the beginning or take steps while in repayment.
Congress sets the interest rates for federal student loans, and you can’t negotiate them, though there are some ways to lower them once you get into repayment. And for the vast majority of borrowers, federal loans start with lower rates than they could qualify for anyway.
Regardless of the loan type, many of these methods for lowering your interest rates will positively impact every loan you borrow. So it’s a good idea to do them even if you have a federal loan.
1. Improve Your Credit Score
It’s possible to get a student loan with a poor credit score. The federal government doesn’t check your credit at all for federal student loans.
And while they do a credit check for PLUS loans, it’s only to ensure you haven’t defaulted on any prior loans. Your credit score doesn’t affect approval or the interest rate.
But private lenders are very concerned with your credit score. You may still be able to get a loan with an average score, but your interest rate will be much higher.
To score the lowest rates, you must have excellent credit. So if your credit isn’t great or you don’t have a credit history, you need to work on boosting your credit score. Don’t worry. If you?re under 18, you can still take steps to build credit.
Start by checking your credit report to see what’s negatively impacting it. Once you have an idea, you can address any issues. For example, if you have any past due payments, get caught up.
If you have high balances on your credit cards, work on paying them down. As a general rule, you want to maintain balances of no more than 30% of your credit limit on each of your cards.If you?re a teen just starting to build credit, get a job. It won?t directly impact your creditworthiness, but it does make you look good to creditors. Then, open a teen-friendly checking account and high-yield savings account and start squirreling away a certain percentage of your weekly pay.
You can even ask your parent or guardian to put a bill or two in your name.Once you’ve saved enough money (or with the help of a responsible adult), you can open a secured credit card. Just make sure you pay the balance in full each month.Wherever you are on your credit-building journey, you can use a credit monitoring service like Credit Karma or Credit Sesame. Both help you monitor your credit score and give you helpful tips to improve it.The credit-building process can take time, especially if you have negative actions on your report, such as late payments, missed payments, or defaults. These can take anywhere from two to seven years to fall off or otherwise stop impacting your credit report, even after you?ve caught up or paid off the debt. But the sooner you get started, the sooner you?ll qualify for lower interest rates.
2. Make Automatic Payments
The easiest way to lower the interest rate on your student loans is to enroll in autopay, which applies to both federal and private loans. All federal loan servicers and most private lenders offer a 0.25% interest rate reduction for making automatic payments. While a 0.25% interest rate reduction doesn’t sound like much, every little bit adds up. For example, if you borrowed $40,000 at 6% interest, a 0.25% reduction would save $600 in interest over the life of the loan on a 10-year repayment plan.
That’s more than a whole payment. Autopay is something almost everyone can do. Plus, it ensures you never accidentally miss a payment, potentially getting hit with late fees. Just ensure you always have enough money in your bank account to cover your monthly payment. Otherwise, you could end up with an overdraft fee.
3. Pay Your Bill on Time
A handful of lenders reward customers for good money habits. For example, MPower Financing, a private student loan company that specializes in lending to international students, 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% autopay discount. But most lenders don’t automatically lower your interest rate just for being a good customer. That said, if you consistently pay your bill on time, it puts you in an excellent position to negotiate a lower interest rate later.
4. Refinance Private Loans
Refinancing is the process of exchanging your current loans for a new loan with a better interest rate, terms, or both. To qualify, you typically need good credit (a credit score in the high 600s to 700s) and a comfortable cash flow. In most cases, you also need to have graduated. But it can still be difficult for recent graduates without an established credit history or good-paying job to qualify for the lowest rates. If you’ve been out of school for a while and had time to establish yourself financially, you stand a much better chance.The best financial situations lead to the best interest rates because lenders see you as less of a risk.The very lowest rates offered are always variable interest rates. But if you opt for one, you’re the one taking a risk. Variable rates fluctuate with market conditions, so the rate could go up (but it could also go down).
Thus, if you accept a variable-rate loan, you’re gambling the rate won’t rise past what you could have gotten on a fixed-rate loan.If you want to take the gamble, do a little research first. Search online for the average private student loan interest rates for the current academic year. Then search backward. Are the rates trending up or down? If you’re borrowing in a high-interest year, a variable rate could be a good idea since you’ll be getting a lower rate than the current fixed rate. But if it’s a low-rate year, rates will likely rise soon.
For example, the 2020-21 rates were at historic lows thanks to emergency measures taken by the Federal Reserve during the coronavirus pandemic. But economists predict rates could be on the rise soon. So it may be wiser to lock in a fixed rate given current market conditions. Fortunately, you can refinance student loans as many times as you can get approved. Most refinance lenders don’t charge origination fees (a type of processing fee). So you can always refinance again in a few years if you can get a better rate, which is possible if your credit or income improves.
Ways to Lower Student Loan Interest Rates