If you’re repaying educational debt, a lower student loan interest rate makes the process easier.
The lower your rate, the less you’re charged for borrowing. When a smaller portion of each payment goes to interest, you reduce your principal balance faster. This enables you to spend less over time and possibly become debt free sooner.
But, how can you lower your student loan interest rate once you’ve borrowed? A number of options are available including refinancing student loans, signing up for autopay, and more. This guide will explain different techniques so you can find one that’s right for you.
- Basics to lowering interest rates
- Refinancing student loans
- Signing up for autopay
- Getting other discounts
- Can’t lower your rate? Try these strategies
Basics of lowering student loan interest rates
Interest-free student loans are few and far between as most lenders, including the Department of Education, charge interest for borrowing. But there’s a wide variation in rates for different kinds of loans and lenders.
The higher your interest rate, the more it will cost you to pay off your debt, and the higher your monthly payment will be.
For example, if you’re borrowing $20,000 at 4.00% interest for a decade, you’ll owe a total of $4,299 in interest over 10 years, with a monthly payment of $202, assuming you make payments while in school. But the same $20,000 loan at 6.00% interest for a decade would cost you $222 per month and $6,645 in total interest over time.
Because a lower student loan interest rate can save you money, it’s worth exploring opportunities such as refinancing student loans, signing up for autopay, or asking for other discounts in an effort to reduce your rate.
Refinancing student loans
When you refinance student loans, you take out a new loan. Ideally, the new loan will have a lower rate and better terms than current educational debts.
Once you’re approved, you can use the proceeds from your new refinance loan to pay off your existing loans. You’ll then repay your new loan, which should have a lower student loan interest rate.
Direct Consolidation Loans
Only private lenders offer the opportunity to take out a refinance loan. The Department of Education only offers student loan consolidation loans. With a Direct Consolidation loan, you take out one new loan to pay off existing debts. However, your interest rate is a weighted average of the federal loans you consolidated so your rate isn’t lowered. You can find the Direct Consolidation loan application online at the Department of Education.
Because you typically don’t want to convert federal loans to private loans and lose borrower benefits, it’s better to only refinance private loans. Generally, you’ll need good credit and proof of income to refinance student loans or must have a cosigner to be approved. You can shop around for a refinance loan online, and then choose a lender with the most competitive rate and best terms.
Calculating your savings
A loan refinancing calculator can help you determine how much you can save by refinancing. Some examples of refinance loans that could potentially help you to lower your student loan interest rate include loans from the following lenders:
- Brazos, which offers fixed rates as low as 4.40% and variable rate loans as low as 4.54% to both undergraduate and graduate students as of Feb. 3, 2023
- Citizens, which offers fixed or variable rate loans with rates starting as low as 5.39% as of Feb. 3, 2023
Remember, it only makes sense to refinance if your new lender has a lower rate than you’re currently paying. Otherwise, you end up raising your costs.
Signing up for autopay
If you sign up to have student loan payments directly debited from your bank account, you’ll generally be able to reduce the interest rate you pay. This is true for both federal student loans and most private student loans.
Typically, you’ll get a 0.25 percentage point reduction in your interest rate if you sign up for autopay for either federal or private loans.
Getting other discounts
Autopay isn’t the only discount your lender may offer to help you lower your student loan interest rate. There could be other options as well, depending on the type of loans you have and your lender’s policies.
Loyalty discounts are one common example of another savings opportunity you could take advantage of. Some lenders, such as SoFi, offer a lower student loan rate if you have an existing membership or financial relationship with the institution. SoFi provides a 0.125% rate reduction if either you or your cosigner is already a member when you apply for a private student loan.
Can’t lower your rate? Try these other strategies
If you can’t find a way to lower your student loan payment, try these techniques to reduce either monthly payments or total borrowing costs.
- Make extra payments
This strategy allows you to reduce your loan balance quicker by lowering total borrowing costs.
Each extra payment goes entirely towards reducing the principal, which means your balance goes down much faster (and you also pay interest on a lower balance as well).
- Look for a job with loan repayment assistance
Some companies offer student loan repayment assistance as a job perk. For example, Google matches up to $2,500 in student loan repayments per employee per year. And some government employers offer loan repayment help through the Federal Student Loan Repayment Program.
If your employer helps with repayment, your principal balance will go down faster with less money out-of-pocket from you since some of your payoff funds will come directly from your company.
- Change your repayment plan
If you have federal student loans, you can change your repayment plan. You have multiple payoff options, including a standard 10-year repayment plan as well as income-based plans.
Opting for an income-driven plan or one with a longer payoff period would mean paying more in interest over time. But it could offer more flexibility in your budget if you were hoping to lower your student loan interest rate because your monthly payments are too high.
A change to a different repayment plan could also help you to avoid missing payments and potentially becoming delinquent on your loan or even going into default. If you default on federal student loans, you’ll need to get current before switching payment plans, according to the Department of Education. You can look into rehabilitation vs. consolidation, each of which could help you get back on track.
Ultimately, exploring all these options can be worthwhile. But if your primary goal is to reduce student loan repayment costs over time, finding a way to lower your interest rate can be the most effective approach.