6 ways to lower your student loan interest rate
Looking for a good way to curb student loan debt? Focus on interest rates. (iStock)
Student loan debt is already high without having to put up with high student loan interest rates.
According to the Department of Education, U.S student loan debt, in total, stands at $1.64 trillion in 2020. On a per-student basis, the average student loan amount owed is $35,397. Rates of federal loans are standard, as follows for the 2020-2021 school year:
Undergraduate borrowers 2.75 percent
Graduate school borrowers 4.30 percent
Parent borrowers 5.30 percent
Private student loan borrowers are another story. Interest rates for private student loan rates fluctuate from between 4.5 to 11 percent for fixed-rate loans and between 1.25 to 12 percent for variable-rate loans, depending on the lender and the borrower’s credit score.
Another commonality is getting the best rate deal possible, which usually means focusing on private student loans, which don’t have fixed standard rates like federal student loans. That means drawing a bead on lowering student loan interest rates, which can be easier said than done.
6 ways to cut student loan interest debt
There is no single best way to curb student loan interest rates. The good news is there are multiple ways to get the job done. Financial experts recommend focusing on the following student loan interest rate reduction strategies:
1. Refinance your loan
One of the best ways to reduce student loan interest is to continuously refinance your student loans with better interest rate deals. Visit Credible to see a rates table that allows you to easily compare fixed and variable rates from several private lenders.
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“Many people who refinance their loans don't know they can do it as many times as they want,” said Amber Masters, a blogger at DeeplyinDebt.com, which chronicles her journey of paying down $650,000 in student loan debt incurred by her and her husband. “Often, lenders will offer lower rates once you've lowered your balance a little bit.”
You can use online tools to compare multiple lenders at once and identify whether you’ll have access to beneficial rates.
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Masters said her household strategy was to refinance the student loans once, make extra payments on them for six months to a year, and then re-refinance them with another lender who was offering a lower interest rate. “We just kept repeating that process,” she said. “It saved us thousands of dollars.”
2. Get creative
Lenders have come up with ways to offer a more diverse product set to better fit your family’s needs and those options come with varying interest rates (Use Credible to see what kind of rates are currently available to you).
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For example, certain lenders offer four different types of repayment options when you take out a student loan, such as deferred repayment, Interest-only loans, partial repayment loans, and immediate repayment loans.
“Choosing loans with interest-only payments during school, for example, will likely get you a lower rate for the life of the loan as well as avoid compound interest, so you’re actually saving money two different ways,” said Lauren Anastasio, a certified financial planner at SoFi, a personal finance company. “If you’re able to pay as little as $25-per-month while in-school, you could greatly decrease the overall cost of borrowing for your education.”
3. Sign up for auto-pay and other discounts
Many lenders will offer a rate discount if you enroll in autopay, just one of the unique ways you can save on interest without much effort.
“Some lenders will also provide discounts depending on their relationship with you,” Anastasio said. “When shopping around for loans, make sure you check with the financial institution’s you already work with to see if they’ll give you a rate discount based on your existing relationship.”
The best thing you can do to secure a low rate is to shop around. You can use an online site like Credible to compare your personalized loan options.
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4. Apply with a creditworthy cosigner
Lenders look at the higher of the two credit scores, said Mark Kantrowitz, publisher at SavingforCollege.com. “They also give a little boost with a cosigner because they then have two fish on the hook instead of just one,” Kantrowitiz said.
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5. Shop around each year or semester
Lenders don’t have up-front pricing and the lowest advertised rate isn’t necessarily the student loan interest rate you'll get.
“The only way to know how much a lender will charge you is by applying,” Kantrowitz said. Consequently, don't worry about hurting your credit score by applying for multiple loans. The credit bureaus now recognize shopping-around behavior with regard to student loans.”
Plus, some lenders will use a soft credit inquiry instead of a hard inquiry when you initially apply for the loan. “They’ll do a hard inquiry if you decide to get the loan from them,” he added.
When you do shop around, put an online loan comparison specialist like Credible to work. There you can compare loans from 10 student loan providers in just two minutes – and cut the best loan interest rate deal possible in the process.
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6. Use a good online calculator
Like any job that needs to get done, getting the best information on student loan rates requires a solid data gathering tool – and that’s where an online calculator can help.
Running the numbers through an online calculator can give you the data you need at your fingertips to arrive at an informed decision.
That’s exactly where you need to be when you’re trying to save significant money on student loan interest rates.