If this headline piqued your interest, then maybe the interest rate on your student loan has peaked too.
There’s a few things you can do send your student loan interest rate on the decline, and even the smallest change can have a big impact on the amount you pay.
The average student loan borrower pays an estimated $75 in interest per month over the course of their repayment period. The average student loan borrower was determined using the following numbers and enrolling in the 10-Year Standard Repayment Plan offered by the federal government. The average graduate with student debt owes $32,731. Federal student loan rates were set at 5.05% for undergraduates and 6.6% for graduate students in 2018.
There are two reasons to lower those interest rates. One is to achieve a lower monthly payment, and another is to save money down the line.
If your goal is to lower your monthly payment by reducing your interest rate, you are unlikely to make much of a dent. Even lowering that interest by a full percentage point would take only $16 off the monthly payment. You’re better off keeping your federal loans with the government and looking into income-driven repayment plans.
But if you can afford your monthly payments and your goal is to save some money, use these techniques to lower your interest rate.
Send a few loan applications to student loan refinancing companies like SoFi, Earnest, LendKey and CommonBond and see if they can beat your current rate.
If you were one of the lucky undergraduates who borrowed in 2011-2014 while rates were under 4%, you probably won’t find a better deal than what you have from the federal government. That includes federal repayment benefits, which you would lose if you choose student loan refinancing.
Many others, especially graduate students, that signed up for rates between 5-8% might be able to find a better deal with a student loan refinancing company. You will need good or even great credit and a comfortable income to be an appealing borrower.
A couple of tips to get an even lower rate during a refinance:
Choose the shortest loan term – Lenders determine rates based on the amount of risk. The longer the lender has to wait to recoup their money, the more risk there is to the lender. So, you’ll get a lower interest rate on a 5-year loan than you would on a 15-year loan.
One of the consequences is that your monthly payment will be much, much higher for a shorter loan term. Be sure to consider what you can actually afford each month.
Lower your credit score – Order a free credit report from one of the three major credit bureaus, and check that the information they have on you is accurate. A quick way to optimize your credit score is to keep your credit utilization under 30% – the ideal number is closer to 15%. Credit utilization, the ratio of your credit card balance to your credit card limit, makes up 30% of a FICO score.
A good way to get there is to pay off your credit card balances twice per month, once in the beginning and once in the middle each month, and you should see an increase in your credit score.
Apply with a cosigner – A cosigner lowers the risk for the lender because in the event that you cannot make a payment, the cosigner agrees that he or she will pick up the tab. Some lenders will release the cosigner once you have demonstrated you are a reliable borrower.
Pay Off Your Loans Faster
Take extra income you might have and make additional payments toward your student loans. This will pay off your loans quicker, which lowers the total interest you pay over time.
No, this technically won’t lower your interest rate, but if the goal is to save money, this is an effective approach. The longer you allow interest to accrue, the more interest you will end up paying. It’s a strategy you can use for both federal and private student loans if you have the extra money to attack student debt.
The average borrower would save nearly $2,000 and pay their debt two years earlier with an additional $70 payment each month.
Prioritize high-interest debt if you have multiple student loans with different rates. Use the extra money to pay off the loan with the highest interest rate first. Then move on to the loan with the next highest rate.
Automatic Payments (ACH Discount)
Federal student loan servicers award a 0.25% interest rate deduction when you enroll in “automated debit.” Many private lenders also have this perk. Sometimes it will be called an ACH transfer discount or auto-pay discount.
The average borrower would save about $500 over the course of their repayment period with this discount.
An added benefit of auto pay is that you won’t have to worry about missing payments. Just be sure you always have enough money in your bank account to cover your student loan payments.
Make On-Time Payments
You might get an additional discount after a few years of making on-time payments. When you apply to refinance your loans, ask the lender if they offer this. At the very least, on-time payments will help you avoid late-payment fees.
Some lenders offer a discounted rate if you already have a bank account with them. Wells Fargo offers 0.25% off your interest rate if you or a cosigner has a qualified checking account with Wells Fargo, and 0.5% off if it is a Portfolio account. Citizens Bank has a 0.25% rate discount for those who have a bank account with them. College Ave offers the same discount for customers that have a bank account with Nationwide.
Some of these tips have a larger impact than others, and some will make more sense in your situation than others. Go for the easy rate discounts first like auto-pay, research student loan refinancing to see if it benefits you and put extra income toward your student loans to pay them off sooner.
About The Author
Max Fay is an entrepreneurial Millennial whose thoughtful writing shows he has a keen eye on both. Max has a genetic predisposition to being tight with his money and free with financial advice. At 25, he not only knows what an “emergency fund” is, he already has one. He wrote high school and college sports for every major newspaper in Florida while working his way through Florida State University. That experience was motivation to find another way to succeed financially and he has at Debt.org. Max can be reached at firstname.lastname@example.org.
- Federal Student Aid (2018) Federal Student Loan Portfolio. Retrieved from https://studentaid.ed.gov/sa/about/data-center/student/portfolio
- Value Penguin (2018) Average Student Loan Debt In America. Retrieved from https://www.valuepenguin.com/average-student-loan-debt
- Federal Student Aid (2018 July 1) Retrieved from https://studentaid.ed.gov/sa/types/loans/interest-rates#rates
- myFICO (2019) Amounts Owed. Retrieved from https://www.myfico.com/credit-education/credit-scores/amount-of-debt
- Federal Student Aid (n.d.) How to Repay Your Loans. Retrieved from https://studentaid.ed.gov/sa/repay-loans