How to Lower Your Student Loan Interest Rate
This article breaks down your options to lower your student loan interest rate.
When you are repaying your student loans, a portion of your monthly payment goes to the principal, and a portion goes to interest. If you can lower your student loan interest rate, more of your money will go towards paying off your loan balance and less toward interest so your loan will cost less.
To do that, you need to know how to get a lower interest rate on student loans. The good news is, there are a few techniques that can help you to drop the cost you're paying to borrow.
1. Sign up for automatic loan payments
The easiest way to lower student loans interest rate is to set up automatic payments on your loans.
This technique works for federal student loans, which are loans issued by the Department of Education and managed by a student loan servicer. If you sign up for automatic payments directly from your bank account, you will receive a .25% discount on your interest rate. This is sometimes referred to as an ACH discount. This is one of the few options available for easily reducing your interest rate on federal loans without giving up any important borrower benefits.
Some private student loan lenders also allow you to qualify for an automated payment discount, but eligibility and the amount of discount can vary by lender. In many cases, you'll qualify for the same 0.25% autopay discount with private lenders as the Department of Education offers.
Automatic student loan payments can not only reduce your student loan interest rate, but they can also help you protect your credit history and avoid late fees or penalties by ensuring you never accidentally miss a payment. However, you must work your payments into your budget and know when the money will be debited from your account so you don't overdraft your bank account and risk getting hit with overdraft fees.
2. Open up multiple different types of accounts
Many private student loan lenders allow you to get a lower interest rate on student loans if you have multiple different kinds of accounts with them.
For example, you may be able to save on student loans by also opening up a bank account with the same financial institution that made the loans. Or you could save on your educational debt by also taking out another loan type with the same lender, such as a mortgage loan or a car loan.
This is a solution only for people who are borrowing from private student lenders as the federal government doesn't provide any type of loyalty discount when applying for student aid. You'll also need to make sure that the institution you are borrowing from offers this kind of savings.
3. Refinance student loans
There's another simple answer to the question of how to get a lower interest rate on student loans. You can refinance them with a new lender. If you refinance to reduce your rate, you apply for a new loan. If you are approved at a competitive rate, you'll use the proceeds from your new loan to pay off your existing debts.
This approach works if you can qualify for a refinance loan at a rate that is lower than you are currently paying. This is often possible if interest rates have fallen since you took out your original student loans. Or if you have improved your financial credentials since the time you originally borrowed, you may be able to qualify for a loan at a lower rate.
You can refinance both federal student loans and private student loans to reduce your interest rate on both kinds of educational loans. The lower interest rate provides savings over the life of the loan.
However, refinancing federal student loans may not be a good idea -- even if you can drop your rate. Federal loans offer student loan forgiveness programs, income-driven repayment plans, flexible forbearance and deferment options, subsidized interest on some loans, and many other borrower benefits and protections not available for private student debt. You'd have to give all that up if you refinance federal loans. You won't face this downside if you have private loans.
Can you consolidate student loans for a lower interest rate?
Some borrowers wonder if it is possible to consolidate student loans to lower interest rate on federal loans. That's because it is possible to consolidate with the Department of Education and keep all of your federal student loan benefits.
When you consolidate student loans, you take out a new loan to pay off multiple existing federal student loan debts. That makes consolidation similar to refinancing. Unfortunately, unlike when you get a refinance loan, your consolidation loan will not change your federal student loan interest rate at all.
If you consolidate student loans, your interest rate will simply be a weighted average of the rates on your current debt. That means the process will keep your total interest costs exactly the same.
How to refinance student loans at a lower interest rate
Refinancing can work very well to drop your private student loan rates -- sometimes by a substantial amount. But the key is knowing how to refinance student loans at a lower interest rate than you are currently paying.
To maximize your chances of qualifying for a loan at a reduced rate:
- Aim to improve your credit score before applying. You can do this by making on-time payments and keeping your credit utilization ratio on credit cards (the amount of credit used relative to credit available) as low as possible.
- Consider applying with a cosigner if your own credit or income doesn't make you the ideal customer. Your cosigner's financial credentials will be considered when your rate is set, making it possible for you to qualify for a lower rate than you could qualify on your own.
- Shop around. Private student loan rates vary from lender to lender, unlike the rates on federal student loans. It's helpful to compare quotes from multiple companies to ensure you're getting the most competitive loan offer.
Juno can help you to refinance student loans at the lowest rate possible for your situation. We get groups of borrowers together and negotiate on behalf of the group with lenders so they compete for your business.
Christy Rakoczy Bieber
Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbooks and serving as a subject matter expert.
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