How to Lower Your Student Loan Interest Rate

  • Interest on your student loans may add thousands of dollars to your borrowing cost over the life of the loan.
  • Scoring even a marginal drop in the interest rate could save you a substantial amount in accrued interest.
  • With good credit and a stable income, you may be able to lower your student loan interest rate significantly, saving you money over the life of the loan.

A large number of students take student loans every year to help cover the cost of college tuition. By the time this student loan debt is paid off, interest on the loans could have added hundreds to thousands of dollars to the total borrowing cost because interest accrues over the life of the loan.

Paying interest on student loans is unavoidable, whether it is a federal or a private student loan. Generally, the lender sets the customized rate of interest at the time of signing. But, depending on the terms of your loan, you may be able to reduce your interest rate. That, in turn, can enable you to lower your monthly payment and also lower the amount of interest that you pay over the life of the loan. When you reduce your student loan interest rate, you may also be able to finish paying off the debt much earlier.

Before discussing how to lower your student loan interest rate, it helps to understand a few basics about interest rates and how they work.

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How Interest Works on Federal & Private Student Loans

When you take a loan from a lender, the lender charges you interest, which is the cost of borrowing. The rate of interest that you pay depends on whether it is a federal student loan or a private loan.

Federal student loans: The federal government sets a fixed interest rate at the start of the year. This is valid for one year and may or may not change for the subsequent year depending on market conditions. All students who take federal loans during that year pay the same interest rate. Once you sign the loan agreement, that interest rate remains the same for the total repayment period. Your monthly loan payments also remain the same.

Private student loans: With private student loans, each lender sets its own interest rate. Every borrower pays a different rate depending on their monthly income and credit score. Private lenders offer two types of interest rates. If you choose fixed interest, you’ll pay the same rate throughout the life of the loan. If you choose variable interest, your rate may increase or decrease regularly, depending on market conditions. Under this payment procedure, the interest payment you make one month can be quite different from the interest the next month.

5 Ways to Get a Lower Interest Rate on Student Loans

Now that you know how interest rates work on federal and student loans, let’s take a look at how to lower the interest rates on student loans.

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1. Sign up for autopay

Want to quickly and easily lower your interest rate? An easy way to do this is to check if your loan servicer or lender offers a rate discount on autopay. Autopay involves setting up automated transfers directly from your savings account to the lender’s account on a fixed date every month. This ensures that your loan payments go out on time every month.

Setting up autopay is beneficial for you as well as the lender. Lenders are assured of timely payments every month and in return, many lenders offer a 0.25% interest rate reduction to borrowers who set up automatic payments. This is a super-simple way to lower your interest on student loans at the outset. The 0.25% drop in the interest rate may not seem like a lot but it does add up over time.

In addition to lowering your student loan interest rate, autopay also offers other benefits. It minimizes the risk of late payments, so you avoid costly late payment fees. Timely auto-payments also help build your credit score.

2. Refinance your loans through a private lender

Refinancing is a popular solution among students looking for ways to get a lower interest on student loans. With refinancing, you replace your current student loans with a new loan. The newly refinanced loan will have a new set of terms and conditions and a new interest rate too. When refinancing, the key is to make sure that the refinanced loan has a lower interest rate than your current rate.

There are a few important things to know about refinancing student loans:

  • You can refinance both private as well as federal student loans, but you can only do this through private lenders. The federal government does not offer this facility. Refinancing is only offered by private lenders.
  • When you refinance federal loans, they are converted to private loans and you’ll lose access to federal benefits and protections associated with the loan. That means you will no longer be able to enroll in income-driven repayment plans or loan forgiveness programs. You must give some thought to this aspect before refinancing your federal student loans.
  • The interest rates on your current student loans have no bearing on the rate of your refinanced loan. Your refinancing rate will depend primarily on your current creditworthiness. Most lenders will quote a personalized interest rate based on your credit score, monthly income, and debt-to-income ratio. Solid financial credentials will generally qualify you for a lower interest rate.
  • There are usually no or low fees for refinancing so you can refinance multiple times as you build your credit and qualify for lower interest rates later on.

Overall, refinancing is a great way to lower your student loan interest rate if you have strong credit, are employed, and earn a steady monthly income.

3. Use a cosigner when refinancing your student loans

If your less-than-stellar credit and financial circumstances don’t qualify you for a lower refinance rate you may be able to get a lower interest rate by using a creditworthy cosigner.

A creditworthy cosigner is someone who meets the lender’s requirements for getting a lower interest rate. When you refinance student loans with a cosigner, the lender sets your rate based on the cosigner’s credentials.

A cosigner can be a parent, sibling, relative, or friend. This person shares equal responsibility of the loan with you and could be on the hook for the loan if anything goes wrong. A missed payment will damage the cosigner’s credit score as well as your own credit score. In addition, the lender can notify your cosigner to make the payment.

If you decide to refinance student loans with a cosigner, look for a lender who offers a cosigner release option. This way, when your credit improves and you qualify for lower interest on your own, you can release your cosigner from their financial responsibility.

4. Explore loyalty discounts

Many lenders offer loyalty discounts to student loan borrowers who have an existing relationship with them. Taking advantage of these loyalty discounts is an easy way to get a lower interest rate on your student loans.

For example, suppose you or your cosigner have a qualifying account with Citizens. In that case, you may qualify for a 0.25 percentage point interest rate reduction when you refinance your student loans through them. Qualifying accounts include any savings account, checking account, certificate of deposit, credit card account, or money market account. They also include any other student loans, mortgages, home equity line of credit, home equity loans, or auto loans owned by Citizens at the time you submit an application.

5. Negotiate with your current lender

While this is not a guaranteed strategy, it’s worth a try. Some lenders may offer you a preferential interest rate especially if you have a good payment history with them. Before you approach your lender, however, you could also shop around and get rate offers from other refinancing lenders. Knowing what the best rate you can get may put you in a better position to negotiate. If you have a good payment history, your lender is more likely to counteroffer with a lower interest rate to keep you as a customer.

This strategy is only applicable to private student loans. It won’t work for federal student loans as you cannot switch loan servicers.

Important Note: Consolidating Federal Loans Does Not Lower Interest Rates

Student loan refinancing and consolidation are often used interchangeably but this is wrong. Both terms refer to two very different processes with different benefits and downsides.

Consolidation only applies to federal student loans. It allows you to combine two or more loans so you make only one monthly payment instead of several. Consolidating your student loans will not help to lower your interest rate. This is because the interest rate on your consolidated balance is calculated as the weighted average of your original loans.

So, while consolidating can be useful for simplifying your payments and even lowering your monthly payments (by extending your repayment terms), it won’t be helpful if you’re just looking to lower your interest.

If you are ready to consider refinancing, our Student Loan Finder tool makes it easy to find and compare loans from reputed lenders. Get started now.