Student loans can help you get the education you need to achieve your career goals. Without them, many Americans wouldn’t be able to pursue their dreams. For instance, 42% of those who attended college, acquired some debt from their education.
However, education debt can be a big burden to bear when it comes time to pay them off. One-fifth of those with debt are reportedly behind on their payments.
If you have student debt and want to minimize it, you need to lower the amount of interest and other fees you are paying. But, how? Read on to learn different strategies that will help you get the lowest rate possible.
How do the interest rates and APRs on student loans work?
The total cost of a student loan depends on factors such as the interest rate, loan amount, loan term, and fees. The annual percentage rate (APR) takes all of these factors into account and expresses the cost of credit as a nominal yearly rate.
According to the Truth in Lending Act (TILA), credit card and loan issuers must express their borrowing costs as an APR. The standardization makes it easy to compare lenders.
So when trying to lower your interest rate on a student loan, you will be lowering your APR.
Two ways to lower interest rate on student loans
There are two main approaches to lowering the APR on a student loan; You can optimize your current loan, or you can refinance it with a new lender. Below, we will highlight strategies for both approaches.
1. Optimize your current student loan
First, let’s look at what you can do to lower the interest rate on your current loan.
Automate your monthly payments
When you automate your student loan payments, your lender will automatically withdraw the amount due from your bank account each month. Some lenders assign you a withdrawal day (i.e., the 15th, 30th, etc.) while others let you choose the day which will be best for you on an ongoing basis.
Automatic payments help to streamline the collection process for lenders, and they reduce the risk that you will fall behind on your payments. As a result, many lenders will offer you a discount on your interest rate to encourage you to sign up. For example, LendKey and CommonBond both offer a 0.25% APR reduction.
Enrolling in automatic payments is one of the easiest ways to shave a little off of your APR. The only catch is, you have to make sure that you have the money in the bank each month to cover the payment amount. If not, you may face returned payment fees, late fees, and overdraft fees. As long as you keep your account funded, you can say hello to easy savings.
Some lenders will offer you a reduced interest rate if you have paid your bills on time for several years. Others might give you a discount if you have another type of account with the organization.
For example, if your student loan is through Wells Fargo and you also have a qualifying consumer checking account, they offer an additional 0.25% interest rate reduction. It doesn’t hurt to call your lender and ask them about the discount programs they have available.
While these discounts can help to lower interest rate on student loans, if you are looking for a more significant decrease, you should consider refinancing your loans.
2. Refinancing student loans
Refinancing your student loans means you get a new loan, use it to pay off your old loan(s), and then make payments to the new lender. The main reason to do this is to get a better deal.
How can you save with a new loan?
There are several ways.
Comparison shop for the lowest APR
First, if a new lender offers you a lower APR than you currently have on a loan term that is equal to the remaining period on your current loan, you have an opportunity to save.
For example, say you just began making payments on a 10-year loan with an, 8% APR, and you get approved for a 10-year loan with a 6% APR. You can save by making the switch.
The first step is to get approved for a loan amount that is high enough to cover your existing loan amount. Online student loan lenders now let you apply online with no impact to your credit score.
You can easily find out if you can get a better rate within a few minutes, from anywhere. It’s wise to apply with a few leading lenders to see which can offer you the best deal.
See the best student loan lenders right now.
Get a shorter loan term
Next, shorter repayment periods mean less risk for the lender because there is a smaller likelihood that you will default. A reduction in the risk you present means a lower borrowing cost (APR) for you.
However, it also means your monthly payment amount will likely increase as you are paying off the balance in a shorter amount of time. If you are looking to lower your overall cost and are comfortable with a higher monthly payment, this can be a great solution.
However, if you need to keep your monthly payment equal to or lower than its current amount, it will be better to go with one of the other refinance strategies.
Opt for a variable interest rate
Another way to lower interest rate on student loans is by opting for a variable interest rate. While fixed interest rates offer more stability because they don’t change throughout the term of the loan, variable rates start lower.
So if you refinance and choose a variable APR, you can reduce your payments for the short-term. However, it’s important to understand that the variable rates do adjust periodically. You are taking on the risk of possible paying more down the road if the rate goes up. That being said, you can always refinance to a fixed rate down the road if it goes up too high.
Compare the pros and cons of fixed vs. variable interest rates on student loans.
Apply with a cosigner
Applying to refinance your student loans with a cosigner can help you to get a lower rate as it could lower the level of risk you present to lenders. If your credit is less than excellent, a cosigner with a strong credit score and income profile can help you knock a few percentage points off your APR.
As you can see, refinancing presents many opportunities for you to reduce your interest rate and APR.
Interested? Here are five scenarios when refinancing makes sense.
Tips for managing student loan payments
If you are struggling to repay your student loans, here are a few tips that may be able to help.
Federal student loan forgiveness
Nine out of 10 student loans are funded by the federal government. The federal student loan forgiveness program forgives student debt if you work in a qualifying public service job for 10 years. If you have federal loans and think you may qualify, you should look into this option before refinancing.
Income-driven repayment plans
The federal government also offers income-driven repayment plans for its federal loans. These plans base your monthly repayment amounts on your income and family size to increase short-term affordability.
If you don’t repay the loan after 20 or 25 years (the limit varies depending on the plan) the remainder of the balance is forgiven. However, the forgiven amount may be considered taxable income.
The standard federal repayment plan is preferable because it only lasts 10 years and will cost you less overall. But if you can’t afford the standard payments, income-driven repayment plans can prevent you from defaulting.
Learn more about whether you should refinance your federal student loans.
Pay off high-interest loans first
If you are paying down multiple student loans, be sure to pay the minimum balance on all of them each month. Then, if you have extra money to put toward your student debt, pay it towards the loan with the highest interest rate. Once you pay it off, move to the loan with the next highest rate and so on until they are all paid off. Read this for more information on how to get out of debt.
Try to pay off loans as fast as possible
It can be tempting to stick to the minimum payments on your student loans and to spend or save any extra money you make. However, keep in mind that the longer it takes you to repay your loans, the more it is going to cost you. If you can get on a schedule to make extra payments toward your student debt, it will reduce your overall cost.
Save on your student loans
Now you are armed with the know-how to help you get the best rates on your student loans. A good first step is to contact your current lender(s) and find out what savings they will offer you. Once you get your current loan’s APR as low as possible, it’s time to shop around.
Check out private student loan lenders that offer refinancing. Shortlist a few reputable companies and then apply to see what they will offer you. Remember to get quotes for both fixed and variable APRs, and for various loan term lengths. Additionally, if your offers aren’t great, consider applying with a cosigner.
Once you have all the offers in hand, compare them to your current loan. If one of the lenders can beat your current cost, by all means, refinance and start saving!
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.