Chances are you didn’t look too closely at the fine print when you took out your student loan. You needed the money to pay for college. So, like 13.2 million students each year who receive federal student aid, you signed the loan documents and made a mad dash to class.
Fast forward to post-graduation when it’s time to pay off your loan. The fine print suddenly becomes important, doesn’t it? If you’re making on-time payments, but your balance isn’t lowering as quickly as you thought it would, keep reading.
You’re going to discover six ways to lower your monthly student loan payments today.
How student loan interest works
You can blame the seemingly slow student loan payoff on a couple of factors that involve interest. Interest has a huge impact on how long it takes to pay off your student loans.
When you make a student loan payment, interest is paid first. The remaining portion is applied toward the loan’s principal.
Student loan interest is also usually compounded daily. That means that the interest rate on your loan is divided by the days in the year. You’re charged that amount of interest on a daily basis, so it keeps adding up.
For example, let’s say you have a Federal Direct Student Loan with a $10,000 balance at the current 4.45% fixed interest rate.
Annually, the compounded interest on this loan would be $445. Compounded daily, however, the amount is $1.219 per day. Every 30 days, you owe an additional $36.57. If you have a standard repayment term of 10 years for the $10,000 Direct Student Loan, your payment will be $103 per month. That means, when you make your monthly payment, $36.57 goes towards paying the interest accrued that month, while $66.43 goes toward the principal.
Over time, that principal payment will pay off the loan. The interest charge will also lower as you pay off the principal. The lower the principal balance, the lower the interest.
For example, when the student loan reaches $5,000, your compounded daily interest will be 0.61 cents per day and $18.30 per month. At that point, you’ll be making a principal payment of $81.70 per month.
Subsidized vs. unsubsidized loans and interest
If you’re still in school and have a Direct Subsidized Student Loan, you don’t need to make payments until six months after graduation. Even better, the U.S. Department of Education pays the interest on the loan while you’re in school and the first six months after you leave school.
With unsubsidized student loans, you can defer payments when you’re in school and for six months after graduating. However, interest will accrue while you’re not paying. That means, when you graduate and start paying off your loan, you’ll owe more than the original loan.
6 ways to lower student loan interest rates
We’ve established that a lower interest rate equals a lower monthly student loan payment. So, it obviously makes sense to reduce your student loan interest rate.
But how exactly do you do that?
Here are six methods you can use to reduce your interest rate and, therefore, your monthly payment. The more methods you use to pay off your loans, the less interest you’ll pay.
1. Pay student loans early while in school
If you want to know how to get out of student loan debt fast, pay early. Joe DePaulo is CEO and co-founder of College Ave Student Loans. He says, “You can start paying off student loans right away. It’s a good idea to pay what you can as soon as you can. You can save on interest charges by opting to pay even a little each month during school.”
2. Pay extra on student loans
The more you pay on your student loans, the less interest you pay over the long run. The faster the principal goes down, the less interest you’ll pay and the quicker you’ll pay off the student loan.
Check out this student loan calculator to see how much you can save in interest by paying an additional $20, $50, or $100 each month.
3. Sign up for auto pay for student loans
Setting up your student loan to pay automatically can lower your interest rate.
By synchronizing your student loan payments to a checking account, you can lower your interest rate. Typically, your student loan interest will drop 0.25%.”
Says Craig P Anderson, president of the nonprofit, Student Connections, “By synchronizing your student loan payments to a checking account, you can lower your interest rate. Typically, your student loan interest will drop 0.25%.”
Though seemingly small, the 0.25% drop adds up over time. For instance, say you have a $25,000 student loan at the standard repayment term of 10 years. If you reduce the interest from 6.5% to 6.25%, you’ll pay $380 less interest.
4. Refinance your student loans
Refinancing your loans is one of best ways to lower your student loan payments.
Be on the lookout for any application or origination fees. Such expenses quickly eat into your interest savings.”
When you refinance your student loans, you do so through a private lender such as SoFi, College Ave, LendKey, or CommonBond.
While the federal government only consolidates their loans, you can refinance both private and federal loans with a private lender. Repayment terms and conditions vary, depending on the lender.
With student loan refinancing, you renegotiate the terms of existing student loans and get a brand new loan. This gives you the opportunity to get a lower interest rate. It will also simplify your monthly payments as you’ll only have one payment to remember.
Refinanced loans can have a fixed or variable interest rate. Variable interest rates tend to be lower than fixed. However, unlike a fixed interest rate, a variable interest rate will change over time.
That means you could start out paying less interest than your previous loan, but end up paying more. Consider a variable interest rate only if you plan on paying off the loan within the next two to three years.
DePaulo advises people to carefully check out a private student loan before refinancing. “Be on the lookout for any application or origination fees,” he says. “Such expenses quickly eat into your interest savings.”
Check out our student loans review page to make a side-by-side comparison of all the top lenders.
5. Consolidate student loans with a mortgage refinance
Mortgage debt tends to be low-interest debt. If you consolidate your student loans with a mortgage refinance, you could save a substantial amount of interest. For instance, mortgage rates for prime borrowers are in the 3-5% range, whereas student loan debt is 8-10% or even higher.
You must have sufficient equity in your home to consolidate a student loan with your mortgage refinance. It’s also important to remember that your mortgage balance will rise when you refinance.
A mortgage consolidation is typically a better idea with private student loans. That’s because converting federal student loan debt into mortgage debt forces you to give up certain benefits that only federal loans offer.
6. Pay off student loans with a 0% introductory credit card
Credit cards with a 0% introductory rate enable you to save on student loan interest.
Get a balance transfer card featuring no interest for 18 to 24 months. This will allow you to avoid a year or more of paying interest.
Keep in mind that after the 0% introductory rate, the interest rate is likely to hit the double digits. That means it’s best only to use this method if you can pay the loan off within the grace period. Read this, for an in-depth discussion of the pros and cons of paying student debt with credit cards.
You’ll only qualify for a 0% introductory rate credit card if you have a good credit score of 700 or higher. Paying off with a credit card also means you can’t access any financial hardship benefits of federal student loans.
Avoid income-driven repayment plans whenever possible
If you want to pay less in interest, don’t reduce student loan payments based on income.
Though income-driven repayment plans can help you pay your federal student loans if you’re financially struggling, you could end up paying more in interest over the life of the loan. That’s because you have lower monthly payment amounts and the life of the loan is extended.
For example, say you have a 10-year Stafford subsidized loan of $10,000 at 6.8% interest. If you convert it to a Graduated Repayment plan, it will reduce your monthly payment, but increase your total interest paid by $3,760.50 (97.5%).
Save with a student loan tax deduction
DePaulo reminds students and graduates to deduct student loan interest. He says, “When tax time approaches, be on the lookout for your 1098-E Student Loan Interest Statements. You should get one from each lender that you paid at least $600 in interest during the previous year.”
Are you already following all those tips? Try this. Don’t waste good money on high interest rates. Saving on student loan interest allows you to pay off your loans faster. For more information about saving interest by refinancing your student loans, visit SuperMoney’s best student loans reviews & comparison page.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.