Top 3 Ways to Lower Your Student Loan Interest Rate

Tens of millions of Americans have borrowed money to pay for their education. If you are one of those borrowers, reducing student loan debt could be one of your main financial goals.

If you’re trying to pay off private student loan debt, a good place to start is to see if you can lower your interest rate. Financial experts have a number of tips in their toolbox that could help you here, from automating your payments to refinancing. Below are three ways to lower your student loan interest rate and lower your student loan repayments overall.

3 ways to lower your student loan interest rate

The best method for reducing your student loan interest depends on your overall financial situation.

1. Refinance your student loans

Ideal for: Those with a strong credit score who want to pay off their loan quickly

If you have a strong credit base, are employed, and plan to pay off your loan quickly, you may want to consider refinancing your private student loans. Well-qualified applicants may be able to take advantage of lower interest rates that could save money on monthly loan payments and overall interest charges.

Refinancing costs have fallen significantly due to the coronavirus pandemic, with fixed APRs as low as 2.3% and variable APRs as low as 1.74%. You can sign up for a Bankrate account to see where current rates stand with our daily rate trends.

You may be able to refinance a student loan if you have bad credit, but your rates will likely be higher. A good credit score, by comparison, could improve your chances of qualifying for a lower interest rate.

To improve your credit score, be sure to follow good credit habits. Paying on time is a must. Reducing your credit card balances (and thus lowering your credit utilization rate) could also help.

It’s also okay to be strategic and refinance multiple times, as there are no prepayment penalties on federal or private loans, and most loans don’t charge origination fees.

However, if you have federal student loan debt, be sure to weigh the pros and cons of refinancing into a private loan. Refinancing will cause you to lose federal borrower protections, such as the automatic forbearance period and interest relief until May 1, 2022. If a large student loan forgiveness were to occur, private student loans would not be more eligible. This compromise may not be worth it.

Take away key

With interest rates falling, it is possible to save money on student loans through refinancing. But weigh your options carefully before proceeding, especially if you have federal student loans.

2. Take advantage of discounts

Best for: Borrowers with predictable income or those with multiple accounts with the same company

One of the easiest ways to lower your interest rate is to automate your payments. Many lenders offer rebates of 0.25% to 0.5% if you set up automatic payment from a checking or savings account.

It may not seem like much, but it can add up over time. You could save about $25 per year on a balance of $10,000.

“This can be the easiest and quickest way to achieve interest reduction and requires little effort on the part of the borrower,” says Jon Long, lending attorney at Long, Burnett and Johnson. students.

With some lenders, you may also be eligible for loyalty discounts. Loyalty discounts, if you can find them, reward borrowers (and co-borrowers) who have other accounts with the lender, such as a savings account or another loan. SoFi, for example, offers a “member discount” if you take out a student loan after taking out a personal loan or investment account. Check with your lender to find out what is available.

Take away key

Autopay is a simple option for borrowers with little to no inconvenience. It may also be advantageous to take out a student loan from a company with which you have an existing relationship.

3. Negotiate with your lender

Best for: Those who got their student loans in high interest rate environments

If you’ve borrowed privately or have refinanced before, you might consider researching a more competitive student loan rate and presenting it to your current lender. Although this is a long plan, the lender might be willing to match this rate to keep your business.

Adding a cosigner can help if you need to show better credit or more income to qualify for a lower interest rate. However, be aware that your co-signer will also be responsible for the loan. This is a significant risk for the co-signer. If you fail to make timely payments, both your credit ratings could suffer damage and you could both be financially responsible for the debt.

Take away key

Compare interest rates and see if your current lender is willing to negotiate.

What to do if you can’t get a lower rate

The above money movements may not be suitable for all student borrowers. However, there are other ways to reduce the cost of your student loan, even if your interest rate remains the same.

Deduct interest payments from your taxes

You may be able to deduct some of the interest payments on your student loan from your income. If you qualify, the deduction could offset the amount of income you have to claim and reduce your tax liability.

Here’s how it works for the 2021 tax year:

  • Individuals with adjusted gross income (AGI) less than $70,000 (or married filers with income less than $140,000) can deduct up to $2,500 in interest payments.
  • Phase-outs occur for single filers earning between $70,000 and $85,000 and joint filers earning between $140,000 and $170,000.

The student loan interest deduction is also a top exclusion from income, so you can claim the deduction even if you don’t itemize it on your tax return.

Check for special cash back offers or discounts

Although not a lower interest rate, some private student lenders offer cash back and refinance discounts. Such offers could help you spend less money in the long run, if you use the money wisely.

Credible, for example, offers a $200 gift card if you manage to find a lower rate than what it offers.

Adjust your payment plan

Experimenting with different payment plans can also help you maximize your money and pay less interest over time (even at the same interest rate). There are several strategies you can try with this approach, such as:

As you reduce your loan amount in regular installments, you reduce the amount of interest you pay with each payment.

“Many people find a way to earn extra income, whether it’s tutoring online, gardening work, or a traditional part-time job to pay off their college debt,” says Michael Micheletti of Freedom Financial Network. “If you can pay more, be sure to contact your lender or servicer and request that your additional payments be applied to the outstanding balance, relative to your next payment.”

Final considerations

Lowering your interest rate is one approach that could help you pay less for your student loans. But that’s not the only strategy that works. Being financially savvy is the best way to save money in the long run.

If you can’t qualify for a lower interest rate, find out why. Your credit score can hold you back. Improving your credit can help you not only with your student loans, but also with other types of financing.

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