If you have student loan debt, you’re almost certainly paying interest on it. Student loan interest might be a given, but high student loan interest doesn’t have to be.
If you feel you’re paying too much interest on your student loan, you aren’t alone. The good news is that there are methods to make your student loan interest more manageable. Keep reading to learn how to lower your student loan interest rate.
1. Refinance your student loans
Refinancing offers you an opportunity to lower your student loan interest rates. When you refinance your student loan, you take your current loan and replace it with a new one that comes with new terms — and more importantly — a new, lower interest rate.
That new rate could help you save thousands of dollars in student loan interest over your loan term. Refinancing also makes repayment more convenient, as you can consolidate multiple loans into one for a single monthly payment.
Student loan refinancing isn’t as simple as filling out an application, however. A refinanced loan is offered from a private lender so you’ll have to meet credit and income requirements.
Getting approved for a student loan refinance is more likely once you’re out of school and have a steady income, which will help boost your credit score.
If you have federal student loans, think hard before you refinance them. You could forfeit some benefits that private student loans don’t offer, like income-driven repayment plans, student loan forgiveness or longer forbearance periods.
2. Be smart about how you borrow
Scholarships and grants should always be your first financial aid option because you don’t have to repay them. When you have to borrow money for your education, look to federal student loans before a private loan to have greater access to borrower protections.
Federal student loans offer other perks, too, like lower interest rates, subsidies (the government pays the loan interest while you’re enrolled in school), and no credit check (except for PLUS loans).
Choosing federal student loans over private loans is just part of the battle in lowering your student loan interest rates. You also have to choose the right federal student loans. In this case, borrow the maximum amount for subsidized and unsubsidized Stafford loans rather than choosing higher-rate PLUS loans.
Stafford loans vs. PLUS loans
There are some key differences between Direct subsidized and unsubsidized loans. Direct subsidized loans are based on financial need, and the government pays the interest while you’re in school and during the six months after you leave.
This is called the “grace period.” On the other hand, unsubsidized loans accrue and you’re responsible for the interest charges as soon as funds are dispersed.
Both loan types share a 2.75% interest rate for undergraduate students. Graduate and professional borrowers are only eligible for unsubsidized direct loans and the interest rate is currently 4.30%
Now, let’s compare Direct loans to PLUS loans. PLUS loans also meant to help pay for education expenses that other financial aid doesn’t cover.
Both graduate and professional students, and parents can borrow this type of federal loan, through “grad PLUS” and “parent PLUS” loans, respectively. PLUS loans have a fixed interest rate of 5.30% if disbursed on or after July 1, 2020, and prior to July 1, 2021. PLUS loans also require a credit check.
3. Recertify your income-driven repayment plan
IDR plans are based on your monthly income to help make your payments more manageable. You must recertify your IDR plan annually to maintain this benefit though. Recertification includes providing an update on your family size and income.
Staying on top of your recertification deadlines is crucial for managing your student loan interest rates. If you miss your deadline, your monthly payment won’t be based on your income anymore.
Instead, your payment will be the amount you’d have to pay under and standard repayment plan with a 10-year repayment period. Your monthly payment will be based on how much you owed when you started your IDR plan.
Meanwhile, any unpaid interest will be capitalized, in other words, added to your loans’ principal balance. This will lead to loans becoming more expensive over time because you’ll have to pay interest on the higher loan balance.
You want to lower your student loan interest, not increase it! Certify your IDR plan on time.
4. Take advantage of subsidies
The Revised Pay As You Earn Repayment (REPAYE) plan is another potential way for how to lower your student loan interest rates. Under the REPAYE plan, your monthly payment is generally 10% of your discretionary income and your loan term lasts between 20 and 25 years depending on whether it was undergraduate or graduate/professional study.
Remember, the federal government pays interest for subsidized loans while you’re in school at least half-time and for six months after you’re finished. Having all of that interest paid on your behalf brings down how much interest you will be responsible for going forward.
5. Sign up for autopay
It’s important for your financial well-being to pay your bills on time, especially your student loans. Most private student loan lenders offer a 0.25% interest rate discount for borrowers who enroll in auto-pay.
For example, private lender, SoFi, offers a 0.25% autopay interest reduction when borrowers agree to make scheduled monthly payments through an automatic monthly deduction from their savings or checking account. Your monthly payment doesn’t decrease when you enroll in auto-pay, but the interest savings go toward your principal loan balance, which could help pay your student loan off faster.
Interest may come with the territory when it comes to student loans, but that doesn’t mean you should be paying the highest rates. Instead, put any of the tips here to work to help ensure your student loan interest remains manageable. If you need help, get in touch with Student Loan Planner to schedule a consultation and figure out the best approach to lower your student loan interest rates.