If you’ve borrowed money through student loans, you’ll quickly realize that most of your payment doesn’t go toward lowering your debt. Instead, most of it may be applied toward accrued interest on your account. Sometimes interest rates can be high enough on student loans to actually increase your loan balance.
One thing you can do to fix your high-interest rate student loans is to refinance. The main reason people look to refinance is to obtain the lowest interest rate on student loans, which makes sense. The lower your student loan interest rates are, the less your overall debt bill ends up.
For example, say you have $100,000 in student loan debt and were paying 6% interest on a 10-year loan. You would end up adding more than $33,000 in interest alone to your loan at the end of 10 years. Getting your interest rate decreased and setting up better payment options could be just what you need to jumpstart your student loan payback.
But how do you get a lower interest rate? When you look to refinance your loans, you can get your rate lowered if you can meet certain criteria. Here are 11 ways to help you lower your interest rate.
1. Improve Your Credit Score
So how can you get the lowest interest rate on student loans? It starts with your credit score.
Do you know your credit score? If not, you should You can use services like Credit Sesame, Credit Karma or AnnualCreditReport.com to keep tabs on your credit score. FICO scores range from 300 to 850. Some lenders will accept a score of 650 to qualify for refinancing, but you should work towards a score of 700 or better to receive the lowest interest rate on student loans. Check your lender’s eligibility requirements before moving forward with the refinancing process.
How Can You Improve Your Credit Score?
- Pay your bills off on time and in full. Delinquent payments can remain on your credit report for up to 7 years.
- Never carry credit card debt over from month to month.
- Your credit age is important so if you have older cards, keep them open as long as they don’t have annual fees you don’t want to pay.
- Don’t use more than 30 percent of your eligible credit.
- Make sure your credit report is accurate. Reports show 20 percent of consumers have an error on one or more of their credit reports (there are 3 major credit bureaus)
- Limit new credit applications when you are thinking of refinancing. Every time you apply there is a hard inquiry made and your credit score drops (on average 3 to 5 points). It may not seem like a lot, but it could make a big difference when trying to negotiate a better interest rate on your student loans.
2. Have a Cosigner With Good Credit
While most federal student loans don’t require a cosigner, private loans are generally the opposite, as they almost always require a cosigner. Asking someone to cosign on your student loans isn’t always an easy task since you asking to stake their financial reputation on you being responsible for paying off your student loan debt.
Who can you have co-sign your loan so you can get the best education loan interest rates? The obvious choice would be a parent or another close relative, like an aunt or uncle or grandparent. Other choices could be a family friend or a mentor or former teacher. It should be someone who has a close relationship with you. Be sure to check with lenders if they offer the option for cosigning. For example, one lender that doesn’t is Earnest.
Also, lenders all have their own rules and restrictions concerning cosigners so take time to research each one carefully. If you do choose to use a cosigner on your student loans, understand the risk they are taking by vouching for you and go out of your way to be responsible when it comes to repayment on your loans.
3. Take Time to Find the Right Student Loan in the First Place
One way to get the lowest interest rate on student loans is to start with the right student loan that fits your situation. Everyone is different and finding the right student loan options will depend on your end goal and what is important to you.
You might be looking at Grad Plus loans as an option, but if you will owe a modest amount compared to your salary after graduation, private student loans may be a better option. Before taking out private loans, make sure you will be working in the private and not the public sector.
Grad Plus loans have a high origination fee of well over 4% as well as high-interest rates (over 7.6% as of this article’s writing). The issue with private loans, however, is that they come without borrower protections.
Keep in mind that some private student loans have origination fees as well if you are borrowing in school as opposed to refinancing loans, which has no fees. For private loan options while still in school, check out our private loan referral partners Credible, Lendkey, and Common Bond.
4. Don’t Defer Payment
While many people qualify to defer student loan payments, most of the time, this is not a great option. Unless you have subsidized federal loans, interest will continue to build up during this time of deferment, causing you to incur even more student loan debt, There are times when deferment might be a good option, such as if you are called into active military service, have a serious financial crisis or have a short-term financial hardship, but these situations are rare.
You might be tempted to defer payments to get your financial footing after graduating, but too often people make the mistake of fighting through this and finding another way. If you have federal loans, exploring income-driven repayment (IDR) might be the best option. Being able to pay even a little bit of your loans is better than deferring payment most of the time.
Take time to analyze your financial situation and judge whether you really need the option to defer or if you can find another way to help make ends meet. You may just need to adjust your lifestyle to allow more financial flexibility or look into a part-time side hustle for a short time to give you that extra income to pay your student loan debt. Deferring payments should be seen as a last resort, not your first line of defense.
5. Set Up Automatic Payments
One way to help lower your interest rate is to opt to sign up for autopay, where your student loan payment is automatically deducted from a checking or savings account on a specific day monthly. Some lenders, federal and private, will offer up to a 0.25% interest rate discount when you sign up to have payments automatically deducted from a bank account.
One bonus to setting up autopay is not having to worry every month about payments being on time or missing a payment. It’s one less financial decision to worry about monthly and you get a discount for choosing to pay this way.
6. Pay Your Bills On Time
If you’re looking to refinance and obtain the lowest interest rate on student loans, paying your bills on time seems like a no-brainer, but it’s easy to lose track if you aren’t careful or haven’t set up automatic payments. Consistently making payments on time can also help you earn a bonus. Many lenders offer a reduction to your interest rate if make consecutive on-time payments for a 3-year consecutive period.
Check with your lender to see if this option is available. One missed payment will cancel any reduction, so take time to set up automatic payments to ensure you don’t disqualify yourself from this simple bonus reduction.
7. Loyalty Discounts
Check with your own bank to see if they offer any kind of loyalty discounts or reductions for using their lending services if you refinance student loans with them. Banks like Wells Fargo and Citizens Bank offer 0.25% discounts for having a checking or savings account through their banks.
In our experience, these loyalty discounts do not compete with the best offers that you can find by comparison shopping with our lending partners. That said, you should give it a try to see if you could benefit.
8. Shorten Your Student Loan Terms
Although there are other factors involved, generally lenders offer lower interest rates for shorter repayment terms and higher interest rates for longer repayment terms. Standard repayment terms for federal loans are 10 years, but private lenders often have terms as short as five years. You might be able to cut your interest rate down to 4% or even 3.5% by shortening the repayment term through refinancing.
Obviously, your monthly payments are most likely going to go up if you choose a shorter term. If you aren’t ready to attack your student loan debt and pay it off quicker, refinancing to a five or seven-year-term isn’t right for you. In the long run, though, having a much lower interest rate is going to save you a ton of money and get you out from under your student loan debt quicker.
9. Shop Through Our Partners To Find the Best Rates
Take time to check out the private lenders that Student Loan Planner partners with for great rates and cash back bonuses. Not only have we negotiated the best cash back bonuses for you, if you find a better deal, you can contact us and we will try and find a way to beat your deal still.
Many of our partner lenders offer low-interest rates as well as multiple repayment options. With many lending partners available, we are confident that you will find one that is right for you and fits your needs. One nice feature most of these private lenders offer is the ability to get a pre-qualification offer.
When you actually move forward with a refinancing option, there is a hard inquiry performed that can negatively affect your credit score, but getting a pre-qualified offer only requires a soft inquiry. Soft inquiries don’t affect credit scores.
10. Use the Student Loan Calculator
Student Loan Planner has developed a wonderful free tool, a student loan calculator, that will help you save time and money figuring out the right loan repayment options for you.
While there are many student loan calculators that exist, none of them are as extensive as our free tool and none of them are as easy to understand either. Student Loan Planner’s calculator acts as an interest calculator and a student loan refinance calculator.
Another feature of the calculator is it allows you to see if you can earn subsidies from the REPAYE program. If you owe more than double your income in student loan debt, this free tool is perfect for you. Also, using the student loan calculator lets you look at long-term costs, not just what costs look like for you right now. Life changes and so does your family, your income, and your plans. Use a tool that will help factor in changes like these. Download the student loan calculator today and start finding ways to save money today.
11. Learn To Live On Less Money
Perhaps you’ve graduated and landed a good job. It seems like a great time to reap some of the rewards of all your labor by spending your salary on things you’ve dreamed about. However, just because you might have money to spend, doesn’t mean it’s always the best option. You still have a large student loan debt waiting to get paid off. You also want to have some financial flexibility in your life in case something changes. It’s much harder to refinance loans if lenders see you are living paycheck to paycheck without any real savings.
What areas should you splurge on and what things can you live without for a while? Look at two of the biggest purchases you’ll probably make in your life, an automobile and a house, to see if there are ways to save by choosing more economic options instead of your dream car or house. Choose to defer those splurges so you can afford to pay your debt off faster. This will allow you to choose a shorter refinancing term in order to lower your interest rates and ultimately save on your student loan debt.
Should You Refinance Your Student Loans?
Refinancing to get the lowest interest rate on student loans can get you away from bad lenders, bad student loans, and help you find better options with lower interest rates. There are some things to keep in mind, though, when making this decision. This is why you need to compare student loan interest rates and consider alternative options as well.
If you are interested in taking advantage of Public Service Loan Forgiveness (PSLF), you will lose that option if you refinance your loans through a private lender.
You also will lose the options for loan deferment and forbearance. Some private lenders have unemployment protection, though, which allows you to pause repayment for 3 months if you lose your job. Income-driven repayment options also aren’t available for those that refinance.
If your goal is to improve your high-interest rate students loans and pay them off quickly, refinancing might be the perfect choice for you and your financial situation. Taking the time to look at all options will help you in the long run, no matter what option ends up being the right one for you.
Have you ever thought about refinancing your student loans? Feel free to share any questions or opinions you have about refinancing in the comments below!