Interest rates can be the enemy when it comes to paying back your student loans.
The effects of amortization can mean that the majority of your monthly student loan payment is going toward interest rather than repaying the principal balance.
There are two strategies for increasing the amount of money that goes to principal each month:
- Increase your monthly payment beyond the minimum
- Lower student loan interest rate
In order to maximize your payoff progress, you should investigate ways to accomplish both of these tasks. However, if you focus first on ways to reduce student loan interest rates, then those extra payments will go even farther.
How can I lower my student loan interest rate?
But how do you lower your interest rates? Glad you asked!
Here are two strategies to help you do just that:
1. Sign up for auto-pay
The first (and easiest!) way to reduce the interest rate on your student loans is to enroll in auto-pay. Depending on your servicer, this option might also be referred to as kwik-pay or auto-debit, among other possible names.
What it is: Auto-pay allows you to have student loan payments taken directly from your checking account.
You will log into your servicer’s account and give them your checking account information, as well as give your servicer permission to automatically withdraw your monthly payment from your checking account each month by the due date.
How it works: When you enroll in auto-pay, your servicer doesn’t have to wonder if or when you’ll make each month’s payment. In exchange for the certainty they gain as a result, all federal loan servicers and many private loan servicers will lower the interest rate on your student loans, usually by 0.25%.
Impact on your monthly payment: While an interest rate reduction of a quarter percent might not sound huge, every little bit helps. And depending on the size of your student loan balance, that quarter-percent reduction can really add up over time. Check out our student loan repayment calculators to see how much interest you can save by enrolling in this feature.
Pros and cons to this approach: Enrolling in auto-pay is fast and free — all you need is your bank account information.
The drawback is that you won’t be able to control when the money leaves your account, so you will need to be responsible and make sure sufficient funds are available in order to prevent an overdraw to your account.
The fees and penalties for an overdraft would more than erase the benefit of the interest rate reduction, so be careful!
2. Refinance your student loans with a private lender
Refinancing student loan balances with a private lender can lead to a significant reduction in student loan interest rates, especially if you have older student loans with interest rates that can range from 4.66% to 8.5% for federal loans.
What it is: Refinancing means paying off one or more old loans by taking out a new loan. The old loan(s) no longer exist and are replaced by a new, single loan (ideally, with a lower interest rate).
How it works: Student loan refinancing is different from consolidation, which combines multiple student loans into one; a weighted average of your previous loan rates (plus a couple percentage points) used to set your new interest rate.
You can refinance just one loan or multiple loans with a private lender. The interest rate will be based on current market conditions and your creditworthiness. Currently, student loan refinancing options exist with variable interest rates as low as 2.13%.
Impact on your monthly payment: The impact will obviously depend on your current interest rates and the interest rate your refinancing company approves on the new loan.
For example, if you have old PLUS loans with interest rates of 8.5% and qualify to refinance at the lowest interest rate offered today, your savings can be momentous.
However, if your existing interest rates are relatively low and/or your credit isn’t that great, then your savings might be less significant, or even nonexistent.
Pros and cons to this approach: When you apply for refinancing, the lender will perform a hard credit pull, which temporarily lowers your credit score (getting your interest rate quote does not result in a hard pull). This is important to keep in mind if you know there’s a good chance you won’t be approved.
Additionally, depending on your creditworthiness and current interest rate, you might not realize any savings. Even so, if you have multiple student loans and refinance, you still reap the benefit of one new loan with one monthly payment.
Finally, refinancing federal loans means you’ll permanently lose all the federal benefits associated with those loans (such as the right to forbearance, deferment, access to income-driven repayment plans, and potential loan forgiveness, among others). The process is not reversible.
Those who are good candidates for refinancing can lower the interest rate on student loans by multiple percentage points, saving thousands of dollars in interest and potentially paying off those loans years sooner than they would otherwise.
It’s a big decision that should be made carefully, but refinancing your student loans can have a huge positive impact on your financial security.
Remember, the lower your interest rate, the more of your monthly payment actually goes to paying down your student loan balance, rather than lining the pockets of your servicer. Taking advantage of opportunities to reduce your student loan interest rates can help speed up your progress toward a debt-free life.
Interested in refinancing student loans?Here are the top 6 lenders of 2017!
|Lender||Rates (APR)||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!|
|2.81% - 7.12%||Undergrad & Graduate||Visit SoFi|
|2.57% - 6.39%||Undergrad & Graduate||Visit Earnest|
|2.81% - 7.12%||Undergrad & Graduate||Visit CommonBond|
|2.99% - 6.99%||Undergrad & Graduate||Visit Laurel Road|
|2.58% - 7.26%||Undergrad & Graduate||Visit Lendkey|
|2.79% - 8.24%||Undergrad & Graduate||Visit Citizens|
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