If you’re like most student loan borrowers, your monthly payment eats up a significant amount of your paycheck. The average monthly student loan payment for 20-somethings is $351.
But much of that monthly payment doesn’t help eliminate your debt. Instead, it pays off accrued interest. In some cases, interest charges can even cause your loan balance to grow over time. This can happen if you’re on an income-driven repayment plan and you don’t have low-interest student loans.
As such, qualifying for lower student loan interest rates can help you save money and become debt-free sooner.
How student loan interest works
When you take out a loan, you sign an agreement to repay your loan with interest. Your lender will set up a minimum monthly payment that covers part of the accrued interest and the principal.
For example, if you had a $10,000 loan at 5% interest for 10 years, your monthly payment would be about $106. But over the life of your loan, only $83 of that payment would go toward your principal balance, on average. The remaining $23 goes toward interest charges.
Because only a part of every payment goes toward the principal, you will pay your lender more than the original $10,000 you borrowed. If you just made the minimum payment of $106 for 10 years, you’d pay back a total of $12,728. That’s $2,728 more than you borrowed thanks to your interest rate.
Use our student loan payment calculator to run the numbers for your specific situation. Regardless of what your interest charges come out to be, you can save money — and get rid of your student loans faster — by lowering your student loan interest rates.
How to get a lower student loan interest rate
Although you signed a contract with your lender agreeing to repay the loan at a particular interest rate, you’re not stuck with that rate forever. You can lower your rate if you meet certain criteria.
1. Sign up for automatic payments
One of the easiest ways to lower your interest rate is to enroll in automatic payments. Federal student loan servicers (and many private loan lenders) offer you a 0.25% discount on your interest rate if you allow them to automatically withdraw the minimum payment from your bank account each month.
If that 0.25% reduction doesn’t sound significant to you, do the math to see how the change would affect you over time. If your $10,000 loan at 5% interest was reduced to 4.75% for the length of your loan, you’d pay back $12,582 in total.
That’s a savings of $146. It’s not a huge difference, but it’s still money back in your pocket.
But loan servicers don’t offer this benefit out of the goodness of their hearts. They do it as an incentive to get you to enroll in automatic payments, which reduces the risk of you falling behind on your payments. It’s also more convenient for you.
Enrolling in automatic payments is free and easy. But you’ll need to stay on top of your finances to make sure enough money is in your bank account when the automatic payment is processed. Otherwise, you could get hit with overdraft penalties and fees.
To set up automatic payments, you can contact your loan servicer online or over the phone. You’ll need to provide them with your bank account number and routing number.
You can also usually choose a date each month for your lender to withdraw your payment. For example, if it’s easier to make your payments right after your paycheck arrives, you can set the withdraw date for the day after payday.
2. Always pay your bill on time
Some lenders offer an interest rate reduction, usually 0.25%, if you make three or four years of consecutive on-time payments. Signing up for automatic payments can help ensure you never miss a payment, helping you take advantage of this extra discount.
Most lenders will apply the discount to your account automatically once you’ve made the necessary number of payments. But it’s your responsibility to make sure your payments always arrive on time. One missed payment will make you ineligible for the discount.
3. Refinance your student loans with a private lender
If you have high-interest federal or private student loans, refinancing can be a useful tool to get a lower student loan interest rate and save money. With refinancing, you work with a private lender to take out a new loan to repay some or all of your current debt with low-interest student loans.
The new loan is completely different from your old ones. It will have a new interest rate, monthly payment, and repayment term.
If you have good credit, a steady income, and a cosigner, you could qualify for the lowest rates that student loan refinancing companies have to offer. That makes refinancing one of the most cost-effective ways to reduce your interest charges. Here’s an example of the low-interest student loans for which you could qualify.
|Lender||Variable rates||Fixed rates|
|First Republic||Not available||1.95% – 4.45%|
|SoFi||2.48% – 7.52%||3.99% – 7.80%|
|Earnest||2.57% – 5.87%||3.89% – 6.32%|
If you had a $10,000 loan at 5% interest and qualified for refinancing at 3.15% interest, you’d pay back $11,671 over 10 years. You’d save $1,057 by refinancing your student loan, compared with what you’d pay at 5% interest.
That money could go a long way to paying off your debt faster or help you pursue other goals, such as saving for retirement.
But refinancing isn’t for everyone. For one, you need to be employed, meet minimum income requirements, and have a strong credit history. If you don’t have those things, you might be ineligible for refinancing unless you get a cosigner to act as a guarantor on the loan.
Even then, you might still need a cosigner to qualify for low-interest student loans.
Also, refinancing can be risky if you have federal loans. You’ll lose out on certain federal perks, such as access to income-driven repayment plans and federal forgiveness programs, so it’s important to weigh the benefits and drawbacks of refinancing before applying.
Accelerating your debt repayment
A lower student loan interest rate can help you save money. Refinancing your student loans or qualifying for an interest rate reduction could make a big difference in your cash flow.
But if you don’t qualify for either option, don’t get discouraged. There are still ways you can take charge of your loans and pay them off sooner.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Get real rates from up to 4 Lenders at once
Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Laurel Road.
Laurel Road Disclosures
2 Important Disclosures for SoFi.
3 Important Disclosures for CommonBond.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 5.87%||Undergrad & Graduate||Visit Earnest|
|2.80% – 6.38%1||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 7.52%2||Undergrad & Graduate||Visit SoFi|
|2.47% – 7.99%||Undergrad & Graduate||Visit Lendkey|
|2.57% – 6.65%3||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.17%4||Undergrad & Graduate||Visit Citizens|