Compared to other types of debt, student loans have some of the lowest interest rates around — especially if you borrow from Federal Student Aid.
And for the 2019-20 year, interest rates have fallen on federal student loans for undergraduates, graduate students and parents. While the new rates aren’t drastically lower, even a small decrease in your interest rate can mean big savings on your debt over time.
Let’s take a closer look at how these lower interest rates could save you money — along with a couple of pro tips on how you can lower your interest rates even further. Specifically, we’ll touch on…
- How federal student loan interest rates have improved for 2019-20
- How better interest rates save you money
- 2 savvy ways to lower your interest rate further
- How paying your loan off faster saves you money on interest
Congress sets federal student loan interest rates on a yearly basis. If you already borrowed, the fixed rates on those loans won’t be affected. But anyone who took out a loan on or after July 1, 2019 will enjoy these new, lower rates:
As you can see, rates went down by about half a percentage point for each type of federal student loan. While this might seem like a small amount, it can make a significant difference if you’re paying off a large amount of debt over a long period of time.
Your long-term costs of borrowing almost completely depend on your interest rate. With a high rate, you’ll end up paying back a lot more than you borrowed. A low rate, meanwhile, means you won’t have to spend as much on interest.
Unless you’ve got subsidized student loans or are making payments as a student, interest will be growing on your debt the whole time you’re in college. You want the lowest rate possible, so that you don’t face a ballooning balance after you graduate.
For example, let’s say you take out $40,000 in unsubsidized student loans. If you had the old Direct loan interest rate of 5.05%, you’d pay $11,029 in interest over 10 years. But with the new lower rate of 4.53%, you’ll pay back $9,816, or $1,213 less.
You can see for yourself how a difference in interest rates can impact your monthly payment by plugging different numbers into our monthly payment calculator.
And besides lower rates, you can also speed up the process of repayment by making small or interest-only payments as a student, even though many federal student loans don’t require any payments until six months after you graduate. If you can cover the interest while you’re in school, you won’t be faced with a bigger principal amount when repayment starts.
In a borrower’s ideal world, you wouldn’t have to pay any interest on your loans. But while you probably can’t get your interest rate down to zero, you can find ways to lower it. Here are two strategies that can help:
1. Sign up for autopay
One easy way to get an additional discount on your student loans is to sign up for autopay. All you need to do is sign into your online accounts, provide your bank account information and select “autopay.”
With autopay, your loan servicer will automatically deduct payments from your account each month. An advantage of this is that you won’t have to worry about tracking bills or missing a payment.
And as an added bonus, your lender will likely give you a 0.25% discount. Both Federal Student Aid and many private lenders offer this autopay rate cut.
If money is tight and you’re concerned about accidentally over-drawing on your bank account, autopay might not be as feasible. But otherwise, there’s no reason not to set up autopay and enjoy the peace of mind and interest savings it provides.
2. Refinance your student loans for lower interest rates
Another way to lower your student loan interest rates is through student loan refinancing. If you have strong credit and a steady income (or a creditworthy cosigner), you could qualify for lower rates from a private lender.
Many online lenders make it easy to check your rates online with a quick pre-qualification check. If you meet their underwriting criteria, you could trade one or more of your old loans for a new one with a better rate.
That said, be careful about refinancing federal loans with a private lender if you’re relying on federal protections, such as income-driven repayment. Privatizing your federal debt will also make it ineligible for federal loan forgiveness programs, such as Public Service Loan Forgiveness.
If you don’t think you’ll need any of those federal benefits, though, refinancing with a private lender could be an excellent way to save significant money on interest and restructure your debt.
While these new federal rates mean less expensive student loans for today’s borrowers, the best way to save on interest is to pay your loans off ahead of schedule.
Let’s consider that $40,000 loan at a 4.53% interest rate again. If you paid it off over five years instead of 10, not only would you be debt-free sooner, but you’d also save a whopping $5,040 in interest.
Of course, not everyone can afford to increase their monthly student loan payments. But if you can swing it, speeding up your repayment timeline could mean much less of your money gets wasted on interest.