Can I Negotiate the Interest Rates on My Student Loans?

As a student loan borrower, one thing that can often get in the way of making progress on your debt is the interest you have to pay on your loans.

I know that was the case for me when I was paying off my Grad PLUS loans. They had an interest rate of 7.90%. I was paying hundreds of dollars each month in interest, which felt criminal.

If you’re like me, you may be wondering, “Can I negotiate student loans interest rates?” Read on to find out the answer.

Can You Negotiate Student Loans Interest Rates?

Interest rates on your federal student loans are set by Congress each year. Unfortunately, this can be bad news for borrowers looking to negotiate their interest rate.

“The interest rates on federal education loans are set by law and cannot be negotiated,” confirms financial aid expert Mark Kantrowitz of Cappex.com.

So if you have Grad PLUS or Parent PLUS loans, which tend to have higher interest rates, you’re stuck with that rate.

It’s not a situation where you can just call your loan servicer and try to negotiate student loan interest rates. That strategy may work with some credit cards, and you should definitely try if you have credit card debt. However, it’s a pretty ineffective strategy for student loans.

While there is no surefire way to negotiate student loans interest rates, there are ways you can get a small interest rate reduction.

“With federal and private student loans, borrowers who agree to repay the loan through auto-debit, where the monthly payment is automatically transferred from your bank account to the lender, can get an interest rate reduction of 0.25% or 0.50%,” says Kantrowitz.

How to Negotiate Student Loans with a Private Lender

As with most cases, private student loans have a different set of rules and regulations.

Some private student loan borrowers may be eligible for an interest rate reduction through autopay. But your interest rate is based on a whole different set of criteria.

“Terms of private student loans are set by the lender,” explains Kantrowitz. “However, I have never seen a lender negotiate the interest rate on a new loan. They use formulas based on the credit score of the borrower and cosigner, if any.”

Depending on your credit score and a number of factors, your interest rate could potentially be higher than your federal student loans. One possible way of lowering the interest rate on your private student loans is by having a cosigner.

“You might be able to get a lower interest rate by using a cosigner who has a much better credit score, but you cannot haggle with the lender over the interest rate,” says Kantrowitz.

However, having a cosigner is something you should think about seriously as a cosigner is legally liable for your debt if you are unable to pay.

In recent years there have been complaints about getting hit with auto-default after a cosigner’s death. Additionally, it can be tough to get approved for cosigner release as well. Keep that in mind if you decide at some point you want to release the cosigner from your loans.

Exceptions to the Rule

In general, you cannot negotiate student loans’ interest rates. However, there are extenuating circumstances where your loan servicer or lender may work with you. But, the cases are extremely rare.

“The main situations in which I’ve seen borrowers successfully negotiate a reduction in the interest rate or loan balance, as opposed to a different repayment plan, involved borrowers who were in default and in a “you can’t squeeze blood from a stone” situation,” adds Kantrowitz.

In many of these cases, the student loan borrowers illustrated financial hardship that is unlikely to improve anytime soon.

“I’ve also seen cosigners whose borrower defaulted on the loan negotiate with the lender to remove the default from their credit history and reduce the interest rate in exchange for the cosigner agreeing to make the monthly payments via auto-debit,” says Kantrowitz.

Loan servicers and lenders can be notoriously inflexible and play by the rules. When they do bend the rules, it’s under pretty rare circumstances.

Other Options for Lowering Your Interest Rates

By now you’ve probably realized that the possibility of lowering your interest rate on your student loans is pretty much not going to happen. However, there is a roundabout way you can lower your interest rate.

While you can’t negotiate student loans interest rates with your current lender, you can refinance with another lender. This would potentially get you a lower interest rate.

Student loan refinancing is the process of combining all of your student loans into one monthly payment and having one interest rate — hopefully one that is lower.

If approved for a lower interest rate, you could potentially save thousands of dollars per year. Student loan refinancing is a great way to save money on interest and make your student loan payments easier to manage. However, it’s not for everyone.

If you have federal student loans, you do forfeit any loan forgiveness options as well as any income-driven plans if you decide to refinance. If you don’t plan on taking advantage of those options, you have good credit and a stable job, student loan refinancing is a great alternative for lowering your interest rate.

Bottom Line

Interest on your student loans can be a real bummer, especially when your interest rate feels so cumbersome.

Although it may seem impossible to negotiate student loans interest rates, you may be able to refinance with another lender and save money on interest that way. Just be sure to do your research and make sure it’s the right move for you.

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Published in Federal Student Loans, Student Loans