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How to Lower Your Student Loan Interest Rate

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In a Nutshell

You have many options to lower your interest rates. Refinancing is good when you have good credit. Lowering your interest rate may be as simple as calling your loan servicer and asking for a better rate.

Written by Attorney John Coble.  
Updated May 17, 2021


You have many options to lower the interest rate on your student loan debt. For many people, lower student loan interest rates mean saving thousands of dollars, lower monthly payments, and/or shorter student loan repayment plans. This article will discuss how your student loan interest rates are determined and how you can lower the rates tied to your loans. Making this effort might save you a lot of money over time.

How Are Student Loan Interest Rates Determined?

How your student loan interest rates are determined depends on a few different factors.  All student loan borrowers of any specific kind of federal loan will be assigned the same interest rate that is given to their peers. Federal loan interest rates aren’t dependent on income level, creditworthiness, etc. For private student loans, interest rates are assigned  based on your credit history and other financial considerations. Other important factors include whether you choose a variable rate or fixed-rate loan and the policies of the lender.

Federal student loans usually have more favorable loan options than private loans. These terms include grace periods, deferments, forbearances, income-driven repayment options, and public loan forgiveness. Private student loans are offered by for-profit corporations. These lenders aren't going to give you the generous terms that the federal government will. 

When you refinance, you use a new private loan to pay off your existing federal and private student loan amounts. The question is, why would anyone want to give up the more favorable terms of a federal loan in favor of a private loan? One possible  answer is that you may have taken out a federal loan for a year that required a higher interest than the current rate offered by private lenders for someone with your credit score. Qualifying for the lowest rates requires the best credit scores.

What’s the Difference Between a Variable Interest Rate and a Fixed Interest Rate?

Sometimes, you may have a choice of a lower variable rate compared to the fixed rate assigned to your federal loan. Variable rates rise and fall based on an underlying index such as the London Interbank Offered Rate (LIBOR). While variable-rate loans may be better at the start of a repayment period, a change in economic conditions could cause the index to go up. If this happens, your interest rate could increase. When interest rates increase, monthly payments increase. You could end up with significantly higher monthly payments with a variable-rate loan. The advantage of fixed-rate loans is their interest rates stay the same over the entire life of the loan.

Ways You Can Lower Your Student Loan Interest Rate

There are many ways borrowers can reduce their student loan interest rates. It's best to explore all the ways to reduce interest rates before deciding which choices are best for your situation. 

Refinancing

Student loan refinancing can save you money, reduce your monthly payments, and shorten your repayment term. Refinancing creates a new loan. You can use this new loan as a consolidation loan to pay off the loan balances for all your old student loans. Refinancing can be used to get rid of variable interest rates. Your credit score and credit history will be important in a lender’s decisions regarding interest rates offered. 

Student loan refinances aren't the only way to lower interest rates. Income-driven programs and public service forgiveness programs for federal student loans can be more beneficial than pursuing a refinance. With private loans, you can lower your interest rate by negotiating with the loan servicer, getting a co-signer, or using autopay. Refinancing isn't the only way forward. 

Autopay

The easiest way to lower your interest rate is to take advantage of autopay discounts. Lenders want autopay because they know they're more likely to be paid on time. With automatic payments drafted from your account, you can't forget a payment. Banks are often even willing to pay you to use autopay. They give you this payment through a small interest rate reduction. You may get a .25% interest rate discount by using autopay. Even federal loans provide a .25% interest rate deduction for using autopay.

Autopay may come from your bank account. If you choose this option, you’ll need to keep a close eye on your account. You don't want the autopay to cause an overdraft or to have your student loan payment declined. Another option may be to tie the autopay to a credit card. But, if you fail to pay the credit card off in full each month, you'll incur interest charges on the credit card. This credit card interest might wipe out your interest savings from using autopay. While many people can benefit from autopay, there are probably as many people that would be better off not using autopay. You should do whatever makes the most sense to you.

Contact Your Loan Servicer

With private student loans, you can call your loan servicer and ask them to reduce your interest rates. If you have a good credit score, they’ll know you have refinancing options that might give you a better interest rate. If that is the case, the bank may lower your interest rate to keep from losing your business. This is much easier than student loan refinancing. 

How a Co-Signer Can Help

Using a co-signer who has good credit is a good way to refinance with a lower interest rate. A cosigner is usually a family member, such as a parent or spouse. The drawback is that if you default, the lender will come after your cosigner for repayment. Your relationship could suffer as a result.

Shop Around for the Best Student Loan Interest Rates

The best strategy when considering refinancing is to shop around with many lenders. Private lenders want to beat their competition when possible. If they can give you a lower rate than the next bank, while making an acceptable profit for themselves, they will. After you have found your best deal, it's a good idea to go back to the original lender to see if they’ll match it. After you have found your lender, then decide on whether to use features such as autopay or not.

Benefits of Lowering Your Student Loan Interest Rate

In the examples below, you’ll see that refinancing can substantially reduce your monthly student loan payment while potentially saving thousands of dollars on the total principal and interest you’ll pay on your student loans. Or, you can save even more on the total amount paid by keeping a similar monthly payment amount and reducing the term of your repayment.

In these examples, you’re a hypothetical law student who needs financing for three years of graduate level schooling. You also have loans covering your undergraduate years. You started college in 2000 and completed law school in 2007. You consolidated $130,000 of student loans into a federal consolidation loan in 2007 just before repayment started on 7/1/2007. Your interest rate is fixed at 6%. Your term is 30 years. In 2021, exactly 14 years after you started making payments, you decide to look at refinancing. You have excellent credit. You consider both fixed and variable interest rate loans. You also consider different loan terms. 

In Example-1, you consider a refinanced loan with a term of only 5 years. You choose a variable interest rate since with such a short term, there's less risk of the interest rate going up. The interest rate is 2%. You choose autopay reducing your interest rate another .25%. You have a five-year loan of 1.75%. Your remaining principal on the original loan is about $96,000.00. 

Example-1 

Continue at 6.0%Refinance at 1.75%Refinance at 1.75%
Remaining Term16 Years16 Years10 Years
Interest to be Paid53,600.0014,136.008,715.00
Principal to be Paid96,000.0096,000.0096,000.00
Total to be Paid149,600.00110,136.00104,715.00
Amount Saved39,464.0044,885.00
Monthly Payment779.00574.00 873.00

In Example-1, the savings are incredible. You could pay the debt off 6 years earlier and you save almost $45,000.00. Your monthly payments are only $94.00 more than the monthly payment before refinancing. Or, you could keep the same loan term and you would still save almost $40,000.00. With the same 16-year repayment term, you would save $205.00 on your monthly payments.

This is great, but there's a catch. This example was calculated with a variable rate mortgage that could go up. For purposes of this calculation, interest rates were kept stable. If interest rates made a big upward move, it could be catastrophic for you. 

An interactive version of the graph below can be found on the Federal Reserve Economic Database (FRED). Choose the maximum date range to get this graph.

Many people with variable-rate loans suffered greatly during the late 1970s and early 1980s. It's a mistake not to learn the lessons of history. These high-interest rates were the result of manipulation by the Federal Reserve to fight inflation. Some economists believe we're about to enter another period of higher inflation. If this happens, it's likely interest rates will increase. When rates increase, variable rates go up, but fixed-rate loans remain the same. 

Example-2 uses a fixed-rate student loan with everything else being the same, except the interest rate. Here, the interest rate is 3% reduced by .25% for autopay leaving an applicable interest rate of 2.75%. 

Example-2

Continue at 6.0%Refinance at 2.75%Refinance at 2.75%
Remaining Term 16 Years 16 Years 10 Years
Interest to be Paid 53,600.00 22,772.00 13,914.00
Principal to be Paid 96,000.00 96,000.00 96,000.00
Total to be Paid 149,600.00 118,772.00 109,914.00
Amount Saved 30,828.00 39,686.00
Monthly Payment 779.00 619.00 916.00

Example-2 costs $45.00 more per month more if the same 16-year term is kept. If you choose a 10-year term, the monthly payment is only $43.00 more than the 10-year term at the 1.75% variable rate. But, you're buying a lot of security provided by the fixed-rate versus the variable-rate. 

Let’s Summarize…

You have many options to lower your interest rates. Refinancing is good when you have good credit. Lowering your interest rate may be as simple as calling your loan servicer and asking for a better rate. It may be that you need a co-signer to reduce your interest rates. Don’t be discouraged if you strike out on a few applications. Shopping around can possibly get you a better deal. Lenders give everyone a small discount on their rate if they use autopay. The sooner you start working on a lower interest rate, the sooner you’ll start saving money.



Written By:

Attorney John Coble

LinkedIn

John Coble has practiced as both a CPA and an Attorney. John's legal specialties were tax law and bankruptcy law. Before starting his own firm, John worked for law offices, accounting firms, and one of America's largest banks. John handled almost 1,500 bankruptcy cases in the eig... read more about Attorney John Coble

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