Ways to lower the interest rate on your student loan

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On average, Class of 2020 graduates who took out loans left college with $ 29,927 in student loan debt. On his…

On average, Class of 2020 graduates who took out loans left college with $ 29,927 in student loan debt. In itself, that’s a lot to digest. But with an interest rate of 5.8% (the average student loan interest rate among all existing borrowers) and a 10-year repayment plan, you’ll end up paying a total of $ 39,510 for your loan. student.

With thousands of dollars at stake, learning how to get a lower interest rate on student loans could save you a lot of time. The options may vary depending on the type of student loan you have and your current rates. Read on to learn more about your choices.

Federal or private student loans

First of all, it’s important to understand that your options for getting a lower student loan interest rate will depend on the type of loan you have.

With federal student loans, for example, consolidating them through the Department of Education will result in a slightly higher interest rate, not lower. Indeed, the new rate is the weighted average of the interest rates on the loans in consolidation, rounded to the eighth of 1% higher. In addition, the rates are set by Congress, so there is no leeway for negotiation. For the most part, your best bet is to refinance your loans with a private lender.

Even then, federal student loans tend to have lower interest rates in general, especially for undergraduates. So unless your credit history is in great shape and you have a high income, you could be stuck with what you have. Also, if you refinance your federal loan with a private lender, you are waiving any federal loan waiver or forbearance program.

With private student loans, on the other hand, you’ll have more opportunities to work with your current or new lender to save interest, reduce student loan payments, and more.

How to reduce student loan interest rates

Getting a lower student loan interest rate will not only save you on interest charges, but it can also help you lower your monthly payments and even pay off your student loan debt sooner. Here are some of the best ways to lower your interest rate on student loans.

Configure automatic payments. On private and federal student loans, lenders and loan managers often offer a rate reduction if you set up automatic payments. Most discounts reduce your rate by 0.25 percentage points, but some go as low as 0.5.

It may not seem like much, but the savings can add up over time. For example, paying an interest rate of 5.55% on $ 29,927 of student debt instead of 5.8% will save you $ 447 over 10 years.

“It’s a no-brainer, and it will make your life easier since you won’t have to worry about missing a payment,” said James Lambridis, Founder and CEO of DebtMD. “Just make sure you have enough money in your bank account each month to cover the payment. ”

Look for other discounts. Depending on the lender, you may be able to benefit from other discounts on the interest rate on your student loan.

For example, MPower Financing offers a rate discount of 0.5 after making six consecutive payments on time through Auto Pay, and this is in addition to its Auto Pay Discount of 0.5.

Other lenders, including Citizens Bank, may offer a loyalty discount of 0.25 (or more) if you have an existing relationship, such as a bank account or other loan.

Negotiate with your lender. If you have private student loans, you may be able to negotiate a lower interest rate with your lender. This is especially true if you are struggling to keep up with your monthly payments or if you are considering refinancing and want to give your lender a chance to match.

Of course, there’s no guarantee that your lender will accept a lower interest rate for student loans, but it’s worth a try. “Borrowers who are in financial difficulty may get a reduction in short-term interest rates under extreme circumstances,” says Mark Kantrowitz, an independent financial aid expert. “The lender is more likely to offer a forbearance or partial forbearance than to reduce the interest rate.”

Refinance your student loans. One of the best ways to maximize your savings on your student loan repayment plan is to refinance your debt with a new lender. Depending on your credit health and financial situation, you could significantly reduce your interest rate.

To give you an idea of ​​the potential savings, let’s say you qualify for a reduction in your interest rate from 7% to 4%. With a principal balance of $ 29,927, you would save $ 5,338 in interest over 10 years.

“You also have the option of opting for a variable rate loan, as opposed to a fixed rate,” explains Mr. Lambridis. “Variable rates are generally lower than fixed rates, but may increase. As such, most people are better off with a fixed interest rate.

If you want to know what your savings might look like, most of the best student loan refinancing companies allow you to pre-qualify before submitting a formal application. This process does not involve a serious credit check and no commitment is required to obtain a quote.

You can even seek help from companies like Juno, which consolidate student loan borrowers and negotiate with lenders on their behalf for lower refinance interest rates.

[Read: Best Student Loan Consolidation and Refinance Companies.]

Get a co-signer. If you can’t qualify for a lower interest rate through refinancing on your own, consider having a loved one apply with you as a co-signer. If that person’s credit and income are in great shape, it can increase your chances of getting approved and qualifying for a low rate.

In many cases, lenders even have co-signer release programs, allowing you to remove your co-signer from the loan after meeting certain payment and credit requirements.

Just keep in mind that if a parent or partner co-signs your loan application, the loan will show up on the co-signer’s credit report and could potentially hurt their chances of getting credit when needed. Plus, if you miss a payment, your co-signer is legally responsible for paying what you owe. Failure to do so could damage both of your credit scores.

Build your credit. If you don’t have anyone who can or wants to co-sign, take the time to work on improving your credit history so that you can qualify for a lower interest rate.

This process can be time consuming, especially if you have negative items on your credit report. Use a free credit monitoring service like the one offered by Experian to review your credit report to get an idea of ​​what improvements you can make.

Possible actions you can take include paying off credit card balances, catching up on overdue payments, disputing inaccurate credit report information, and adding as an authorized user.

[Read: Best Starter Credit Cards for Building Credit.]

How to reduce student loan payments

Lowering your interest rate may automatically lower your monthly payments, but you may not always be able to get a lower rate.

If you want to learn how to reduce student loan payments with or without a lower interest rate, here are a few options:

Adopt an income-based repayment plan. If you have federal student loans, you may be able to subscribe to one of the four income-based repayment plans. These plans reduce your monthly payment by 10-20% of your discretionary income and also extend your repayment term to 20 or 25 years. At the end of your term, any remaining balance will be canceled.

Refinance with a longer repayment term. Even if you can’t get an interest rate lower than what you’re paying now, refinancing your longer-term student loans can dramatically reduce your payment. For example, if you refinance $ 29,927 into student loans at the same 5.8% rate with a term of 20 years instead of 10 years, your monthly payment would drop from $ 329 to $ 211. Of course, you’ll end up paying an additional $ 11,122 in interest as well, so think carefully about all of your options before choosing this one.

Apply for a loan modification. If you have private student loans and are having trouble making your payments, you can request a change to your payment plan to stay current. Loan modifications can include lower payments, lower interest rates, or both, and although you will end up paying more in the long run, it can make your life less stressful as you work to get back on your feet financially.

Plus, while it won’t lower your monthly payments, taking advantage of the student loan interest deduction on your tax return each year can save you money.

“The interest deduction on student loans is an above-the-line income exclusion, which means you don’t have to itemize to claim the deduction,” says Kantrowitz. “It’s actually a discount on the interest rate, equal to the borrower’s marginal income tax rate. You can deduct up to $ 2,500 in student loan interest paid throughout the year on qualifying loans.

Whether you are looking to get a student loan interest rate, a payment, or both, the important thing is to be proactive in researching your options and finding the one that best fits your current financial situation and to your long-term goals.

[Read: Know These 7 Above-the-Line Tax Deductions.]

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Private Student Loans vs. Federal Student Loans: What’s the Difference?

Poll: Almost a third owe more than $ 30,000 in student loans

Do student loans count as income?

Ways to lower the interest rate on your student loan originally appeared on usnews.com


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