Get Lower Interest Rate On Student Loans

When you’re trying to get lower interest rate on student loans, you have a lot of options. You can consolidate your loans, refinance them, or even get a personal loan to pay off your student loans.

You could also try getting a credit card with a 0% APR promotion and using the money that you would have paid toward your loans to pay down the balance on your credit card. This will allow you to save some money in interest charges over time, but it won’t lower the actual monthly payment amount on your student loans.

If you want to do something more drastic, like refinance or consolidate your student loans, there are some things you need to know first.

The 3 Best Ways To Lower Your Student Loan Interest Rate | Bankrate

Get Lower Interest Rate On Student Loans

3 ways to lower your student loan interest rate
The best method for lowering your student loan interest depends on your overall financial picture.

  1. Refinance your student loans
    Best for: Those who have a solid credit score and want to pay off their loan quickly
    If you have a solid credit foundation, are employed and plan to pay off your loan quickly, you may want to consider refinancing your private student loans. Well-qualified applicants may be able to take advantage of lower interest rates that could save money on monthly loan payments and overall interest fees.

Refinancing costs have come down markedly due to the coronavirus pandemic, with fixed APRs as low as 2.3 percent and variable APRs as low as 1.74 percent. You can sign up for a Bankrate account to see where current rates stand with our daily rate trends.

You may be able to refinance a student loan if you have bad credit, but your rates will likely be higher. A good credit score, by comparison, might improve your odds of qualifying for a lower interest rate.

To improve your credit score, be sure to follow good credit habits. Paying on time is a must. Reducing the balance on your credit cards (and thereby lowering your credit utilization ratio) might help too.

It’s also okay to be strategic and refinance multiple times, since there are no prepayment penalties on federal or private loans, and most loans don’t charge origination fees.

However, if you have federal student loan debt, be sure to weigh the pros and cons of refinancing into a private loan. Refinancing will cause you to lose federal borrower protections, like the automatic forbearance period and interest waiver through Aug. 31, 2022. If broad student loan forgiveness were to happen, private student loans would also not be eligible. That trade-off may not be worth it.

2. Take advantage of discounts

Best for: Borrowers with predictable income or those who have multiple accounts with the same company

One of the simplest ways to lower your interest rate is by automating your payments. Many lenders offer discounts of 0.25 percent to 0.5 percent if you set up autopay from a checking or savings account.

It might not sound like much, but it can add up over time. You could save around $25 a year on a balance of $10,000.

“This may be the simplest and quickest way to realize a reduction in interest and requires little effort on the borrower’s part,” says Jon Long, an attorney with Long, Burnett, and Johnson who specializes in student loan debt.

With some lenders, you might be able to qualify for loyalty discounts as well. Loyalty discounts, if you can find them, reward borrowers (and co-borrowers) who have other accounts with the lender — like a savings account or another loan. SoFi, for example, offers a “member discount” if you take out a student loan after taking out a personal loan or an investment account. Check with your lender to learn what’s available.

3. Negotiate with your lender

Best for: Those who got their student loans during high-interest-rate environments

If you borrowed at the private level or if you have already refinanced, you might consider shopping around for a more competitive student loan rate and presenting it to your current lender. Although it’s a long shot, the lender might be willing to match that rate to keep your business.

Adding a co-signer might help you if you need to show better credit or more income to qualify for a lower interest rate. However, be aware that your co-signer will be equally responsible for the loan. That’s a significant risk to the co-signer. If you fail to make timely payments, both of your credit ratings could suffer damage and you both could be financially liable for the debt.Key takeaway

student loan interest rates

To better understand how student loan interest works, let’s start by defining what “interest” means.

Interest on a loan of any kind – college, car, mortgage, etc. – is, essentially, what it costs to borrow money. It is calculated as a percentage of the principal (the amount you borrow), and this percentage is what’s known as your interest rate.

How does student loan interest work when paying back your loans?

Student loan interest rates can be fixed (unchanging for the life of the loan) or variable (fluctuating throughout the life of the loan). In both cases, the lower the interest rate, the less you’ll owe on top of the principal, which can make a big difference in the total amount you’ll owe on your loan over time. Federal loan interest rates remain fixed for the life of the loan. Private student loans vary by lender, but most lenders offer both variable and fixed interest rates.

A student loan is often a long-term commitment, so it’s important to review all of the terms of your promissory note (sometimes called a credit agreement) before signing. This note is just how it sounds – an agreement or promise you make to pay back your loan within the parameters laid out by your lender.

Terms in a credit agreement include:

  • Amount borrowed
  • Interest rate
  • How interest accrues (daily vs. monthly)
  • First payment due date
  • Payment schedule (how many payments – or “installments” – it will take to pay back the loan in full)

Your student loan will not be considered repaid in full until you pay back both the principal and the interest. To better understand how these costs combine, let’s dive into some common questions about student loan interest.

Your interest rate is determined by your lender. In most cases, if you’re considered a riskier candidate (and many students are, simply because they lack credit histories and steady incomes), the loan can be more expensive by way of a higher interest rate. To help secure a lower interest rate, students often apply with a cosigner. It might be difficult, but it’s not impossible to get a private student loan without a cosigner.

This applies more to private student loans than federal student loans, which have a separate application process that does not always consider the credit worthiness of applicants.

How is interest calculated on federal student loans?

Federal student loans, which are issued by the government, have a fixed interest rate (unchanging for the life of the loan), which is determined at the start of the school year. The rate determination is set in law by Congress.

Federal student loans and simple daily interest

Federal student loans adhere to a simple daily interest formula, which calculates interest on the loan daily (as opposed to being compounded monthly).

Since federal student loans are issued annually (and they don’t calculate your yearly balance for you), it’s fairly simple to calculate the amount of interest you’ll owe that year. Just take your annual loan amount (the principal), multiply it by your fixed interest rate, then divide that amount by 365:

Principal x Interest Rate / 365
Example:$5000 x 5% / 365 = 0.68 (68 cents per day will accrue on this loan)

With these stabilized variables, interest on federal student loans can be easier to calculate and predict than interest on private student loans. However, since both types of loans might be required to cover costs, it’s a good idea to understand how interest works on both.

How is interest calculated on private student loans?

Private student loans, which are issued by banks, credit unions, and other non-government entities, can have either fixed or variable interest rates, which can fluctuate during the life of a loan.

Student loan interest rates can vary from lender to lender, to get a better understanding, let’s take a look at an example.

If your loan balance is $2,000 with a 5% interest rate, your daily interest is $2.80.

1. First we calculate the daily interest rate by dividing the annual student loan interest rate by the number of days in the year.
.05 / 365.25 = 0.00014, or 0.014%

2. Then we calculate the amount of interest a loan accrues per day by multiplying the remaining loan balance by the daily interest rate.
$20,000 x 0.00014 = $2.80

3. We find the monthly interest accrued by multiplying the daily interest amount by the number of days since the last payment.
$2.80 x 30 = $84

So, in the first month, you’ll owe about $84 ($2.80 x 30) in monthly interest. Until you start making payments, you’ll continue to accumulate about $84 in interest per month.

Be sure to keep in mind that as you pay off your principal loan balance, the amount of interest you’re paying each month will decrease.

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