How to Reduce Your Student Loan Interest Rate

Besides student loans being a massive financial burden for millions of Americans, their interest rates are ridiculously high making repayment a nightmare. If you are struggling to pay back your student loans or want to save some money during the loan period, start by reducing your interest rate. This move will work magic considering a minimal interest rate means paying lesser interest and getting out of debt faster.

In this article,  we are going to explore various ways that can help to reduce your student loan interest rates.

1. Refinance Your Student Loans

This tops the effective strategies for lowering interest rates on student loans. It entails a private lender paying off your existing loan and issuing a new one with updated terms that possibly have lower interest rate. Make sure your credit is good i.e., has a score above 670, you’ve a stable and sufficient income that affords monthly payments, and interest rates have gone down since your original loans to benefit fully from refinancing.

Most private lenders offer refinancing options that are either fixed or variable rate. A fixed rate does not fluctuate through the entire loan span, whereas variable rate tends to change over time. If you're confident in your financial stability, refinance into a lower fixed rate to save thousands of dollars over the loan period.

2. Enroll in Auto-Pay for an Interest Rate Discount

Most loan servicers reward their borrowers with a small interest rate discount, typically 0.25%, for autopay enrollment. It is not a lot, but it can add up over time and help save hundreds of dollars. Autopay is helpful in making on-time payments which build credit score, reduces the risk of late fees and penalties, and lowers lenders’ risk of missed payments. Therefore, If you’ve multiple loans with different servicers, make sure each is set to auto-pay to maximize your savings.

3. Federal Student Loan Benefits

Federal student loans come with built-in options that are meant to reduce interest rate and minimize the burden of repayment.

Income-Driven Repayment (IDR) Plans

These plans cap your monthly payments at a percentage of your income. IDR plans do not directly lower your interest rate, but they prevent it from getting out of control by subsidizing some of it.

Some IDR plans include:

• Revised Pay As You Earn (REPAYE) -  the government covers 50% of unpaid interest for both subsidized and unsubsidized loans.

• Pay As You Earn (PAYE) -  limits your monthly payments to 10% of your income.

Loan Consolidation

It allows you to combine multiple loans into one to make payments manageable. Notably, loan consolidation results in an interest rate that is the weighted average of your existing loans rather than a reduction.

Therefore, consolidate your loans to simplify the repayment process rather than to save you some pocket change

4. Improve Your Credit Score

Credit score has a huge impact on the interest rate, especially for private student loans. The better the credit score, the bigger the probability of lenders offering you lower rates.

To improve your credit score:

• Ensure all your payments are made on time as payment history makes up 35% of your credit score.

• Minimize your utilization of credit to keep card balances below 30% of your limit.

• Do not add debt, this is because applying for multiple loans or credit cards in a short period affects your score.

• Always check your credit report for free services such as AnnualCreditReport.com to monitor and correct errors.

A high credit score, above 700, will make you a stronger candidate for refinancing, which will lower interest rate.

5. Pay Off Interest During School and Grace Periods

Borrowers who have unsubsidized federal and private student loans accrue interest while in school and during the grace period. It is advisable to pay off the interest before it gets added to the principal to reduce the total amount you owe and to ultimately keep the interest rate low.

This is doable by making small monthly interest payments while in school and using windfalls e.g., tax refunds, bonuses, and gifts to pay down interest before official start repayments. Even the smallest amount, $25 to $50 a month toward interest can in the long run save you hundreds or even thousands.

6. Employer Student Loan Repayment Assistance

Many companies help their employers in reducing debts by offering student loan repayment benefits. Some employers go an extra mile by negotiating lower interest rates with lenders as part of their repayment programs. Employees can take advantage of this perk by asking HR if they offer student loan repayment benefits, and if they don't, they can suggest it as a workplace benefit. Additionally, if the student loan debt is a major concern, always select companies that offer the benefit.

7. Look for State and Federal Loan Forgiveness Programs

Federal and state programs reduce or entirely eliminate student loan balance, significantly lowering interest costs. Some of these programs include:

• Public Service Loan Forgiveness (PSLF) - You have a higher probability of qualifying for a complete loan forgiveness after 10 years of payments if you work in a government or an eligible non-profit.

• Teacher Loan Forgiveness - This is for teachers in low-income schools; they receive up to $17,500 in loan forgiveness.

• State-Specific Programs - Numerous states offer repayment assistance for professionals in fields such as healthcare, law, and education.

Final Thoughts

Reduce your student loan interest to make a significant difference by paying off your debt fast or minimizing the amount you spend in the long run. Therefore, it is crucial to explore diverse options e.g., refinancing, auto-pay discounts, federal repayment programs, and employer benefits to lower costs and gain financial freedom. If you are unsure of the best options, start by checking your credit score, reviewing your loan terms, and talking to your lender about available discounts. Even the tiniest step counts in reducing the financial stress of student loans and bringing you closer to debt-free life.