If you're a student, you may not have much control of the interest rates you pay on your loans. The U.S. Department of Education determines the interest rate for federal loans each year. Private student loans can be difficult for young people with a limited history of credit.
There are some things you can do to reduce the amount of interest you pay on your student loans once you've graduated. Here are some tips to lower your student loan interest rate.
Pick the right repayment plan
Standard Repayment Plan will usually be selected if you do nothing. Your payments will be based on an average 10-year plan. However, this plan does not work for everyone.
The federal government offers four income driven repayment plans (IDR), where monthly payments are determined by your family size and income. The monthly payments may be lower, but the interest will not likely decrease. You may even end up paying more.
Depending on the IDR plan chosen, any remaining balances are forgiven after 20 or 25 year. The IRS may tax the forgiven amount. Even though your student loans are forgiven, you may still be hit with a large tax bill.
Public Service Loan Forgiveness, or PSLF, is a repayment program that can save you money. If you're employed by a qualified public sector organization or government, you could be eligible to receive your student loans after 10 service years.
Check here to see if you qualify. It's important to submit your Employment Certification quickly to ensure that you qualify.
Consolidate your student loans
You may have several student loans you'd like to consolidate. Consolidation is a great option. You can combine all of your student loans and make one monthly payment at a single rate. The problem is that consolidation alone will not guarantee a lower interest rate on your student loans. You'll only have to make one payment rather than multiple.
To consolidate federal loans for students, you can utilize a Direct Student Loan Consolidation. Your new rate of interest is the weighted-average of your existing student loan rates. It is possible that the weighted rate will be slightly higher than you previously paid. Consolidation can be used to reduce payments while increasing the amount of debt.
Although consolidation is not the best way to lower your interest rate, it could be a good option if you are having difficulty keeping track of monthly payments. Consolidation could be beneficial if, for example, you wish to combine direct federal loans with non-direct federal loan programs (such as Perkins). This will allow you to take advantage of income-driven repayment plans and/or forgiveness programs.
Often, "consolidating," and "refinancing" are used interchangeably. However, they have different meanings. While refinancing is a form of consolidation, it's done to lower your interest rates.
Set up automatic payments
Many student loan companies, both private and federal, offer interest rate discounts if autopay is enabled on your account. Your student loan interest rates can be lowered depending on your servicer. SoFi offers, for instance, a discount of 0.25% on autopay.
This discount is offered by servicers because automatic payments reduce the risk of you missing payments or defaulting on your loan.
You'll (hopefully!) also get a lower interest rate on your student loans. With autopay, you can be sure that no payment will be missed. You may be paying too much on student loans. Ask your loan servicer if there is a discount for autopay.
Enjoy a loyalty discount
Some private student loans companies offer loyalty discounts in addition to autopay discounts if you have an eligible account.
You can get a 0.125% discount on new loans if you are already a SoFi member.
Other lenders will require you to open an account at their bank in order to receive the bonus. If you do, you could even be eligible for a higher discount.
You can use a refinance calculator for your student loan to find out what the new payments would be.
Refinancing your student loans
There are other options to consider. You may be able to get a lower interest rate on student loans if you refinance your student loan.
Refinancing student loan offers many benefits. Bundling loans together (both federal and personal) can lower interest rates. You can reduce your interest rate by bundling several loans (federal and private) into one new loan.
Refinancing student loans is a good option for those with high-interest federal student loans and who know that they will not be using any federal loan benefits like forgiveness of student loan. You will lose all federal benefits, such as income-based repayments, if refinancing.
Refinancing your student loans can lower the interest rate:
- An excellent credit rating: The lower your score is, the greater your chances are of obtaining a good rate.
- A lower debt-to-income ratio (DTI). Your monthly income is another important factor lenders take into account, particularly in relation to your total debt burden. You may be able to devote more money towards your new loan if you are paying less on your debt.
- The co-signer Although your income and credit are both in good condition, a person with excellent credit who can co-sign for you could be helpful.
- A variable interest rate: Some student loans refinance lenders have both fixed and variable rates. Variable interest can be lower at first, but will increase as the market fluctuates. The fixed rates remain the same throughout the entire loan term. Variable rates might be cheaper if you intend to pay your student loans off quickly.
- Finding the right lender: Every lender sets its own interest rate criteria, so you should shop around for the best lender to meet your needs. You can even view the rate offers from some lenders before applying, such as SoFi.
You can lower your student loan interest rate
You can lower the interest rate on your student loans in several ways. To find out if there are any discounts available, you can call your servicer. You can also refinance and consolidate federal and personal loans. If you qualify for a refinance, your interest rate may be lower if you've got a good credit rating, a low-debt-to-income rate, a cosigner on the loan, or an adjustable interest rate. Refinancing federal loans will result in the loss of federal protections, including forgiveness.
You can easily check the interest rate on your student loan with SoFi in a matter of minutes. It won't be long before you can apply. If you refinance, you may be able to save on interest.