- 6 Legit Ways To Lower Your Student Loan Payments
- 1. Extend your repayment plan
- 2. Opt for a graduated payment plan
- 3. Enroll in an income-driven repayment plan
- 4. Consolidate your loans
- 5. Refinance at a lower interest rate
- 6. Set up autopay
- You don’t have to be held hostage by student loans.
- The Ultimate Guide to Lower Student Loan Payments
- Option 1: Enroll in an income-driven repayment plan
- What is your eligibility for an income-driven repayment plan?
- How to enroll in an income-driven repayment plan
- Option 2: Extend your loan term
- Option 3: Refinance your loan
- College Ave
- 6 Ways to Reduce Your Student Loan Costs
- 1. Sign up for automatic payments
- 2. Choose a shorter repayment term
- 3. Make payments while you’re in school
- 4. Make additional payments
- 5. Refinance your student loan
- 6. Combine these tips to save the most money on your student loan
- 5 Things to Know About Current Repayment Flexibilities and Your Federal Student Loans
- 1. Your Monthly Payments Are Suspended for ED-Owned Loans
- 2. Temporary 0% Interest Rate on Loans Owned by ED
- 3. Your Income Driven Repayment (IDR) Recertification Date Has Changed
- 4. Avoid Coronavirus-Related Scams!
- 5. If You’re Struggling Financially, You Have Multiple Payment Options When Payments Resume
- The 7 Best Ways To Lower Your Student Loan Interest Rate
- 7 ways to lower your student loan interest rate
- 1. Consider refinancing
- 2. Automate your payments
- 3. Negotiate with your lender
- 5. Work with a co-signer
- 6. Choose your loans carefully
- 7. Borrow equity from your home
- What to do if you can’t get a lower rate
- Deduct interest payments from your taxes
- Check for cash back specials or rebates
- Adjust your payment plan
- Final considerations
- Next steps
- Learn more:
6 Legit Ways To Lower Your Student Loan Payments
millions of other Americans, financial journalist Janet Alvarez was laid off from her job in 2009. She decided to ride out the recession by pursuing her MBA, racking up six figures in student loan debt along the way.
But when she graduated, the economy was still sputtering, and there were few jobs available for her, despite her advanced degree. Her credit score was in the gutter, and to top it off, she had tens of thousands of dollars in medical debt.
“I was really at a rock bottom,” said Alvarez.
But thanks to her professional background, she had the skills to dig up solutions to her massive debt problem.
Through a combination of income-driven repayment and refinancing, she was able to lower her payments until she was in a position to aggressively tackle her loans.
Today she is nearly debt-free, and as the executive editor of personal finance site Wise Bread, she helps others navigate similar difficulties.
Whether you’re barely scraping by or simply want to pay less per month on your student loans, there’s hope for getting those payments lowered.
1. Extend your repayment plan
When you graduated from college, you were automatically enrolled in the standard repayment plan, the default plan for federal borrowers, which requires you to pay off your loan over 10 years. What you might not realize is that this plan is not your only option ― far from it, in fact.
One way to lower your monthly payments is to enroll in an extended payment plan. Adam Minsky, a lawyer whose practice is dedicated entirely to helping people with student loans, said this allows you to stretch out payments over up to 25 years. With more time to pay, the amount you have to hand over each month decreases.
The extended repayment option is available only to federal student loan borrowers (as are most repayment benefits). Additionally, you cannot have had an outstanding balance on any Direct loans or Federal Family Education Loan (FFEL) Program loans before Oct. 7, 1998, and you must have at least $30,000 in Direct or FFEL loans.
The drawback? The longer you take to pay off your loan, the more you’ll pay in total interest. It’s important to ask yourself whether lower payments now are worth spending more on your loans over time.
2. Opt for a graduated payment plan
If your income is low now but you expect it to increase over the next few years, a graduated repayment plan might give you the breathing room you need.
Rather than fixed payments over 25 years, this variation of the extended repayment plan starts off with monthly payments that gradually increase. Most federal loans require a payment period of just 10 years. However, if you consolidated any loans through the Department of Education, you may have 10 to 30 years to pay off the consolidated loan, depending on how much you owe.
3. Enroll in an income-driven repayment plan
“If you’re unemployed … your payment might actually be $0.”
– Janet Alvarez, executive editor of WiseBread
You also have the option of enrolling in one of four available income-driven repayment plans, which cap monthly payments as a percentage of your discretionary income.
In fact, according to Alvarez, “if you’re unemployed or your earnings dropped to a very low level, then your payment might actually be $0.”
These plans promise to forgive any remaining balance after the repayment period is up, though borrowers must pay taxes on the full forgiven amount the same year it’s discharged.
- Pay as you earn (PAYE): Payments are capped at 10 percent of your discretionary income and can never exceed what you would pay on the standard plan. Any remaining balance is forgiven after 20 years.
- Revised pay as you earn (REPAYE): Payments are capped at 10 percent of your discretionary income. However, there’s no cap on how high payments can go; if your income increases significantly, so can the payments. Additionally, if you’re married, your spouse’s income and student loan debt will be considered when determining payments, even if you file taxes separately. Any remaining balance is forgiven after 20 years for undergraduate loans and 25 years for graduate loans.
- Income-based repayment: Payments are capped at 10 to 15 percent of your discretionary income, depending on when you took out your loan. Payments will never exceed what you would pay on the standard plan. Any remaining balance is forgiven after 20 to 25 years, again depending on when you borrowed.
- Income-contingent repayment: Payments are capped at 20 percent of your discretionary income or what your payments would be on a 12-year fixed repayment plan, whichever is less. However, there’s no cap on how high payments can go. Additionally, the amount of student loan debt you have is considered along with your income when determining payments. Any remaining balance is forgiven after 25 years.
Another reason to consider an income-driven plan: You might get your debt forgiven sooner, tax-free.
“Certain loan forgiveness programs require that you be in certain types of repayment plans,” said Minsky. “For instance, the Public Service Loan Forgiveness program requires that borrowers be on an income-driven plan. So if you’re not in one of those plans, you might not be able to make qualifying payments toward that program.”
If you are considering one of these income-driven plans, be sure to fully investigate all the rules before committing. Then you can use the Department of Education’s repayment estimator to crunch the numbers and see which plan would work best for you.
4. Consolidate your loans
If you have multiple federal student loans with varying interest rates, repayment terms and payment due dates, a direct consolidation loan is a convenient way to roll all those loans into one. Plus, borrowers with loan balances exceeding $60,000 can extend their loan term up to 30 years, according to Minsky.
Consolidating is often required to enroll in certain repayment and forgiveness programs, including those outlined above. But even if you don’t pursue one of these programs, simply consolidating and extending the repayment period beyond 10 years is another way to see lower payments.
Keep in mind that federal consolidation doesn’t save you any money. Not only will you pay more interest over time, but also the interest rate you pay on your new loan will be a weighted average of your old loans, plus a small percentage. Again, you’ll have to decide what’s more important to you: more cash now or more savings overall.
5. Refinance at a lower interest rate
One of the few options available to borrowers who took out private loans is student loan refinancing.
The process of refinancing involves taking out a new loan through a private lender and using that money to pay off your old loans.
The goal is to achieve better terms with the new loan, such as a lower interest rate or different repayment term.
Since refinancing is available only through private lenders, you’ll be subject to a credit check and other eligibility requirements to qualify, all of which vary by lender.
“[With private loans,] basically, you owe what you owe, and you have to pay it.”
– Janet Alvarez
Although it’s possible to refinance federal and private loans, refinancing federal loans is generally ill-advised. That’s because refinancing with a private lender strips you of any federal protections, such as income-driven options, forgiveness programs, deferment and forbearance.
“Private loans generally don’t include any provisions to protect borrowers during times of unemployment or financial difficulty,” said Alvarez. “Basically, you owe what you owe, and you have to pay it.”
Even so, if you have older federal loans or high-interest PLUS loans, scoring a lower interest rate might be worth giving up those benefits.
“It comes down to the borrower’s risk tolerance … whether they’re comfortable giving up those rights and protections that are inherently part of the federal loan system,” said Minsky.
6. Set up autopay
If you have private student loans, be sure to opt into your lender’s autopay program. Most lenders will provide a rate discount in exchange for the guarantee that they’ll get paid on time and in full every month.
Usually, the discount is a small 0.25 percent. Even so, every bit helps, especially if you have a large balance. Some lenders will offer an additional discount if you’ve made consistent payments for a certain period, according to Alvarez.
You don’t have to be held hostage by student loans.
“Most of us will at some point encounter difficulties that are beyond our control,” said Alvarez. “A recession, we can’t control. Layoffs, we often can’t control.”
However, she said, after rebuilding her financial life from scratch, she felt much more empowered.
“I understood how the game worked,” said Alvarez.
The student loan system can feel a game in which the odds are stacked against you. But if you know what tools are at your disposal, it’s a game you can learn to win.
The Ultimate Guide to Lower Student Loan Payments
If you have one federal loan, you can lower your monthly payments by using one or more of these three options:
- Enroll in an income-driven repayment plan.
- Extend your loan term.
- Refinance to a lower interest rate.
Option 1: Enroll in an income-driven repayment plan
One of the most straightforward ways to reduce your monthly payment is by signing up for an income-driven repayment plan.
There are four income-driven repayment plans, but they all have the same purpose: to allow you to continue paying back your student loans without inhibiting your ability to afford basic things food and rent.
That means your lender needs to understand how much you spend on the non-negotiable things in your life so that they know how much you have left over (your “discretionary income”).
The idea is that, while you absolutely have to pay the heat bill and the rent check, you could skip the new purse or the fancy vacation.
Of course, everyone on an income-driven repayment plan isn't submitting their monthly budget to the Department of Education. Instead, you provide documentation of your current annual income, and the government calculates your discretionary income using federal poverty guidelines for families of your size in your geographic location.
Once they've calculated your discretionary income, they'll set your monthly payment at 10-20% of that number, depending on the specific plan you've chosen.
What is your eligibility for an income-driven repayment plan?
If you have federal student loans, you can enroll in an income-driven repayment plan.
If you checked out NSLDS or your credit report, then you already know whether you have federal loans.
How to enroll in an income-driven repayment plan
Great news: you can enroll in an income-driven repayment plan in less than 15 minutes.
You'll need to gather some information, your social security number, your federal student aid ID, proof of income, and similar information about your spouse (if you're married).
There are two ways to apply:
An important thing to note with income-driven repayment plans is that while they may reduce the amount you pay in the short-term, they can significantly increase the amount you pay in the long-term.
Most income-driven payment plans come with a term of 20-25 years, so you'll be paying interest over a longer period of time.
Plus, lower payments mean that less of your payment will be going toward your principal every month, so it will take longer to whittle down your balance.
However, if you're still paying after 20-25 years, any remaining balance will be forgiven (although you'll have to pay taxes on any unpaid debt).
The one exception: Public Service Loan Forgiveness(PSLF). This program is available only to borrowers with federal student loans working in eligible public service positions. PSLF comes with a 10-year term and tax-free loan forgiveness after 120 qualifying payments.
Want to see if you qualify for PSLF? Check out What is Public Service Loan Forgiveness?
Option 2: Extend your loan term
If you're not interested in an income-driven repayment program but still want to maintain federal benefits, you can simply lengthen the term of your loan to an extended plan, which sets your repayment term at 25 years.
You'll need to contact your loan servicer to ask about extending your term.
Remember that extending your repayment term may lower your payments now but will ultimately result in your paying more over the life of the loan.
Option 3: Refinance your loan
If you don't intend to use federal loan benefits the PSLF, or if income-driven repayment isn't going to lower your payment all that much, refinancing may be a smart idea.
Refinancing to a lower interest rate is a supe- effective way to lower your monthly payments. And … if you refi and also opt for a longer loan term, you may be able to lower your payments by as much as $250 a month.
While refinancing is a big money saver for a lot of borrowers, you'll want to think very carefully about any actions that would reduce your monthly payments but remove your eligibility for federal student loan benefits.
For example, refinancing your student loans is a great way to reduce your interest rate, but it's not an option if you're counting on a federal loan forgiveness program or if you want to maintain the ability to ask for a period of deferment or forbearance in the future. (We'll talk more about this in a minute.)
It’s no secret going to college can be expensive, and students are often faced with finding alternative ways to pay for it. As a result, it’s common for students to end up with federal or private student loans – or some combination of both.
When talking about student loans – in the news, during debates, or even when shopping for a student loan – the conversation usually centers on interest rates and the total amount of debt but very rarely focuses on the ways a borrower can reduce the total cost of student loan debt.
The reality is that at a specific point in time, when shopping for a student loan, a borrower can’t do much to change the interest rate they are offered by the lender whether it’s a fixed or variable interest rate, which can affect the total cost of the loan and your monthly payments.
There are ways to lower student loan debt that a borrower can control.
Here are six tips on how to reduce the cost of your student loan.
6 Ways to Reduce Your Student Loan Costs
To see the impact that each tip below has on reducing the cost of your student loan, let’s start with an example loan scenario:
Let’s assume you need a $10,000 loan for your freshman year of college. * On this loan, you get a 6% interest rate, and you elect to defer payments while in school and pay it back over 10 years.
Under this scenario, the total cost of your loan would be $16,920 (which consists of the original $10,000 loan – also called the principal – plus $6,920 in interest charges). We will use this as the baseline in most of the comparisons below, and then at the end, we will look at the impact on the total cost if you combine some of the tips.
Interest Rate: 6%
Tip: Explore your potential costs with our student loan calculator.
1. Sign up for automatic payments
Most lenders, such as College Ave, give you the option to sign up for automatic payments, and in return, you receive a student loan interest rate reduction, which is typically 0.25%. This is a very easy way to reduce the cost of your loan, and it makes your life easier as you don’t need to take the time to make a payment every month – or worry about missing one.
For example, by signing up for automatic payments as soon as you get the loan and receiving a 0.25% interest rate reduction, you reduce the total cost of your student loan to $16,581, which saves you a total of $339. Be sure to check with your lender to see if there are restrictions on the auto-pay discount.
Interest Rate: 5.75%
2. Choose a shorter repayment term
When taking out your student loan, some private lenders such as College Ave, give you the option to select how long you want to repay the loan while others assign a loan term. Having the option is a benefit for you as you can customize the loan to fit your needs. Choosing a shorter repayment term will result in a higher monthly payment, but you will save money in the long run.
For example, by choosing an 8-year repayment term instead of 10 years, you reduce the total cost of your student loan to $16,022, which saves you a total of $897.
Interest Rate: 6% x 8 years
3. Make payments while you’re in school
While the ability to defer payments (or grace periods where you are not required to make payments) while in school is a great option if you cannot make any payments, deferring payments increases the total cost of your loan.
Even though your payments are deferred, your loan is still accruing interest that you’ll have to pay later. When your loan enters repayment, any unpaid interest charges are capitalized, meaning they are added to your original loan balance ($10,000 in our example).
The new loan balance is the amount you are required to pay back.
Now you might be thinking – how much should I pay while in school? Making full payments while in school will result in the lowest overall cost, but many students can’t afford to do this because they’re in school and not working full-time, and that’s okay. Even if you can only make $25 payments each month, it is better than making no payment at all.
For example, by making $25 monthly in-school payments instead of deferring repayment, you reduce the total cost of your student loan to $16,471, which saves you a total of $449.
If you’re able to afford slightly more than $25 per month, you could elect to pay just the interest charges each month, which would reduce your total cost to $16,022 and save a total of $897.
And lastly, if you’re able to afford full payments while in school, electing to pay full principal and interest with no deferral would result in a total cost of $13,322, which saves you a total of $3,597!
|Principal: $10,000||Principal: $10,000||Principal: $10,000|
|Interest Rate: 6%||Interest Rate: 6%||Interest Rate: 6%|
|Interest: $6,471||Interest: $6,022||Interest: $3,322|
|Total Loan: $16,471||Total Loan: $16,022||Total Loan: $13,322|
|Savings: $449||Savings: $897||Savings: $3,597|
For more information on in-school payments, check out The Benefit of In-School Student Loan Payments.
4. Make additional payments
If you want to reduce your school loan and lower your payment even further, make additional principal payments while in repayment.
By doing so, you reduce the principal amount owed faster than scheduled in your repayment plan, which reduces interest charges.
You could make recurring additional payments every month or elect to do lump sum payments – after receiving graduation gifts or tax refunds.
For example, if you elect to pay an additional $20 per month once you begin repayment, you reduce the total cost of your student loan to $16,191, which saves you a total of $729.
Interest Rate: 6%
Note: Be sure to confirm that your lender does not have a prepayment penalty or fee before making additional payments. College Ave does not charge a penalty or fee for making additional payments.
5. Refinance your student loan
Another way to reduce the total cost of your student loans is to refinance. This is especially beneficial if your credit situation has changed from the time you took out your loans.
As students graduate and begin working, it’s common for them to start building a more comprehensive credit history and profile (student loan payments, rent/mortgage, car payments, credit cards, etc.
), often resulting in a better credit score than when they were 18 or 19 years old.
With a better credit score, borrowers can refinance to a lower monthly payment because they qualify for lower interest rates, which will help reduce the total cost of the loans while still offering the previously mentioned benefits of auto-pay reductions and shorter loan terms. Keep in mind that federal student loans have certain benefits and options which you may lose if you refinance them into a private student loan.
Because refinancing can vary according to many variables, this example doesn’t fit too neatly into our given scenario. But you can check our refinance calculator to see how much refinancing can reduce your loan payments.
6. Combine these tips to save the most money on your student loan
If you combine these tips it would result in significantly greater savings. Let’s say you enrolled in automatic payments, decided to select an 8-year term instead of 10 years, and decided to make full payments while in school. The new total cost of your student loan would be $12,499, which saves you a total of $4,420 compared to the initial loan scenario!
Interest Rate: 5.75% x 8 years
No matter what your situation is, there are ways you can reduce the total cost of your student loan. Take advantage of some, or all, of them to help you save!
To see the impact different repayment options and terms will have on your loan, check out College Ave’s student loan calculator.
*All loan scenarios assume a $10,000 loan that is disbursed in one disbursement, four-year in-school period, and a six-month grace period.
5 Things to Know About Current Repayment Flexibilities and Your Federal Student Loans
On Jan. 20, 2021, the 0% student loan interest rate and suspension of payments on federal student loans owned by the Department of Education (ED) were extended through at least Sept. 30, 2021. These relief measures began on March 13, 2020, and below you’ll find a recap of the resulting repayment flexibilities for student loan borrowers and relevant considerations.
1. Your Monthly Payments Are Suspended for ED-Owned Loans
ED placed your ED-owned student loans in a temporary payment suspension that started March 13, 2020. This means you don’t have to make monthly payments during this time. If you made a payment during this time, you can request a refund through your loan servicer.
Federal loan servicers were directed to report to credit reporting agencies as if regularly scheduled payments were occurring during the payment suspension period. Unless you chose to opt the payment suspension, servicers are reporting monthly payments of $0. Delinquency will not be reported during the payment suspension period, even if you chose to opt the payment suspension.
Generally speaking, if you were up to date on your payments before the payment suspension period began, interest accrued prior to March 13, 2020, will not capitalize. This means no outstanding interest will be added to your principal balance when the payment suspension ends.
However, if you were in the type of deferment or forbearance in which interest would normally capitalize prior to the payment suspension period, then interest accrued prior to March 13, 2020, will capitalize when your original deferment or forbearance ends or when the payment suspension ends, whichever is later.
If you were in your grace period before the payment suspension period began, any outstanding or unpaid interest on your account will capitalize as it usually does when you enter repayment.
2. Temporary 0% Interest Rate on Loans Owned by ED
From March 13, 2020, to the end of the payment suspension period, the interest rate on ED-owned student loans is automatically set at 0%. That means your student loans will not accrue (i.e., accumulate) interest during this time.
If you are able, continuing to make manual payments on the loan servicer’s website has some benefits.
3. Your Income Driven Repayment (IDR) Recertification Date Has Changed
As part of the administrative forbearance, your IDR recertification date has been changed from your original recertification date. You will be notified by your loan servicer when it is time to recertify.
If you were paying your student loans using automatic debit earlier this year, your automatic payments will resume after the COVID-19 emergency relief measures end. If you’d to make a change to your payment method, you must contact your loan servicer online or by phone.
If you’re unsure about your next payment amount, contact your loan servicer to confirm your upcoming payment amount. This info may be available to you online by logging in to your loan servicer’ s website.
4. Avoid Coronavirus-Related Scams!
There is no fee for this payment suspension or 0% interest period—not from the federal government and not from your loan servicer. If someone asks for money for either of those reasons, it’s a scam.
Your loan servicer provides free help with your questions or concerns about your loan payments. There is no coronavirus-related loan forgiveness for federal student loans.
Learn about avoiding student aid scams.
5. If You’re Struggling Financially, You Have Multiple Payment Options When Payments Resume
If you are worried you won’t be able to make your next payment after the payment suspension ends, you have options.
ED offers a variety of income-driven repayment (IDR) plans your income. Under an IDR plan, payments may be as low as $0 per month.
Check out StudentAid.gov’s Loan Simulator to learn how switching your repayment plan could impact your monthly payment amount before your next bill.
After understating all your repayment options, you can apply for a specific plan or ask to be placed on the repayment plan that results in the lowest monthly payment amount.
If you are already on an IDR plan but are currently unemployed because of the COVID-19 emergency, you can update (recertify) your information to see if you qualify for a new, lower payment amount by logging in and completing the steps below:
Any changes to your payment amount will take effect after the payment suspension ends.
If none of these options seem beneficial to you, contact your loan servicer to discuss additional forbearance options after the payment suspension ends. However, please remember that interest accrues for most borrowers on a general forbearance.
Disclaimer: This article contains general statements of policy under the Administrative Procedure Act issued to advise the public on how ED and Federal Student Aid (FSA) propose to exercise their discretion as a result of and in response to the lawfully and duly declared COVID-19. ED and FSA do not intend for this article to create legally binding standards to determine any member of the public’s legal rights and obligations for which noncompliance may form an independent basis for action.
The 7 Best Ways To Lower Your Student Loan Interest Rate
For the tens of millions of Americans who borrowed money for college, chipping away at student loan debt probably seems high on the financial priority list. A good place to start is lowering the interest rate you pay on those loans.
If you’re trying to snag a lower interest rate on your student loan, financial experts have a number of tips in their toolkit – from automating your payments to refinancing. Here are seven ways to score a lower interest rate on your student loans and other money-saving tips to help you trim your student loan payments in general.
7 ways to lower your student loan interest rate
The best method for lowering your student loan interest depends on your overall financial picture. Some of the most common ways to lower interest rates are:
1. Consider refinancing
If you have a solid credit foundation, are employed and plan to pay off your loan quickly, you should consider refinancing into a lower rate. Refinancing costs have come down markedly due to the coronavirus pandemic, with fixed rates as low as 2.78 percent and variable rates as low as 1.89 percent.
Don’t be afraid to get strategic and refinance multiple times. “There are no prepayment penalties on federal or private student loans. And most private student loans do not charge any kind of a fee to originate a new loan. So, nothing stops you from refinancing your student loans into a private refinance multiple times,” says Mark Kantrowitz, publisher of PrivateStudentLoans.guru.
However, if you have federal student loan debt, be sure to weigh the pros and cons of refinancing into a private loan. By doing so, you give up federal borrower protections, the automatic forbearance period through the end of 2020. That trade-off may not be worth it.
Takeaway: With the decrease in interest rates, it’s possible to save quite a bit of money on student loans by refinancing. But weigh your options carefully before proceeding, particularly if you have federal student loans. By refinancing into a private loan, you’ll lose many key protections.
Who this helps the most: Those who have a solid credit score, are employed and are seeking to pay off their loan quickly.
2. Automate your payments
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 much, but it can all add up in the end, saving you about $25 a year if you have an interest rate of 5 percent 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.
Takeaway: This is a straightforward option for borrowers with no downside. The first step is to check with your loan servicer to see if your loan qualifies.
Who this helps the most: Borrowers who are confident that they’ll have enough money in their bank account each month when the payment will be deducted.
3. Negotiate with your lender
If you borrowed at the private level or have already refinanced, you might be able to shop around for a more competitive rate and present it to the lender you’re already working with. Although it’s not a guarantee, the lender might be willing to match that rate to keep your business.
Takeaway: Negotiation with your lender for better interest rates is possible for those who have private student loans.
Who this helps the most: Those who obtained their student loans during times of higher lending rates.
Having a solid credit score is an important foundation to any type of financial goal. That’s especially true when it comes to student loan borrowing, particularly from private lenders. You may still be able to get a student loan with a bad credit score, but your rates will be higher.
“For private loans, the higher your credit score, the lower the interest rate,” says Michael Micheletti of Freedom Financial Network.
“For federal loans, however, boosting your credit score will not matter, because most of these loans do not require a credit check. That includes all federal loans for undergraduates.
And while federal Direct PLUS loans require a credit check, rates are not affected by credit scores.”
To boost your credit score, be mindful of paying all of your credit card bills on time and maintaining a balance of less than 30 percent of your credit line.
Takeaway: A good credit score can help you lock in a lender’s most competitive rate.
Who this helps the most: Those taking out a private student loan or refinancing their student loans with a private lender.
5. Work with a co-signer
If you have no credit built up or if you have a low score, consider working with a parent or relative who has a more established record. Adding a co-signer who has good credit improves your overall credit picture and may help you score a lower rate.
“From the lender’s perspective, if one of the two people is low risk because he or she has good credit and the means to repay, the overall loan is lower risk,” says Long.
Just keep in mind that your co-signer will be equally responsible for the loan, meaning their credit score could suffer if you fail to make timely payments.
Takeaway: Having a co-signer can be helpful if your credit is less than ideal and you want to obtain the best interest rate possible. However, both you and the co-signer need to be fully aware of the responsibility involved.
Who this helps the most: Those whose credit score is not strong enough to obtain the most competitive interest rates on their own or who have minimal credit history.
6. Choose your loans carefully
For federal borrowers, there are generally three types of loans: Direct Subsidized and Direct Unsubsidized, which are sometimes referred to as Stafford Loans and Direct Stafford Loans, and Direct PLUS Loans (which also includes parent PLUS loans).
Direct Subsidized and Unsubsidized Loans have lower interest rates than Direct PLUS Loans, but most colleges and universities cap how much you’re able to take out.
Private student loans may also have caps, and your interest rate is determined by your credit score.
Deciding which loans to take out to fund your education is one of the hardest parts about starting school. Review the terms and interest rates associated with each loan option available to you and be sure to max out the loan with the lowest interest rate first, which will help minimize the amount of debt you accumulate to pay for your education.
“A smart borrower will maximize the amount of the loan with the lower interest rate before moving to one with an increased interest rate,” says Long. While a difference of 1 or 2 percent may not seem a lot on paper, remember that you will typically make 120 loan payments — which means that borrowing as much as you can with the lowest interest rate could save you thousands of dollars.
Takeaway: Take the time to methodically review the interest rates associated with your loan options and plan strategically how you’ll borrow money, relying as much as possible on the funds from the loans with the lowest interest rates.
Who this helps the most: Those who are just beginning their college education and still have the opportunity to compare various loans offers.
7. Borrow equity from your home
This is perhaps one of the trickiest options for lowering your student loan interest rate. If you own a home and have student loan debt, it is possible to “refinance” that debt with a lower interest rate by taking out a home equity line of credit (HELOC) and using the cash to pay off the educational debt.
HELOCs and mortgage rates have come down significantly in 2020 from what were already record lows a year earlier. Still, it’s important to look carefully at your finances and determine whether this is the right step for you, as there are many drawbacks.
“If you do not pay, the lender can take the collateral and sell it to pay the loan,” says Long. “Carefully consider the risk to your home that you’re undertaking. If you don’t pay a private student loan, it is very unly and a lot more difficult for the lender to threaten your home. If you don’t pay a home equity line or second mortgage, your home may be lost.”
Takeaway: It is possible to obtain a lower interest rate by paying off your student loan debt using a home equity line of credit, but it’s important to weigh the benefits and drawbacks first.
Who this helps the most: Those who have significant equity in their home and a reliable source of income to make the HELOC payments.
What to do if you can’t get a lower rate
Sometimes these money moves aren’t a viable option for student loan borrowers. But don’t fret – there are still ways you can trim your student loan costs in general, even with the same interest rate.
Deduct interest payments from your taxes
You might be able to deduct a portion of your interest payments from your topline earnings, which would therefore reduce your income and ultimately how much you have to pay in.
For individuals whose adjusted gross income (AGI) is less than $70,000 (or married filers whose income is less than $140,000), you can deduct $2,500 worth of interest payments, according to the IRS. Phaseouts occur for single filers who make between $70,000 and $85,000 and joint filers earning between $140,000 and $170,000.
Check for cash back specials or rebates
Though it’s not knocking down your interest rate, cash back specials and refinancing rebates offered through many servicers and lenders in the private space could help you spend less money in the long run – if you use the cash right.
Credible, for instance, will offer you a $200 gift card if you’re able to find a lower rate than what it offers you.
Adjust your payment plan
Experimenting with different payment plans is a sure way to maximize your money and pay less in interest over time, even if the rate at which you’re borrowing stays the same. That can include steps such as selecting a shorter repayment plan or making multiple payments a month. Be sure to also prioritize paying off the loans with the highest interest rate.
By reducing the loan in regular increments, over time you’ll lower how much interest you pay in each installment.
“Many people find a way to bring in extra income, anything from online tutoring or yard work to a traditional part-time job to put toward student loan debt,” says Micheletti. “If you can pay more, make sure to contact your lender or servicer and request that your extra payments go toward the outstanding balance, versus your next payment.”
Lowering your student loan interest rate is just one way to maximize your payments; it’s not the be-all and end-all. Being savvy with your money is what ultimately saves you money in the long run.
And even though student loan debt feels a heavy burden, don’t let it derail your other financial goals, such as saving for retirement and building up an emergency fund.
If, despite all your efforts, you can’t seem to obtain a lower interest rate than you have, it’s a good idea to try and figure out why.
“Maybe you already have a great rate. Maybe it’s because you have a dinged credit report or poor earnings,” says Long. “Once you understand the why, you can choose a course of action to either mitigate the cause — perhaps by rehabilitating your credit or seeking a co-signer — or accept you have the best you will get.”