Student loan payments account for quite a chunk of an average student loan borrowers monthly expenses, and average out at around $393. This could be around half of your monthly rent expense and for most borrowers, it certainly exceeds the sum of a typical auto payment and the insurance payment for that vehicle as well. It's important to understand the options you have when it comes to potentially reducing your monthly payments and overall interest to give yourself some breathing room.
If your income improves or a co-signer is willing to lend a helping hand, you could qualify for a lower student loan interest rate, which can help you save money on interest over the term of the loan, reduce your monthly payments and even get out of debt faster.
Here are 5 ways you can lower your student loan interest rate:
1. Make automated payments
We can't stress the first one enough, since it's probably the easiest. You can start off saving by signing up for autopay feature for your student loan. Many private lenders and even federal loans can offer you a rate discount, or an ACH discount, which is typically 0.25% of your initial interest rate, if you sign up to have your monthly student loan payments automatically extracted from your bank account.
Every penny counts when you're saving from your job and paying back student loans and there's no point in paying more than you need to. When you sign up for a student loan or refinance your currently existing student debt, be sure you contact your lender during the process to ask about an ACH (automated clearing house) discount, since most lenders offer this benefit.
Setting up an autopay feature can also prevent you from accidentally missing a payment. Before you set up the autopay feature, make sure you have enough in your account each month to avoid having your balance go negative, which would cause you to be charged overdraft fees.
2. Ask for a loyalty discount
Making automated payments seems like an easy way to lower your student loan interest rate, but did you know another quick and easy way to reduce your rate even more is to ask if your lender offers a loyalty discount? Many lenders may offer loyalty discounts to currently existing customers, on top of offering an autopay or ACH discount.
Many banks will not only offer you loyalty discounts, but many, like Citizens, will offer solid 0.25% rate discounts if a co-signer is a currently existing customer for certain bank products.
So far, if you're able to set up autopay and receive a loyalty discount, you've shaved off 0.5% from your interest rate. Over time, these small rate benefits can add up. For example, using our refinancing calculator, if you have a loan balance of $40,000 and pay an average interest rate of 7% over the course of 10 years, if you receive the autopay benefit and loyalty discount for a total of 0.5% off your interest, your new interest rate would be 6.5% on that 10 year term loan. This would save you a whopping $1,200 in interest.
3. Pay your student loans on time
On top of offering an ACH and loyalty discount, some lenders may also offer another interest rate reduction of around 0.25%, if you also make several yearly on-time payments, typically for three or four years. Once you've set up autopay, this should keep you from missing payments accidentally, which will enable you to automatically qualify for an additionally 0.25% off your interest rate after three to four years, depending on the borrower's terms.
4. Refinance your student loans
Refinancing your student loans will help you save the most in interest over the term of your loan. If you think your interest rate on your current federal or private student loan is too high, refinancing could be a great way to lower your student loan interest rate.
The way refinancing works is fairly simple. When you refinance your student loans, a private lender issues you a new loan for some or even all of your current student loans. This new loan has a different (usually much lower) interest rate and could even have an (ideally) lower maturity as well. This would allow you to pay lower monthly payments towards your balance.
While refinancing your student loan sounds simple and convenient, it's important to go through our checklist to make sure refinancing your student loans is something you would want to consider, especially if you have federal student loans.
If you refinance when you have federal loans, you could miss out on great repayment benefits that the federal government offers. But if you qualify to refinance with a private lender, you may be in a good enough financial spot and may not necessarily need federal income-driven repayment and distress benefits.
What's great is once you are able to refinance your student loans, you can still qualify for an autopay benefit, a loyalty discount and a consecutive repayment discount. These combined discounts can really help reduce your overall interest paid. For example, if you have a loan balance of $50,000 with an interest rate of 8% and a maturity of 15 years, refinancing at a rate of 6% for a term of 10 years and receiving an additional 0.75% off your interest rate can help you save $21,720 in interest over the term of your loan.
5. Pay off your loan faster
If you're on a mission to reduce your DTI over the next several months, especially through getting a side gig or by taking on a better job, you could also pay off your student loans faster which would help you save on interest throughout the life of the loan.
Lenders should not charge you prepayment fees if you pay more than the minimum monthly payment, so a good idea could be to ask your lender or loan servicer to apply the extra payments or lump-sum payment to your current student loan balance instead of your next payment, which you would be paying next month anyways.
There's multiple ways to save money by lowering your interest rate. If you haven't signed up for an autopay benefit or qualify for a loyalty discount and haven't received one yet, now's the time to reach out to your lender or loan servicer. Shop around to refinance your student loans and if it makes sense, refinancing your private or even federal student loans could help you save a ton in interest.