Can I negotiate my interest rate on my student loans?
This is a commonly asked question by many student loan borrowers, and for good reason. If you can negotiate your interest rate on your student loan, you have the opportunity to save thousands of dollars in interest paid over the term of your loan. A loan principal of $18,000 and an interest rate of 6.2% with a loan term of 15 years can have you paying as much as $9,720 in interest.
While you unfortunately can't negotiate the interest rate for federal student loans since those rates are fixed, you can certainly try to negotiate your student loan interest rate for private lenders or refinancers.
Here's how you can take a stab at negotiating your interest rate with private lenders.
Private lenders set their own interest rates for student loans
Federal student loans are originated with fixed interest rates which are set by Congress, but this doesn't mean you can't negotiate your private loan rate. The rate that your lender agrees to receive when you submit your lending or refinancing application depends on a wide variety of factors, such as your income levels, DTI ratio, or even your co-signer's income and credit profile. The better your credit history, the more responsibly you can manage your expenses and the lower your DTI, the higher the chance that you can reduce your interest rate based on your personal profile.
Private lenders are flexible, which implies that they might potentially be willing to negotiate your interest rate, yet lenders aren't likely to submit to a lower interest rate once you have agreed to the loan terms. Interest rates are determined by complex financial formulas which take into account multiple current and historical statistics related to the applicant's financial profile, as well as the profile of a co-signer, if applicable.
Since it's tough to negotiate your interest rate once you and the lender have agreed to the terms of a new loan, it makes a lot more sense to try to shop around with multiple offers to find the lowest interest rate before you make a final, binding decision. Be honest and open with lenders you speak on the phone with, and tell them you are looking at other opportunities before making a final decision.
If you can get a co-signer during the process, this could also help you get a lower interest rate as well, especially if they have a better financial profile or higher credit rating than you do.
Be sure to ask lenders if they offer any autopay discounts during your application or search process, since some could offer a small discount on your interest rate for setting up autopay features on your loans so the funds are withdrawn directly from your bank account each period. A commonly offered discount of 0.25%, for example, could save you almost $500 in interest paid on a loan balance of $30,000, an interest rate of 10% and a loan term of 10 years.
Refinancing your student loans could offer better rates
Refinancing your student loans could yield even better results than trying to haggle for a lower interest rate with your lender, but there's a lot of important questions you should ask yourself before deciding whether or not to refinance your student loans.
If you have a low enough DTI and a stable income stream or a cosigner with a solid financial profile, you could apply for student loan refinancing and could lower your interest rate on one or more or possibly all of your student loans.
Refinancing your student loans allows you the flexibility to pay under more favorable loan terms, such as extending your term of the loan to pay less each month or to even shorten the lifespan of the loan in order to accelerate principal and interest paydown, especially if you recently got a better and more stable job and interest rates in the macro environment have dropped.
The caveat with student loan refinancing is that you should ask yourself whether refinancing your federal student loans is a good idea since you could miss out on favorable repayment and even forgiveness plans offered by the government.
It will probably be fairly difficult to negotiate your student loan interest rate, especially once your lender and you have officially agreed to the terms and conditions of your student loans.
However, refinancing your student loans offers a higher possibility of you receiving more favorable loan terms that can easily help you save money over the term of your loan, if your credit score and financial condition can help you qualify for a better rate.