Repaying your student loan can be difficult especially when you consider the high-interest rate it attracts. However, if you get a loan with a lower interest rate, you can ease this burden and save thousands of dollars.
In this article, we will discuss five tips that will help you reduce your student loan interest rate.
Know your student loan type
Understand that your chances of getting a lower student loan interest rate depend on your student loan type – federal or private student loans.
Federal student loans often have lower interest rates than private student loans. Although their interest rates are more difficult to reduce as they are set by Congress with zero negotiation room.
As a result, you stand a higher chance of getting a reduction in student loan interest rate if you borrow from a private lender.
Refinance your student loan
This is perhaps the most effective method of reducing your student loan interest rate.
Student loan refinancing means trading your existing loan for a new one, preferably one with a lower interest rate. The reduced interest rate will help you lower your monthly payment, thus enabling you to save money.
To qualify for a student loan refinance, you need the following:
- Good credit score: Your credit score must be at least in the high 600s. Or you can get a co-signer with good credit. A higher credit score will qualify you for a lower interest rate.
- Reliable income: You need a comfortable cash flow, like rent and credit cards, to afford your monthly repayments.
- Shorter loan term: Loan rates are determined based on the risks involved. Hence, a loan with a five-year repayment plan will have less interest than one with a 15-year repayment plan.
In essence, the higher your credit score and income, the lower the interest rate you can get.
Register for Autopay
Signing up for autopay or automatic clearing house (ACH) transfer discount also helps to lower your student loan interest rate.
Lenders prefer that you make regular, on-time payments for your loan. To facilitate this, they offer an interest rate reduction of up to 0.25 or 0.5 percent to borrowers who register for automatic payment.
While this may not seem like much, it will help you save more than $500 across your repayment period.
Additionally, autopay ensures you don’t miss any repayment. However, ensure you have enough in your bank to cover your loan repayment every month to avoid overdraft fees.
Negotiate with your lender
If you have already refinanced or borrowed from a private lender, you may want to search for more competitive student loan interest rates.
If you find a better interest rate offer, present it to your current lender. Although it is unlikely, they may want to match the rate to retain your clientship.
Pay your loans faster
This method won’t lower your interest rate; however, it will help you save more money.
It involves paying more than your monthly repayment fee, which will enable you to pay off your loans ahead of schedule.
Generally, the longer your loan period, the more interest it will accrue. However, paying off your loan faster will decrease your loan period, thereby reducing your interest rate.
On average, a student loan borrower will save about $2,000 if they complete their loan repayment two years faster than scheduled. The best part is an additional $70 monthly will help you achieve this.
Lowering your student loan interest rate is an effective method to reduce the amount you will pay on your student loan.
We recommend that you opt for easier methods like auto-pay and faster loan repayment before you go for the more complex ones. Also, ensure you properly research loan refinancing before you go for it to know whether it will benefit you or not.