For millions of Americans who took out loans for their education, reducing their student loan debt is high on the financial priority list.
A good starting point is decreasing the interest rate you pay on your loans. In this article, we’ll cover 15 different ways to reduce student loan interest rates.
You can automate your payments, refinance your student loan, or apply some of the following solutions and score a lower interest rate.
Table of Contents
- How Do I Pay The Lowest Interest Rate on Student Loans?
- Can I Get a Lower Interest Rate On a Federal Student Loan?
- Can I Get a Lower Interest Rate On a Private Student Loan?
- Do Private Lenders Reduce Interest Rates in Cases of Hardship?
- I Can’t Lower Interest Rate On My Federal/Private Loan, Now What?
- Was This Helpful?
How Do I Pay The Lowest Interest Rate on Student Loans?
The COVID-19 pandemic sparked economic chaos, leaving millions of Americans unemployed or faced with fewer hours and causing many more to be worried about their financial future.
In the middle of the current economic volatility, it’s no wonder you’re interested in cutting student loan costs. Refinancing could be a great way to do that but has a few downsides.
For instance, you’ll lose all the federal payment protection, but you’ll probably lower interest rates. That said, let’s discuss some of the common ways to lower your student loan interest rates.
See our related article about How To Apply For Personal Loans For Students With No Income. You’ll be surprised to learn how easy it is to apply for a personal loan even if you’re a full-time student with no income.
1. Try Smart Borrowing
The smartest way to restrict what you own is to understand every single detail of the borrowing process, like how much money you really need to borrow and how much you’re exactly taking.
The U.S. Department of Education can help you learn about college costs and discover ways of reducing them. The exit counseling aid may also serve as a helping hand in organizing your costs for the year.
It can also help you determine your estimated student loan level in opposition to your monthly paycheck or pocket money. Various budget calculators can help you control your finances while you’re in college.
Setting a fixed budget can help you control your overall income and costs to make sure you’re not taking more than you can pay back. You can always check StudentAid.gov for reliable information.
They get official details from all of the servicers to offer a complete picture of all of your federal student loans. If you deal with private debt, you can often locate your servicer or lender on your annual report.
There’s also an excellent calculator provided by the U.S. Department of Education that can help you calculate how much you’ll pay per month for the student loan debt and any extra costs that you can expect to take.
Use it to help you calculate your monthly payments after you leave college.
If you have a good understanding of what you need to repay and how much your monthly payments will be, there’s less chance of taking as much as you can and creating unnecessary future costs.
2. Learn About Interest to Prevent Capitalization
Capitalization and interest increase your costs, so understanding this whole process is important. First of all, interest represents the expense of borrowing funds.
It starts to pile up (accrue) the moment you receive your loan money, and since there’s no fixed rate, the interest rate you pay depends on different factors. So, the more money you borrow, the more interest you’ll pay, and the lower your interest rate, the less interest you’ll pay.
Also, the faster you repay your debt, the less interest you’ll pay. The government may or may not help pay the interest depending on whether you have a subsidized debt or unsubsidized.
The rate on private student loans is determined by the lender whereas the interest rate on federal loans is determined by Congress as a part of the Higher Education Act.
When unpaid interest is applied to your loan principal, that’s capitalization. It can occur at certain times during the period of your loan like when your loan goes into repayment for the first time.
It can also occur after a forbearance or deferment period ends. When you’re in your grace period (the 6 months after you leave college full time), you often don’t have to make payments on your student loan.
And before your first monthly payment is due, any piled-up interest is applied to the full amount you took. In this case, interest piles up on the higher balance. Meaning, you start paying interest on interest.
With federal loans, this only happens when it’s demanded by the Department of Education.
IMPORTANT NOTE: For the federal student loans in the COVID-19-associated administrative forbearance interest won’t capitalize once the forbearance finishes.
However, for those loans that were in a forbearance or deferment status before March 13, 2020, interest can capitalize after September 30, 2021. It all depends on your individual status, so please call and ask for first-hand information.
Now, let’s discuss how to avoid capitalization.
How to Prevent Capitalization
You can prevent capitalization on your unsubsidized student loan by making payments on your interest before standard payments come into play.
Not everyone can afford this, but making interest-only payments before you begin paying your monthly payment can restrict the bad effects of capitalization.
You can wipe out your interest by paying it off as it piles up, so there’s nothing left to capitalize on when your monthly payment arrives.
3. Get a Side Hustle and Get Help From Your Employer
If you don’t have enough money to pay additional costs, consider getting a side hustle. Learn some skills and earn money remotely or get a part-time job.
That way, you can gain more cash flow and redirect those extra dollars toward your loan as you get them. Take your time to find and compare different opportunities.
An increasing number of businesses provide student loan repayment assistance to attract top talent, so keep that in mind. With their help, you could repay your debt quicker.
You could also save money, so don’t forget to ask the human resources office if your employer provides such a program.
4. Make Student Loan Payments While You’re in School
One of the easiest ways to lower student loan interest rates is to make payments while you’re still a college student. If you can, making payments can lower what you have to repay in the long run.
It decreases the total loan along with the amount of interest that piles up on your unsubsidized loan and capitalizes. Inform yourself on how installments are added to loans while you’re still in college.
5. Shop Around Each Year or Semester
Lenders usually don’t have up-front pricing. Therefore, the lowest publicized rate isn’t what you’ll get. The only way to know how much you’ll be charged is by applying.
Don’t stress about damaging your credit score by applying for various loans. As of recently, the credit bureaus acknowledge random-shopping behavior regarding student loans.
Also, some lenders will utilize a soft credit exploration instead of a hard one when you first apply for the loan and if you decide to take the loan, that’s when they’ll do a hard examination.
Put a loan comparison specialist to work when you shop around, so you can compare various loans from different providers in minutes and find a suitable interest rate much faster.
6. Use a Good Online Calculator
Obtaining the right information on student loan rates requires a good data collecting tool. That’s where a reliable online calculator can save the day!
Using one can help you gather the data you need to make a final decision and save some money on your student loan interest rates, so choose carefully.
7. Move to Another State
Although moving someplace else might sound overwhelming, where you reside might influence your repayment.
If you meet the requirements of these programs, you can save money.
However, before you pack up your things and go, make sure to consider other crucial factors such as the cost of living and your earning potential in a new place.
8. Refinance Your Student Loans
If you have a good credit score and look for a way to pay off your loan quickly, you can refinance your student loans at a smaller interest rate.
Due to the COVID-19 pandemic, refinancing costs have dropped significantly, with fixed rates as little as 2.25% and varying rates as little as 1.88%.
The better your credit score, the better rates you’ll be provided. So take steps to boost your credit score before you opt for a student loan refinancing.
Don’t be afraid to act strategically and refinance a few times as there aren’t prepayment penalties on either private or federal student loans. Additionally, most private loans don’t charge a dime to create a new loan, so there’s no obstacle in the way.
If you have federal loans, on the other hand, make sure to inspect the advantages and disadvantages of federal student loan refinancing into a private student loan debt.
In general, if you take this step, you’ll lose your federal protections such as the automatic forbearance session through September 30, 2021.
9. Automate Your Payments
If you have a stable, predictable income, automating your payments is one of the easiest ways to lower your student loan interest rate.
Most lenders provide a discount of 0.25%-0.5% if you install autopay from a savings or checking account. Although it doesn’t sound like much, it can sum up in the long run, saving you about $25 annually on a balance of $10,000.
According to experts who specialize in student loan debts, automating your payments is the easiest and fastest way to obtain a reduction.
The best part? It doesn’t need a lot of effort on the borrower’s part. It’s a straightforward solution with no disadvantages.
10. Use Loyalty Discounts
If you’ve already borrowed cash from a company in the past, then you can take advantage of loyalty discounts. They’re not as common as discounts for autopay.
However, when combined, these discounts can significantly reduce your annual percentage rate. This is how companies reward customers who use other services, as well.
For instance, SoFi provides a “member discount” if you use a student loan after using a personal loan or have a previous investment account. If you don’t have other accounts, don’t worry about it. Some firms will still provide a loyalty discount as long as your co-signer does.
Therefore, check your options and pick wisely. It may be a good idea to take a student loan with a firm you already know and take advantage of possible discounts.
11. Negotiate With Your Lender
If you got your student loan during high-interest-rate conditions, you can negotiate with your lender for a lower rate. This is if you have already refinanced or have made a private loan.
Therefore, shop around for a better rate and show it to the lender you’re already collaborating with.
It’s not a guarantee, but the lender might be inclined to match that rate to keep your contact.
12. Improve Your Credit Score
Having a good credit score is an integral part of any type of financial aim, including student loan borrowing. It’s even more important to have a solid credit score when borrowing from private lenders.
You can still get a loan with a poor credit score. However, you’ll also get a higher rate. Remember that for federal loans, improving your credit score won’t make any difference because most of these loans don’t require a credit check.
For private student loans, however, it’s a whole different story.
Federal Direct Plus loans need a credit check but rates aren’t affected by your score. When dealing with a private student loan, the higher your credit score, the lower the interest rate.
You can easily improve your credit score by paying all of your bills on time and keeping a balance of less than 30% of your credit line. A decent credit score can help you get a better interest rate.
13. Work With a Co-Signer
If you have a short credit history or a poor credit score, working with a co-signer is your best choice. You can work with a relative or parent who has a better record than you.
Working with a co-signer with more reliable credit than yours improves your overall credit score and can help you obtain a lower rate on your loan.
According to experts, lenders prefer people with good scores, so if your co-signer has a better score, it’s a lower risk for the lender.
Just remember that your co-signer will hold equal responsibility for the loans. That means that their credit score could take a hit if you don’t pay on time.
Overall, working with a co-signer is beneficial if you have a poor credit score and you want to get a great interest rate. However, be aware of the minor disadvantages involved.
14. Pick Your Loans Carefully
If you’re at the start of your schooling, pick your loans wisely.
If you opt for a federal loan, you can select from 3 types of student loans including Direct Subsidized and Direct Unsubsidized, also known as Stafford Loans, and Direct PLUS loans which also include Parent PLUS loans. The first two options have lower interest rates than the latter.
The interest rate on private student loans is determined by your credit score. Overall, determining what loan suits you best is one of the hardest decisions to make when starting school.
However, it’s important to take a closer look at the interest rates and terms associated with each option, so you can make a better choice.
Always consider the ones with the lowest interest rates as this will help reduce the amount of student loan debt you get to pay for your schooling in the end.
A difference of 1-2% may not appear like much at the moment, but you’ll probably pay 120 installments, meaning a low-interest rate can save you a lot of money in the long run.
Therefore, take the time to look closely at all the options available.
15. Pay Off Your Loans Quicker
Last but not least, it’s recommended that you pay off your loans as quickly as possible.
Make it a goal to avoid spending too much money on things that don’t matter and make extra payments toward your loans. That way, you’ll be able to pay back your student loan a lot faster.
Paying back your loans faster decreases the total interest you pay over time. This method won’t magically decrease your interest rates. However, if your goal is to save coins, it’s a super-effective approach.
The longer you let interest pile up, the more interest you’ll pay in the end.
The average student would save about $2,000 and repay two years earlier with an extra monthly payment of $70. Therefore, keep your priorities straight and put your loans before shopping.
If you have a few student loans with various rates, prioritize the ones with the highest interest rates and repay them first. Then, move on to the loans with the second highest rates, and so on.
Hopefully, these tips can help you reduce your student loan interest rate successfully.
Watch this video to learn more about how interest works:
Can I Get a Lower Interest Rate On a Federal Student Loan?
Interest rates on federal student loans are determined by Congress annually. This doesn’t work in favor of people trying to get a deal on their interest rate.
Unfortunately, interest rates on these student loans can’t be negotiated because they’re set by law.
So, if you deal with subsidized or unsubsidized direct loans, parent PLUS, or Grad PLUS loans, you don’t get a choice to ask for a better rate from the federal government, according to financial aid experts.
Federal Student Loan Rates (2020-2021)
Direct subsidized loans and direct unsubsidized loans (undergraduates)
Direct unsubsidized loans (graduate students)
Direct PLUS loans (parents, graduate students)
Generally, you can’t contact your loan servicer to reduce student loan interest rates with federal loans. That strategy can, however, show results with certain credit cards, so if you have credit card debt, you should try it.
Still, there’s a way you can obtain a small decrease in your interest rate, and that’s by repaying the loan via auto-debit. That way, your payments will automatically go from your bank account to the lender and you can obtain a decrease of 0.25-0.50%.
Therefore, as long as you’re not stressed about overdoing your bank account, setting up automatic loan payments can help you save some money.
Can I Get a Lower Interest Rate On a Private Student Loan?
Private loan interest rates aren’t as strict as federal ones. In fact, they’re far more flexible! However, the rate you obtain depends on multiple factors.
Those key factors can include your credit score and income or your cosigner’s credit score and income. Typically, the better your credit score, the better deal you could obtain, so keep that in mind.
Since lenders determine the rates, they might likely be up for a discussion and a possible decrease in your rates. However, there may not be much space to negotiate over prices.
Additionally, if they already assigned a rate, there’s little chance you can change their mind afterward.
Experts claim that they’ve never seen a lender discuss the interest rate on a new student loan because they apply formulas based on the person’s score and a cosigner if any. That’s how they set rates.
In that case, your best bet is to compare different private loans to find the lowest rate before you take the money. You should also consider the option of working with a cosigner with a decent score.
If you’ve already taken the money, you can try student loan refinancing (check above).
If you opt for a private student loan with a cosigner, note that you might be able to obtain a lower rate if they have a better credit score than you. You can also take advantage of the autopay discounts and decrease your interest rate.
Certain private lenders provide a discount of $0.25 if you opt for the autopay option. Additionally, some banks like Citizens Bank provide a loyalty discount if you have other accounts with them.
See our related article about How to Get Private Student Loans No Cosigner No Credit Check. This is a very detailed article showing how you can get a private student loan without a cosigner or credit check.
Watch this video to learn how to lower student loan payments:
Do Private Lenders Reduce Interest Rates in Cases of Hardship?
Usually, people don’t have much luck requesting their private lenders lower their interest rates. However, if you’re having a hard time and you can’t repay your loan, they might be up for negotiation.
According to experts, the only times in which they’ve seen people successfully get a reduction in the loan balance or interest rates were situations involving borrowers in serious financial hardship.
In most of these cases, the student’s financial situation was unlikely to get better anytime soon.
They’ve also seen success in negotiations between cosigners whose partner defaulted on the loan and lenders. If the cosigner agrees to set automatic monthly payments, they might get a reduced interest rate.
Keep in mind that most lenders and loan services aren’t up for any negotiations. Thus, when they do make an exception for someone, it’s usually under very rare circumstances.
Therefore, if you’re struggling with your payments, contact your lender, explain your situation, and ask for help. Hopefully, they’ll understand and reduce your interest rate or help you in some way.
We suggest that you research lenders who allow their borrowers to pause monthly payments in the event you return to school or lose your income. These things happen, so be prepared.
I Can’t Lower Interest Rate On My Federal/Private Loan, Now What?
There are a few last resort options if you can’t obtain a lower interest rate on your federal or private loans. Sometimes, what works for others doesn’t do much for you or suit your lifestyle and current income.
Perhaps you’ve already scored a loyalty discount or installed autopay, or realized that student loan refinancing isn’t the best option for you. In any of these cases, stop stressing and start acting!
There’s a list of other ways to reduce your interest installments and save money even if you’re not capable of reducing your rate.
Pick The Right Repayment Plan
Holding onto the usual repayment plan for federal student loans can tie you up with payments for up to 10 years. However, there’s no shame in changing to a paycheck-driven plan if it’s better for you.
If you’re repaying a private student loan, you might contact your lender and ask about different options available in cases like yours. You can also try refinancing to a longer or shorter student loan term.
Take The Debt Avalanche Method Into Consideration
This is a great way to reduce student loan interest rates and their effects.
This method suggests paying off the highest interest loans first while paying only the minimum on the lowest-interest loans. If you opt for this method, you’ll significantly maximize your interest savings.
Combine Different Ways to Repay Your Loan Quicker
The quicker you repay your loan, the less time there is for interest to pile up, capitalize and empty your checking account.
Therefore, if you have space in your budget to make additional (large, if possible) payments toward your student loan, do it to minimize your interest payments.
Side hustles, promotions, wage raises, or tax refunds – anything can help! Put repaying your loans on top of your financial priority list and do your best!
Watch this video to learn how to deduct student loan interest:
Was This Helpful?
Overall, learning how to reduce student loan interest rates could help you decrease your regular payments or help you repay your student loans a lot faster.
If you’re at the start of your education, choose your loans carefully and weigh the pros and cons of every option before you make a choice. Keep in mind that some methods can negatively affect your federal loans while others will have a positive effect and improve your current position.