You’re about to graduate, and you look forward to launching a great career. But you’ve spent the last four years taking out student loans to pay for your education, and now you worry about paying them back.
Federal student loans often have a grace period of six months before monthly payments start, but if you took out private loans, you might have started paying some portion of these already.
Most borrowers need to lower the overall cost of their student loans to pay them off as quickly as possible. While decreasing the principal of the loan is not an option, reducing the interest rate can cut down the overall cost.
Top 3 Strategies to Lower Interest Rates on Student Loans
The Department of Education and several private lending companies offer repayment calculators. You can adjust the repayment period from 10 years to more or less, and see how much you will pay overall. You can also determine how much you will pay each month and how the interest rate will adjust your total.
You may find that the interest rate for your student loans is too high. Especially if you have several different types of loans, a low-interest rate can help you pay them back more quickly. In some cases, that means adjusting the interest rate. There are four ways to do this.
- Pay on time. If you have several student loan payments or begin to struggle with employment or personal expenses, you may find that you miss a payment or pay late. While missed payments may not be intentional, they can hurt your interest rate over time.
If you consistently make on-time payments, you may receive an interest rate reduction of about 1% after 36 months (three years) and 2% after 48 months (four years). While private student loans have stricter payment terms in their contracts, you may be able to shop around and find one that offers a similar benefit for being responsible.
- Enroll in automatic payment. Many lenders want guaranteed payments, so they encourage borrowers to sign up for automatic payments by offering certain benefits for this service. Incentives include discounting your interest rate by half a percent each year. While this reduction may not seem like much, it can add up over decades.
- Refinance. This approach works for both private and federal loans. If you have multiple sources of student loans or private student loans with high-interest rates, refinancing may be a great option. Your loans will be taken over by a private lender regardless of the original loan source. Then, the lender will consolidate these loans into one loan with a new interest rate and repayment schedule.
In some scenarios, refinancing your student loans results in lower monthly payments due to a new interest rate that is lower than that you were previously paying. However, be aware of your repayment term. If it becomes shorter after you have refinanced, you may be met with higher monthly payments to meet those terms.
Many recent graduates can get a lower interest rate because their credit score has increased since they first applied for the loan. If you continue to pay your bills on time and pay down your debts, your credit score will continue to improve.
You can also choose between a fixed and a variable interest rate on your refinanced student loan. While a variable interest rate can be a riskier bet, it may allow you to take advantage of lowering the initial interest rates you received from the federal government if you have federal student loans.
After you refinance your student loans, there is the chance that you will end up paying more to the lender over time depending on the loan term. While you may choose to extend your loan term by 10 to 20 years, you will end up paying thousands of dollars more over the new term, regardless of a lower interest rate.
Overall, for those seeking lower interest rates on their student loans, refinancing is typically the best option. However, if you only have a few federal student loans, the Department of Education offers a better alternative.
Other Options for Low-Interest Rates on Student Loans
As you think about your repayment plans and personal budget after graduating, the three steps above are the best ways to get low-interest rates on student loans.
If you are a new student and investigating student loans, you can help your future self by shopping around for the best interest rate on loans. This is especially true if you are considering taking out private student loans, which can have a range of interest rates, both fixed and variable, and a range of repayment requirements.
Rather than taking the first loans that look good, make lenders compete against each other. Get three to five quotes from lenders, and then send the best quotes to other companies and see if they are willing to offer lower interest rates on your student loans. Ask about any bonuses for using their specific company too.
If you must refinance your student loans, you can also shop around for lending companies that offer this service. Ask several companies for quotes and be transparent about what companies have offered you to get a lower interest rate. You may be able to get $1,000 or $2,000 toward your principal with some companies just for choosing their service, so ask how the lender will help you if you refinance with them.
Companies want your business and colleges want students to be successful after graduation, so if you have questions about the student loan refinancing or consolidation processes, a financial counselor at your school can help.