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Updated on Tuesday, October 16, 2018
Interest charges can be a huge cost for student loan borrowers. Of course, they’re especially painful for borrowers who have high interest rates or large student loan balances. But even an average borrower might want to know how to lower student loan interest so that their debt costs them less.
A lower student loan interest rate is key to your finances. A high interest rate can cost you thousands of additional dollars over the life of your loan, while a lower rate can mean not just smaller monthly payments, but also a quicker route out of debt.
How student loan interest works
When you borrow with student loans, as with most other credit, what you repay will be more than the amount lent to you — the principal — since interest accrues on whatever you haven’t yet repaid. How much student loan interest you pay is based on how much you still owe — your loan balance — as well as the actual interest rate itself.
How your student loan rate is set
For federal student loans, your rate will be set by Congress for the academic year in which you borrowed them. And not all federal student loan interest rates are created equal. For example, PLUS loans carry rates 2.55 percentage points higher than those for undergraduate student loans.
Private student loan lenders, meanwhile, set interest rates differently. Each has its own formula, but most will tie offered rates to your credit history, giving lower rates to borrowers who have higher credit scores.
How student loan interest rates affect your payment
Most student loan rates are annual, which means they reflect how much interest you’d be charged on the loan within a year. So on a $10,000 student loan with a 5% rate, you’d pay $500 in interest per year if you didn’t repay any of the loan during that time.
But your loan doesn’t accrue interest just once a year. Student loan interest is typically assessed and charged daily. So your annual interest rate is divided by 365 days, and you’re charged that amount of your outstanding balance each day.
As you make payments on student loans, the principal will go down a bit at a time, slowly lowering how much interest you’re being charged each month.
Ultimately, one of the smartest ways to pay less interest is to figure out how to get a lower interest rate on student loans. With a lower rate, you will save money and get out of debt faster.
How to get a lower student loan interest rate
The student loan rates you’re paying now were set when you were first offered the loan, and they are outlined in your loan agreement or promissory note.
But you’re not stuck with what’s in your agreement if you know how to get a lower interest rate on student loans. Here are a few ways you might be able to slash your loan rates.
1. Choose your student lender wisely
As mentioned above, the rate you pay will depend on the type of student loan you choose and from whom you borrow. If you’re taking out federal student loans, for example, it’s wise to borrow with subsidized loans first (no interest while you’re in school), and then unsubsidized loans (interest accrues while in school), before turning to PLUS loans with higher rates.
It’s more important to get picky when looking for the best private student loans. Each lender has its own formula for setting rates, and advertised rates don’t always reflect what a lender will offer you. It’s important to comparison shop to find your best private student loan rates.
You could save even more by seeking a student loan from a bank or lender with whom you already have a relationship. Citizens Bank offers a 0.25% percentage point loyalty discount for borrowers with an existing account, for instance.
2. Sign up for automatic payments
On top of loyalty discounts, some lenders will provide you with a rate discount for making on-time payments. One of the most common ways to reduce a student loan interest rate is to sign up for automatic payments.
When you enroll in autopay, you let your lender automatically debit a connected account to collect your student loan payment each month. In return, you get a rate discount — typically 0.25% off your rate.
3. Refinance student loans with a private lender
Another option to lower your student loan rate involves refinancing with a private lender. Refinancing student loans gives you the option to replace your old loans (and their high interest rates) with a new loan. This is your opportunity to choose a new lender with lower student loan interest rates, and even adjust your loan term or monthly payment.
The lowest student loan refinance rates start around 2.50%. To get these rates you’ll need an above-average income and a good-to-excellent credit score, or else you’ll need a cosigner who meets those requirements. Student loan refinance rates can also vary by the terms you choose, such as loan length and whether you take a variable or fixed rate.
Still, you don’t need perfect credit to benefit from student loan refinancing. If you have interest rates in the range of 6.00% to 7.00% or higher — maybe from a private student loan, or even a grad PLUS or parent PLUS loan — you could be a good candidate for refinancing.
In this case, you might want to start exploring your options to refinance student loans by comparing lender requirements and collecting some rate quotes. Try out our student loan refinancing calculator to see what your savings could look like with a lower interest rate.
Other ways to lower student loan interest costs
After considering the options above, you might be wondering how else you can lower your interest costs.
While figuring out how to get a lower interest rate on student loans can be a good place to start, it’s not the only way to pay less. Here are some other strategies you can use to lower student loan interest charges.
Make extra student loan payments
Besides lowering your interest rate, one of the surest ways to pay less student loan interest is to lower your balance. After all, the interest you’re charged is based on the amount of student debt you owe. If you pay off student loans faster, your balance will also decrease more quickly — resulting in big interest savings.
Lowering your student loan balances is as easy as sending in more than your student loan payment each month. You can round up a payment to the nearest hundred. Or you might set up automatic extra payments deducted each time your paycheck hits your bank account.
Setting up an extra $25 payment from every biweekly paycheck, for example, would be $650 per year. Doing so for a $15,000 loan with a 5.00% rate just entering a 10-year repayment would shave off three years from repayment and save more than $1,300 in interest.
It might not seem like much at first, but after a few months you’ll start seeing results. Student Loan Hero has a student loan prepayment calculator to help you preview your savings and decide how much extra you want to pay on your student debt each month. (Note: Student Loan Hero and MagnifyMoney are both owned by LendingTree)
If you go this route, however, make sure that your extra payment is applied to the principal, rather than as an early payment. Contact your lender to be certain.
Target high-interest loans first
Sending extra student loan payments is a great start, but you can add a level of strategy to make it even more effective. You can do this through the debt avalanche method. Here’s how it works:
- List all your student loans, including balances, interest rates and monthly payment amounts.
- Order your student loans from the highest to lowest interest rate.
- Apply any extra payments to one loan at a time, starting with the highest-interest loan.
- As you pay off one loan, roll over the amount you were paying on that debt — both the monthly and extra payments — and apply them to the student loan with the next highest rate.
- Repeat this until all your student debt is gone.
Following the debt avalanche method helps you quickly lower the balances that are costing you the most. By paying off high-interest debt first, you’ll pay less in interest and get out of debt faster.
Take advantage of interest subsidies
One of the smartest ways to save on interest is to get someone else to pay for it. That’s exactly what happens if you’re lucky enough to get a federal student loan with an interest subsidy.
For the direct subsidized loan, for example, any interest that is assessed and charge while the student loan is in deferment is paid by the U.S. Department of Education. The most common situation where this applies is an in-school deferment for students who are still in college. But this interest subsidy will also apply anytime a borrower defers a subsidized student loan, even if they’ve already started repaying this debt.
So if you have subsidized student loans and can qualify for student loan deferment, it might be worth pausing payments on those. It will save you interest for the months they are deferred, and this can free up funds you could use to make extra payments on your more expensive or unsubsidized loans.
Avoid extending repayment
While deferring subsidized loans can be smart, you should avoid pausing or extending repayment for unsubsidized or private student loans.
Getting a deferment, forbearance or income-driven repayment plan is better than worse alternatives such as missing student loan payments or even defaulting. But you should know for all these options that while they will provide temporary relief, they might also increase your student loan costs over the life of the loan.
That’s because student loan interest still accrues on private or unsubsidized federal loans, even if you pause payments through deferment or forbearance, or lower payments through an income-driven repayment plan. In fact, because you’re paying less toward these loans, your balance will go down more slowly (if at all). And a higher balance means higher student loan interest, too, unless you can get the remaining amount forgiven. So it’s worth sticking to making monthly payments under the standard repayment plan if at all possible.