3 Strategies To Lower the Interest Rate on Your Student Loan (And What To Do If You Can’t)

Athena Lent
Mar 17, 2021

If you're tired of paying down student loan debt, we understand. In this article, we’ll see how to utilize private loan consolidation to get a lower interest rate on, and what to do if you can’t. 

45 million people who live in the US have student loan debt with an average amount of $37,691 per person. The student loan bubble is growing and doesn't seem to be stopping anytime soon. 

The demographic of those with student loan debt is typically younger college graduates between the ages of 22-35 with bachelor's degrees. Since this demographic is usually working on other financial goals, such as starting a family and purchasing their first homes, they tend to feel the pinch more than older ones. 

The bottom line is that debt sucks, which is why you should do whatever you can to pay off your student loan debt as fast as you can.  One way to pay it more quickly is to lower the interest rate on your student loans. 

Why choose to reduce your student loan interest rate?

With so much debt to pay off, every little bit helps. One area of your student loan debt repayment that is often overlooked, but can add up to a considerable amount over time, is the interest rate. 

By lowering the interest rate on your student loan alone, you'll not only have smaller payments but pay less overall during the lifetime of the loan. 

Reducing the interest rate on your student loan debt sounds risky, but it's not. 

Below you'll find my top tips for lowering your student loan interest rate. We all have unique financial situations, so I also included other steps to take if refinancing your student loans isn't an option. 

How to lower the interest rate on a student loan

1. Figure out your overall financial picture, including the total of your loans 

To achieve any huge financial goal (I'm looking at you, private island for my future cat lady oasis), you need to know where you stand, at least with your money. It’s easy to avoid thinking about your student loan debt, something I have done, but this has cost me a ton of interest that I want to help you avoid. 

If you don't already have a budget in place, that's okay. Make a list of all of your current expenses, both fixed and variable. Compare them to your income to see where you stand in terms of money flow. 

If you aren't entirely sure, pull your bank statements from the past three months to make sure you not only include monthly expenses but quarterly ones as well. 

Is what you've been spending match your income? Or have you been living the high life on credit cards? 

Comparing your monthly cash flow to your expenses allows you to see where your money is not only going but where you can cut to fund your goals and priorities. 

I also want to say "PLEASE DO NOT FEEL EMBARRASSED" about your spending. Living without (or even with!) a budget leaves us feeling a bit lackluster about our finances. 

Sticking to your budget can be difficult if you’re not following a plan that works specifically for you, but you’re never in it alone.

Ahem. Now, once you see where your money is going and the interest rate on your debt, you may consider keeping your standard repayment plan or moving on to the next option, refinancing your student loans. 

2. Consider refinancing your student loan debt 

Refinancing your student loans is the best and most optimal way to get a lower interest rate. 

When you refinance your student loans, you are doing more than just consolidating. You now have one monthly payment, and you also now have one flat interest rate lower than you had previously. 

Keep reading: The difference between refinancing and consolidating and how to choose

That's right. Instead of student loans all over the place, with various rates, you now make one payment to one financial institution. 

By locking in one low rate, you have the opportunity to have a smaller payment, which means you're paying less in interest overall.  

Refinancing is also a great alternative to IBR options if you have a higher income. Loan forgiveness does not apply with a private lender, but you're still saving money. 

When refinancing, you'll want to compare the following: 

  • Interest rates: Compare interest rates among lenders to see if you are getting the best deal. Not everyone provides the same rates, which is why you have to shop around. 

  • Type of loan you are looking to refinance: Federal Loans, Parent PLUS Loans, and Private Loans are all subject to different stipulations and regulations, so you will need to check with the lender to see if they can accommodate you. 

  • Bonuses and any discounts:  Lenders want your business, so they provide perks. Cash bonuses for signing up, interest rate discounts, and pre-approval for other financial services are just some of the perks offered. 

3. Automate your payments

Post-graduation, the Department of Education will assign a loan servicer to collect payment on your student loans. Many of these loan servicers offer discounts if you set up automatic payments for your account. 

This is an effective way to lower your student loan payment, and although a small discount might not seem like a lot, it can add up over the life of the loan to several hundred dollars.

To save even more money with automatic payments, consider paying half of your student loan payment bi-weekly instead of monthly. By paying bi-weekly, you'll be making 13 payments instead of 12.  One extra payment means less debt, and less debt means less interest paid. 

What if none of these options are feasible? 

If the optins above don't fit your current situation, I haven't forgotten about you. I have a few more things for you to consider to help your unique financial situation. 

1. Look into IDR 

Income-driven repayment plans (IDR) are a federal option to consolidate your student loans into one monthly payment based on your net income. 

The government acknowledges that receiving an education is expensive, and student loans may prohibit you from not only achieving financial milestones but simply keeping your head above water. 

Payment plans are typically low at 10-20% of your monthly take-home pay. The remainder of your loans will be forgiven after 20 or 25 years. This option is excellent for those with a high debt to income ratio and need additional assistance and need it fast. 

You will have to remember to reapply every year with proof of your income to qualify, but that is a small price to pay for what may be an excellent program for you. 

IDRs are also great for the (PSLF) Program. If you work in the non-profit sector, education, or public service, you may be eligible for loan forgiveness after ten years of consecutive payments. 

For more information, and to see if you qualify, check out the PSLF page on StudentAid.gov

Resource: A complete list of student loan forgiveness programs

2. Deduct all interest possible from taxes 

If you're not already, make sure you are deducting all student loan interest paid on your taxes! 

You can write off up to $2,500 of student loan interest paid on qualifying loans. Your student loan service provider should mail you a 1098-E form with information to apply to your tax return. If they don't, make sure to check your account online or call for more details. 

This article explains how the deduction works so you can take advantage. 

3. Work on improving your credit score 

Just because you weren't approved for student loan refinancing now doesn't mean that you can't be considered later. Take this opportunity to start working on your credit score. 

Check all your credit accounts for accuracy

Pull a free credit report from one or all of the three bureaus. Check to see your score but also to ensure that any accounts listed are yours are accurate. 

If you find there are discrepancies, make phone calls to find out why. Don't be afraid to sort things out and if you do owe, make a plan to clean it up the best way you can. 

Catch up on all (if any) late payments and make a game plan not to fall behind. 

Do a balance transfer on your credit card

If you're in credit card debt, see about doing a balance transfer. You can also utilize secured credit cards to your advantage if you are trying to build, or rebuild, your credit. I've done this, and it was a great way to start rebuilding my credit so I could qualify for a bigger ticket item. 

By utilizing my credit card responsibly, I was able to take out an auto loan through the same lender with only $500 on a brand new car. 

Ensure you do not charge more than what you can pay back and make your payment in full before the due date to avoid paying interest. I like to charge my groceries and gas, then pay it off every two weeks with my next paycheck. 

4. Consider forbearance or deferment if you are struggling 

If none of these options can help, consider contacting your student loan servicer for more information on deferment or forbearance on your student loan.

A deferment allows you to postpone paying back your loans. Dependent on your circumstances, a deferment can last anywhere between one and three years.  

Some cases can include economic hardship, cancer, other major health issues, and unemployment. Interest does not accrue on your subsidized loans, but it does on unsubsidized ones it does. Even despite that, it is still a good option if you are struggling to pay your loans. 

During my thyroid cancer treatment, I applied for deferment. Once approved, I took a year off paying my student loans to focus on my health and medical bills. 

Money that went towards my debt ended up paying for my radiation treatment and medicine instead. I am happy to report I have been cancer-free since 2018! 

If you are looking for a reprieve to get some breathing room and not a long-term break, forbearance might be for you. A forbearance allows you to postpone your payments for a short amount of time (unlike a deferment) until you can get back on your feet. If you do not plan to need financial relief for an extended period (usually under a year), this could be for you since it is much easier to qualify for than a deferment. 

Closing/next steps

Student loans suck, and the only thing that might suck more is having to pay back more than the original amount taken. You’re not alone in your fight or debt. Figure out how much you owe, decide which step above you’re going to try out first, and get started.

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