Can I Negotiate My Student Loan Interest Rate?

Renee Layberry
May 4, 2021

On average, you can expect to pay between $10,000 and $30,000 a year in college tuition, according to the National Center for Education Statistics. That’s a lot, and it’s the reason most students take out loans. But what if you could negotiate your student loan interest rate?   A key factor when choosing your student loan is the interest rate. A high interest rate can result in thousands of dollars of additional payments over the course of the loan. The interest rate alone can add years to your repayment plan and take a big bite of your post-graduation budget.   Learn more about student loan interest rates and how to negotiate the interest rate to reduce what you owe after you earn your degree.  

A look at student loan interest

Every student loan has an interest rate. This interest rate represents the amount of interest on the money you borrow, owed per month. It is expressed as a percentage of the total loan amount.    The lower the interest rate, the less you pay overall. Finding the lowest interest rate available when researching student loans is a smart financial decision. It helps set you up for faster repayment after graduation.  

Comparing interest rates

Since student loans are taken out to fund educational expenses, they typically include a lower interest rate than other types of personal loans.    If you’re comparing interest rates between your student loan and your credit card, you’ll notice that your credit card interest rate is substantially higher than your student loan. The interest on your student credit card might be 18%, while a student loan you’re looking at is 5%. That looks great, until you see other lenders offering student loans at 3%.   For that reason, only compare interest rates offered on student loans.   college female analyzing her budget and spending habits Photo by @tequila via Twenty20

Who sets the interest rate?

The federal government determines the interest rate for each type of loan available under the federal student loans program. The good news is that these loans feature a fixed interest rate, which means it won’t change over the course of the loan. In other words, you won’t be caught off guard by an unexpected increase in your interest rate, which means higher monthly payments.   For private student loans, your lender sets the interest rate based on a number of factors. They evaluate your financial profile, including your credit history, to set the interest rate. So, if you’re a college student with a good credit history, you can benefit from a lower rate.    However, if you’re like many college students and you don’t have much - if any - credit built up, the interest rate on your loan will likely be higher. That means ultimately your loan will cost you more.  

Typical interest rates for student loans

Every year, the federal government establishes the interest rates for student loans. Interest rates vary depending on student loan type. Typically, you can expect to pay a higher interest rate for graduate student loans than undergraduate student loans.    According to the U.S. Department of Education, for example, undergraduate student loan interest rates were 4.53% for the 2019-2020 academic year. These rates increased for graduate borrowers at rates of 6.8%, and interest rates were 7.08% for Direct Plus Loans.   Private student loans usually have higher interest rates. These vary widely and are impacted by many factors, including the economy. For example, if you happen to acquire a loan during a year with low-interest rates across the board, you might get a loan with a more competitive rate (but still likely higher than federal student loans).   The opposite is true too: If you secure your private student loan when rates are higher, you’ll be paying substantially more interest when compared to federal student loans.   Private student loan interest rates can be as low as around 4% or as high as 13% or even higher. If you’re wondering what is a good interest rate, aim for a 3% to 4% rate, which is almost always competitive.   Photo by John Schnobrich

Negotiating interest rates on your student loan

College brings with it plenty of expenses. In addition to tuition, you have to pay for your books,  room and board, and everyday living expenses. Learning to budget helps you live within your means and not spend money that you don’t have.   Learning to negotiate your student loan interest rate is part of smart budgeting. It can also help you build your negotiation skills that can benefit you as you manage future loans and major financial decisions.  

Which student loans are negotiable?

Need-based federal student loans have set interest rates. That means you simply have to accept the loan at the interest rate established federally. They are not open for any negotiation. You either take the interest rate attached to the loan or look elsewhere for a loan with a better rate or offered through a lender with whom you can negotiate terms.   If you choose a private student loan, you can give negotiating a try. Be forewarned though: Lenders probably aren’t going to be open to any significant reduction in the interest rate. In part, this stubbornness might stem from the fact that you’re a young adult with little to no credit history, which makes you a riskier loan candidate.   Still, it can’t hurt to try. You might wind up saving hundreds or thousands over the years, just by having a half a percent knocked off. Follow these tips to try to reduce the interest rate on your student loan.   college student on laptop and phone Photo by @dashapats via Twenty20

Best negotiating strategies

When you want to negotiate an interest rate, make your pitch by showing your lender that you’re a reliable candidate for the loan. First, offer to pay your monthly loan automatically. When you connect your loan payment to a bank account, lenders don’t have to worry as much about you missing a payment. So, if you have a steady flow of income and you aren’t concerned about overdrawing your account, an auto-debit option can result in a reduced interest rate.   Next, consider having a parent cosign your loan, which again can make you a more attractive candidate to your lender. With their longer credit history, your parents will improve the credit score the lender is looking at. In turn, you might get a lower interest rate. The key here is to ensure your cosigner has good credit to make your case for a lower rate.  

Shop around

Rather than negotiating a lower interest rate with just one private lender, you can shop around for the best student loan and rate. Apply for different student loans to see what the interest you get from lender to lender.    While the rates might not vary widely or even at all there’s a chance you will find loans with different rates. So, you might end up saving 0.25% to 0.75% interest simply by shopping around.   Remember to ask about fees and early-payment penalties as well. Ask what happens if your financial situation changes in the future and you can’t meet your monthly payments. If you’re looking at a variable interest rate loan, find out how often the interest can be adjusted and what the cap is. While a low interest rate on your student loan is very important, it is only one feature among many that you will have to consider.   Check out these top student loan lenders for 2020 and start comparing your rates:
  1. Sallie Mae
  2. College Ave

Look to the future

Even if you can’t lower the interest rate when you actually obtain the loan, don’t give up. If you prove to your lender that you’re reliable, you might be able to negotiate a lower interest rate in the future.    The way to do this is first never skip a payment. Next, make sure those monthly payments are always on time. Use this trustworthiness as your negotiating tool when you request a lower rate.