Federal student loans are the best. They are among the easiest to get, have the best repayment options, and some people can even get their loans forgiven.
Despite all of these perks, there are some major downsides to federal loans. Dealing with federal student loan servicers is a nightmare and no matter how good your credit score and income is, you pay the same interest rates as other borrowers.
One of the sad realities of federal student loans is that absent an act of Congress, the terms of your federal loan will not change. Fortunately, there are a couple tricks that can be done that result in you spending significantly less on interest on your student loans.
Trick One: Lowering your effective interest rate
Most borrowers have multiple years worth of federal student loans. The year the loan was actually borrowed and the type of federal loan (such as under grad, grad PLUS, etc.) can have a great impact on your interest rates. As a result, most federal borrowers have many different interest rates on their federal loans.
Step number one of getting a lower effective interest rate on your student loans is to sign up for the repayment plan that results in the lowest possible monthly payment. Even if you can afford the high payments of your current plan, try to switch plans into something that has a lower monthly payments.
Once you have the lowest payment possible on all of your loans, take the extra money that you would have been spending on the low interest loans and put it towards the highest interest loan. The more money you can put towards the high interest loan the better.
By eliminating the high interest debt, your effective interest rate is lower. As an example, suppose you have three loans with a 10k balance on each. The interest rates are 3%, 6%, and 9%. The average interest rate on your 30k in federal student loan debt would be 6%. If you pay 10k evenly across the three loans, your interest rate will still be 6%. However, if you take that same 10k and use it to pay down just the 9%, your interest rate going forward drops to 4.5%. The more high interest debt you eliminate, the lower your interest rate becomes.
Trick Two: Take your business elsewhere
Over the past 5 years a large number of private companies have started refinancing federal student loans. Their business model is pretty simple: target the cream of the crop of the federal borrowers. Because the federal government treats all borrowers as equal credit risks, the people who might not otherwise get loans are getting a great deal while those with great jobs and credit scores are getting the short end of the stick. These refinancing companies pick the low risk federal borrowers and consolidate at lower interest rates. The borrower saves money on their debt and the new lender can make a profit, knowing that their new customer is unlikely to default on their loan.
There are two major potential issues with going this route. First, refinancing or consolidating with a private company means that the federal perks disappear. No loan forgiveness programs and now income driven repayment plans. If you might need these perks, avoid going this route. Second, these lenders tend to be picky about borrowers. If you are unemployed or have a terrible credit score, it will be difficult to get lower interest rates on the private market.
If you are thinking about going this route, be sure to check out our student loan reviews. We try to track all of the lenders out there as well as current interest rates and promotions.
Getting a lower interest rate on your federal student loans isn’t easy. No matter how many times you call your lender, they won’t budge.
As a result, you have to get a little creative… whether it is attacking the high interest debt, or going with a private sector option, it can be done. It just requires a little work on your end.