FedLoan Servicing, often called MyFedLoan, is one of the largest servicers of federal government student loans.
In addition to being one of the biggest federal loan servicers, they have a reputation for being one of the worst. Unfortunately, this makes getting answers to some of the most basic questions difficult.
One of the more challenging issues that a borrower may face is finding a way to secure a lower interest rate on their federal loans.
Getting Lower Interest Rates
If your loan is with FedLoan Servicing, it means it is a federal government loan. Federal government loans are usually the recommended loans for borrowers because they come with great perks like income-driven repayment plans and Public Service Student Loan Forgiveness.
The downside to Federal Loans is that the rates are set by Congress. This means that regardless of your financial situation, FedLoan Servicing cannot offer you lower interest rates. The best you will be able to do is to sign up for automatic withdrawals for your monthly payments to get a .25% interest rate reduction. This reduction is better than nothing, but it is so slight that the difference will only be noticed on loans with very high balances. The good news is that there are a couple of methods to make a real difference in interest rates.
Method #1: Have Someone other than FedLoan Servicing lower the interest rate
Just because you cannot log on to myfedloan and get a lower rate doesn’t mean that it is impossible to get a lower rate on your loans. Private lenders like SoFi and LendKey offer student loan consolidation and refinancing services.
This student loan move can be a great idea because it lowers your interest rates substantially and gets the loans paid off faster. However, it is risky, because once you go with a private lender, you lose out on all the perks that go with a federal loan. Making things even more complicated is the fact that once your loan is private, it cannot ever go back to being a federal loan. With no way to undo this process, borrowers must understand the consequences of giving up federal benefits.
However, for borrowers that are certain they will be paying their loan off in full and unlikely to take advantage of the federal programs, private refinancing has a huge advantage. The idea behind it is that someone with a degree and a job is much less of a credit risk than someone who is still in school. Less risk means lower interest rates. Because competition for creditworthy borrowers is fierce, in addition to lower interest rates, SoFi offers new customers $150, while lenders like Splash will provide a bonus of up to $500.
Method #2: Take Advantage of Income-Driven Plans
Even if you don’t have the credit score or income for a private consolidation, there are still options within Fedloan Servicing.
Most federal student loan borrowers can get lower monthly payments by signing up for an income-driven repayment plan. Even if you can afford the monthly payments on your current payment plan, getting lower payments allows you to essentially lower your interest rate each month.
Suppose you have two $10,000 student loans. Loan A has an interest rate of 7%, and Loan B has an interest rate of 4%. The monthly payment on both loans is $250, bringing your total monthly payment to $500. This is a payment you can afford. Rather than continuing to pay $250 towards each loan, suppose you sign up for an income-driven plan, such as IBR or PAYE. Under the new plan, your payment could be lowered to a total of $100 for both loans. With the new payment plan, you have freed up $400 per month. That extra $400 per month can now be applied to the high-interest rate loan.
Using the strategy of lower payments and directing the extra money towards the high-interest loan, you spend the same amount each month, but you will pay off your student loans faster because you will spend less on interest.
Technically, you are not getting a lower interest rate, but in reality, you are spending less on interest.
Fedloan Servicing has no authority to reduce your interest rate beyond a slight reduction for auto-payments.
However, if you get creative, you can still save money each month on student loan interest.