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14 Ways to Get a Lower Interest Rate on Your Student Loans

Whether you are struggling or cruising to debt elimination, there are options to get a lower interest rate.

Written By: Michael P. Lux, Esq.

Last Updated:

14 Ways to Get a Lower Interest Rate on Your Student Loans

Whether you are struggling or cruising to debt elimination, there are options to get a lower interest rate.

Written By: Michael P. Lux, Esq.

Last Updated:

No matter what your financial circumstances are, chances are pretty good that one of the tips described below will help you get a lower interest rate on some or all of your student loans.

Obtaining lower interest rates can save you hundreds or even thousands of dollars on your student loans.

Sign Up for Auto-Debit or Monthly Automatic Withdrawal

This route is the low-hanging fruit.

Signing up for automated payments saves .25% interest with pretty much every student loan company. Some lenders even offer a .50% reduction if you open a checking account. Saving a fraction of a percent in interest may not seem like much, but it can add up. For example, if you have $40,000 in student loans, that quarter percent savings is worth $100 per year. Not exactly huge savings, but a decent reward for minimal effort.

Even though this is an easy move that every borrower can make, we don’t recommend it for everyone. There are a couple of circumstances where it is best to stick with manual payments.

You can’t trust your lender – The automatic payments give your lender the green light to take money out of your checking account. Unfortunately, there is an element of danger here. This is especially true if your monthly payments might change, such as being on a variable-rate repayment plan. Taking out a fixed amount each month is one thing, but if there is a chance your lender takes out more than what you planned for, be cautious. Once your lender removes that money, it is hard to get back.

You can’t trust yourself – Smart student loan repayment is all about paying extra when you can and targeting high-interest student loans. The savings from this approach will far exceed the potential savings from a .25% interest rate reduction. If signing up for automated payments will cause you to be lazy when making extra payments, stick to manual payments. Lenders maximize profits when borrowers pay the minimum each month over the life of the loan. Don’t let a slight interest rate reduction bait you into maximizing your lender’s income.

Lender Rate Reduction Programs

Lenders seldom advertise or publicize interest rate reduction programs, but they do exist. Private lenders created these programs to help borrowers who had fallen behind on their debt. It is typically available only to those with an income insufficient to keep up with payments. A rate reduction program is rarely a term of the loan contract. As a result, lenders can change the requirements whenever they want.

The nice thing about rate reduction programs is that they can help. Lenders usually give most borrowers who cannot make a monthly payment the option of forbearance or deferment. Delaying payments is typically good for the lender and bad for the borrower, however. The balance on the account will grow due to unpaid interest. Once the deferment or forbearance ends, the borrower has a bigger student loan problem. Continuing to make payments with a lower interest rate allows a borrower to put a dent in the principal balance.

Perhaps the most notable rate reduction program is with Sallie Mae/Navient. Over the years, they have changed the requirements and tweaked terms several times. At present, borrowers can sign up for an interest rate reduction that lasts for six months. Qualifying requires a borrower to provide Navient a detailed accounting of their monthly expenses. Generally speaking, the further behind a borrower is in repayment, the more likely Navient is to help. We have also found that the quality of assistance depends upon whom you talk to you. If one call attempting enrollment is unsuccessful, a second or even third try might make a difference.

Pay Down High-Interest Debt First

On the surface, paying down high-interest student loans first might not seem like a method of lowering interest rates. However, we would argue that it does.

The math is relatively easy. Suppose you have two loans at $10,000 each. One has an interest rate of 8%, and the other has an interest rate of 2%. Your combined debt is $20,000 at an average interest rate of 5%. If you pay off the loans with equal payments, your average interest rate will stay at 5%. However, if you start to pay off the high-interest loan faster, your average interest rate will drop. So, if you eliminate the high-interest loan first, your average interest rate will become a very favorable 2%.

Many people realize that paying extra on their student loans is a great way to pay off loans faster and save money on interest. We like to call these people responsible borrowers. However, we found that when these responsible borrowers don’t focus on the high-interest debt, it can cost them.

Utilizing this approach doesn’t require an excellent credit score or enrollment in any program. If you just pay extra towards your highest interest rate student loan, your average student loan interest rate will drop over time. Finding that bit of extra money to attack high-interest debt can save a lot of money in the long run.

Enroll in the Revised Pay As You Earn Repayment Plan

The Revised Pay As You Earn (REPAYE) plan is an excellent way for some borrowers to save money on interest.

Unlike all of the other federal income-driven repayment plans, REPAYE has a special interest forgiveness provision.

Suppose your federal student loans generate $300 in interest each month, but your required monthly payment is only $100. As a result, your federal student loan balance is growing by $200 every month. Because the federal government doesn’t capitalize the interest each month, many borrowers think that their balance is just staying the same. Once an event that triggers interest capitalization occurs, the balance can jump by hundreds or even thousands of dollars.

Signing up for REPAYE reduces this problem. Going back to our example, instead of growing by $200 each month, REPAYE cuts the extra interest in half. Thus, the borrower would save $100 per month in interest. For borrowers with significant student loan balances and smaller incomes, REPAYE is an excellent option.

Many of the borrowers who could benefit most from REPAYE are also the borrowers who plan on pursuing student loan forgiveness. Consequently, they don’t care what happens to the balance. This line of reasoning is dangerous, though. First, the borrower might not qualify for student loan forgiveness. Failing to sign up for REPAYE could mean that they are stuck with an even larger balance to repay. Second, the IRS treats some forms of forgiveness as a taxable event, including many forms of student loan forgiveness. REPAYE can keep the balance smaller over time and reduce a potential tax bill.

Unfortunately, REPAYE is not a one-size-fits-all option. For example, suppose a couple has one spouse with federal student debt and the other without it. The couple decides to file their taxes separately. When calculating IBR and PAYE repayment terms, the government will look only at the income of the spouse with federal student debt. However, when calculating for REPAYE plans, the government doesn’t exclude spousal income –  regardless of how the couple filed their taxes. As a result, REPAYE may not be the best choice for some couples.

For most, however, REPAYE is a great way to reduce interest spending on federal student loans. This is because the government caps monthly payments at 10% of discretionary income while REPAYE minimizes the damage caused by the excess interest each month. If the federal government it paying a portion of the interest, it means the borrower effectively has a lower interest rate.

Join the Military

Choosing to serve your country can be a big boost in student loan repayment. For starters, numerous student loan forgiveness programs exist specifically for the military, such as the Military College Loan Repayment Program.

In the realm of interest rates, enlisting has immediate benefits as well. Military service can lower your student loan interest rates in two ways:

Servicemembers Civil Relief Act (SCRA) Interest Rate Cap – The SCRA limits all student loan interest rates for active-duty members of the military to 6%. This limit applies to both federal and private student loans. In fact, this interest cap applies to all debt, so long as the debt exists before you begin active duty. If you acquire new debt after active duty starts, it does not qualify for the interest rate cap. Federal law guarantees this rate cap, but you will probably have to contact your loan servicer to get things set up.

0% Interest for Service in a Hostile Area – Anyone who qualifies for special pay by serving in a hostile area doesn’t have to pay interest for up to 60 months. This benefit applies to all Federal Direct student loans issued after October 1, 2008.

Enlisting is obviously a major commitment. But, anyone currently in the military or considering joining should be aware of the potential opportunities to lower their interest rates.

Get Congress to Act

If you have student debt, it probably means that you don’t have millions of dollars to pay lobbyists or contribute to campaigns. However, borrowers as a group still wield enormous power in Washington.

Over the years, there have been proposals that would allow federal borrowers to lower their interest rates to the same levels that banks get when they borrow from the government.

Showing up to vote each November is critical to influencing DC. Think about the senior citizens. Seniors on Medicare and Social Security individually don’t have much money to spend on campaign contributions. But, they vote, and everyone in Congress knows it. Student loan borrowers currently number over 40 million. If they all voted for candidates who pledged to make a difference on student loans, lower interest rates could be just the beginning.

Refinance Student Loans at a Lower Interest Rate

Student loan refinancing is another excellent way to get a lower interest rate on your student loans.

When you refinance your student loans, a new lender pays off some or all of your old student loans in full. The borrower then agrees to repay the new lender according to new terms. The downside to this approach is that this eliminates the old loan’s terms and perks. So, if you like having income-driven repayment plans or loan forgiveness, it is best to skip refinancing and stick with federal loans.

The big advantage of refinancing is the enormous potential interest savings. College students without a job or a degree are risky bets and usually get charged higher interest rates by lenders. Graduates with a job and a degree are far less risky and generally more able to get better interest rates.

The more savvy a borrower is about the refinance process, the more they can save. There are multiple ways that a borrower can use refinancing to get lower interest rates…

Pick a Shorter Repayment Term or Loan Length

By refinancing student loans to a shorter-term loan, borrowers can significantly lower interest rates.

As an example, take a look at the best rates currently available on 5-year fixed-rate loans.

RankLenderLowest Rate
1Splash Financial2.23%
2Laurel Road2.25%
3ELFI2.47%

If we stretch things out to 20 years, the lowest possible rates jump considerably:

RankLenderLowest Rate
1Splash Financial3.09%
2ELFI3.18%
3CommonBond3.39%

To see rates available for 5, 7, 10, 15, and 20-year loans, be sure to check out our best refinance rates by category page. These rates are updated monthly to provide a good idea of the best available rate for any given loan type.

Variable Interest Rate Loans Always Start Lower

When refinancing, opting for a variable-rate loan comes with a bit more risk than a fixed-rate loan. This is because the interest rate of a variable-rate loan can change as the market conditions change.

The initial rates lenders offer on variable-rate loans start out lower than fixed-rate loans, but they can move significantly over time. Additionally, the gap between the best variable-rate loan and the best fixed-rate loan can fluctuate. If lenders expect interest rates to go up considerably, they might be more generous with the initial rates of variable-rate loans. If lenders think rates will decline, the gap between fixed-rate loans and variable-rate loans might drop.

By way of example, take a look at the current lowest rates on a 7-year fixed-rate loan:

RankLenderLowest Rate
1Splash Financial2.44%
2CommonBond2.59%
3ELFI2.68%

If we keep the repayment length the same but opt for a variable rate loan, the rates drop to the following:

RankLenderLowest Rate
1CommonBond2.29%
2Splash Financial2.78%
3Citizen's Bank2.86%

The obvious danger with a variable rate is that the rate can jump. Borrowers should investigate whether their lender has a cap on its variable-rate loans. If so, investigate how high the rates can go.

The longer the loan repayment length, the riskier a variable-rate loan becomes. We typically suggest that all borrowers avoid variable-rate loans longer than ten years. However, if interest rates are at extreme highs, a longer-term variable-rate loan might make more sense.

Shop Around to Find the Best Rate

In the realm of student loan refinancing, the surest way to get the lowest possible rate is to shop around.

All lenders offer a range of loan types and loan options. What they don’t advertise is that all lenders evaluate applications differently. Lenders put different weights on different factors, such as the college you attended, how long you have been in your job, and your profession. A borrower with a high credit score and average income might get vastly different results than a borrower with an average credit score and high income.

Accordingly, the companies advertising the best rates may not be the company that actually offers you the best rate. Because there are so many variables in play, it is essential to check rates with several different lenders. We typically suggest investigating 5-10 lenders out of the many student loan refinance companies.

The good news about shopping around is that it takes very little time. Most borrowers can get a rate quote within 5 to 10 minutes.

Fortunately, shopping around does not hurt your credit score. The credit agencies treat multiple applications within the same window as a single application. This allows borrowers to shop around without fear of negative credit consequences. To be safe, try to keep your shopping around confined to a one- or two-week window.

Get a Cosigner

This option is a pretty lousy way to get a lower interest rate when you refinance. It can help borrowers with less than perfect credit qualify, but it is a massive obligation for the cosigner.

Getting a cosigner to help pay for college is one thing. Getting a cosigner to refinance is another story. Refinancing for some is more of a luxury. Obtaining lower interest rates is nice and saves money, but does it justify the risk that your cosigner is taking on?

That being said, borrowers who are struggling to get approved may be able to refinance successfully with the help of a cosigner. If that cosigner was on the original loan, this move might make even more sense. The cosigner’s obligation doesn’t change, but the borrower’s ability to pay it off faster is improved. This is a win for both parties.

Some borrowers use refinancing as a workaround to get their cosigner released from the loan. If the cosigner is on the original loan but not the refinanced loan, the cosigner has no further obligations when the refinance goes through.

Pay Off Existing Debt First

When refinancing, the two most significant factors in approval decisions are your credit score and your Debt-to-Income ratio (DTI).

Completely eliminating a debt can have a considerable impact on your DTI. Lenders usually don’t care about your current debt balances. For example, if you have a car loan, it doesn’t matter if you owe $20,000 or $5,000. The impact comes from monthly payments on your credit report. Lenders care about the $300 per month that you owe on your car loan. If you eliminate that monthly payment, your DTI improves. It also increases your chances of scoring the best possible interest rate.

If you are about to eliminate a monthly payment, be sure to let some time pass so that the debt doesn’t appear when lenders check your credit report.

Fix or Improve Your Credit Score

Lenders consider your credit score when determining the rates they offer you. Therefore, anything that you can do to improve your credit score will help your cause.

Correcting errors on a credit report is a quick way to get a boost, but that isn’t the only way to improve it. The impact of negative items on a credit report drops with time.

For an idea of what lenders expect from a credit score perspective, be sure to check out our article on the minimum credit score required for refinancing.

Find a New Job or Get a Raise

This tip probably falls into the easier-said-than-done category, but it can make a big difference to your debt-to-income ratio.

Different lenders have different requirements for documenting income and time required at a job, but a recent paystub is sufficient proof of income for many.

Refinance Again

The option to refinance a second or third time is something that many borrowers fail to consider.

The good news for consumers is that there is no rule or limitation on refinancing multiple times.

If you have had the good fortune of getting a higher-paying job, improving your credit score, or eliminating some old debt, there is a good chance that better rates may be available. Similarly, if the first time through the refinance process you skipped out on shopping around, a second bite at the apple might be an excellent opportunity to lock in the best deal.

With many lenders offering refinancing services, jumping around a few times can be an effective strategy.

Lowering Student Loan Interest Rates

The fourteen different approaches that can be used to get lower interest rates represent an opportunity for nearly all borrowers to get some help on their student loans.

Different strategies require different levels of effort, but for many, a minimal investment of time can result in major savings.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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