Lenders hold all the cards.
They write the contracts. They know bankruptcy is a long shot for any borrower. They have an army of call center representatives trained collect payments. That same call center army is given little authority to make any meaningful changes to loan terms that might help borrowers.
To be blunt, borrowers looking to just call up Sallie Mae, Navient, or any other lender in order to get lower interest rates are likely in for disappointment.
That all being said, interest rate negotiation can be done. The key is understanding leverage and knowing how to utilize it. Whether a borrower is struggling to keep up, or having success in repayment, lower interest rates can be achieved.
Negotiating Lower Interest Rates for Struggling Borrowers
Sometimes circumstances make it impossible to keep up with student loan payments.
An illness or a period of unemployment can cause student debt balances to grow out of control.
Borrowers asking for help are most commonly offered a deferment or a forbearance. For many borrowers, this is a mistake as a deferment merely delays payment and allows the balance to grow.
While the deferment/forbearance route may help some people facing a temporary hardship, longer term difficulties will require a different option. Fortunately, some private lenders have shown a willingness to lower interest rates for 6 months to a year in order to help borrowers regain control of their debt. The best known program of this nature is the Navient Rate Reduction Program. Not all Navient employees are aware of the program or able to enroll borrowers, but by asking to be transferred to someone with Rate Reduction Program authority, borrowers can potentially get signed up.
When lenders like Sallie Mae and Navient offer a program of this nature, it is not a term of the original borrower contract. This means that borrowers cannot demand a rate reduction. Instead, they have to persuade the lender to approve it. Borrowers will usually need to share income information as well as monthly debts.
The key to negotiating an interest rate reduction under these hardship plans is to show the following:
- A desire or willingness to repay the loan
- Financial circumstances that make it impossible without some help
Due to the fact that enrollment is something of a judgment call for the lender, it is critical to be kind and patient with the call center employee helping out. Working in customer service means a stressful environment, low pay, and usually poor training. Borrowers who are understanding will be far more likely to get help. Additionally, because these call center employees have different levels of training and because some are more helpful than others, it may be useful to call multiple times to make the request.
Negotiating a Better Rate by Threat of Refinancing
Many borrowers think that by calling a lender and threatening to take their business elsewhere, they will be able to get a lower interest rate.
The idea behind this approach is the lender will want to keep the customer who hasn’t missed any payments and offer a better interest rate to keep them happy.
Unfortunately, this particular tactic will not work. Lenders know that if someone can get a lower rate elsewhere, they will just go elsewhere. As a result the threat of refinance is a hollow threat unlikely to make a difference.
However, making the threat less hollow can make a difference…
Using Other Lenders to Negotiate a Lower Interest Rate
The threat of refinancing means little. Having an approval in hand can make a big difference.
Documenting a refinance opportunity takes a little bit of work, but because there are now 20 different lenders offering refinancing services, competition has forced these companies to make the process quick and easy.
The downside to this approach is that it does require a soft credit pull and at least 15 minutes of time. This strategy will also only work for borrowers who have a solid income and credit score.
The approach is pretty simple:
- Apply to student loan refinance companies like SoFi, CommonBond and LendKey,
- Upload existing loan information to the refinance lender,
- Go through the process up to the point of the new lender sending out a final contract, and
- Take the final offer to the current lender and ask them to beat it.
Some lenders will be more receptive to this approach than others, but the key is to have that final contract, often called a rate disclosure. That document will prove that the “other” offer is real.
This approach will also work when shopping refinance rates. Because each lender has a different formula for evaluating applications, the company advertising the lowest rates may not be the company offering the lowest rates. However, these lenders will compete to win customers so one refinance lender may adjust their rate offer in order to match or beat another lender. The key to this process is to shop around and then use the offers to get lenders bidding against each other.
Some companies are more receptive to matching the competition than others. When a lender refuses to beat the competition, borrowers can just choose the lender that offered the better rate.
Negotiating Interest Rates on Federal Loans
Federal loans are a different animal when it comes to negotiating lower rates.
Interest rates on federal loans are set by Congress. This means that federal loan servicers will not lower interest rates, regardless of the strategy used by the borrower.
The only way to get a lower interest rate on this debt is to actually refinance the federal loans with a private lender. This move comes with a lot of risk because it means that all of the federal protections will be gone forever. As a result, a private refinance of federal debt is only recommended for borrowers who are in a strong financial situation.
Making a Deal on a Loan Payoff
Rather than trying to get a better interest rate, some borrowers would rather try to negotiate a loan payoff, where they pay a large portion of the existing debt in return for the remaining balance being wiped away. As an example, a borrower might want to pay $15,000 up front if it means a $20,000 loan would be eliminated.
The only time these sort of loan payoffs happen is in the event that a borrower has fallen significantly behind on their debt and is severely delinquent or in default. In some circumstances, a lender may offer to resolve the debt in return for a large payment.
Borrowers who are current on their loans are highly unlikely to be able to get a loan payoff for less than the full amount owed. This is because the lender is making money on interest each month and has no incentive to offer a break. They know most borrowers have little choice but to repay the loan in full.
Looking Beyond Negotiation
Negotiation is one tool that can potentially get borrowers a better interest rate on their student loans, but it isn’t the only one.
By our count, there are at least 14 different ways to get lower interest rates on student loans. Expert dealmaking may be one way of getting better rates, but borrowers would be wise to explore all potential avenues of savings.