How to Lower Your Student Loan Rate

How to Lower Your Student Loan Rate

If you carry a large balance on your student loans, they may take several years to pay off. The average student loan interest rate is 5.8%. With student loan debt reaching an average of $30,000, you may accrue thousands of dollars in added interest to your initial balance before paying off your loan.  

Lowering your interest rate can help you pay down your student loans faster and avoid paying accrued interest. Explore the basics of federal and private student loan interest rates and how to lower your student loan rate to save time and money on repayment. 


Federal Student Loan Interest Rates

Federal student interest rates vary depending on loan type. As of 2022, subsidized loans to undergraduates have the lowest fixed interest rates of any federal student loan type. Current rates are 3.73% for undergraduate loans, while graduate and professional loan interest rates are 5.28% or 6.28%.

Federal student loans can also vary depending on the first disbursement date. Loans can be subsidized or unsubsidized. Subsidized loans do not accrue interest while you are attending school. Unsubsidized loans, however, do accrue interest while you attend university and if you go into deferment. 


Private Student Loan Interest Rates

Private student loans originate with financial institutions such as banks, online lenders, and credit unions. They offer more rate-reducing options that allow you to refinance with your lender or seek a new lender that offers more favorable rates. 

While federal loans have a $12,500 annual limit and $57,000 in total for undergraduates, private loans can cover a higher academic cost. You will find that private lenders can place limits as well, but they are higher than what the federal government offers in most cases, with the private loan limits for undergraduates anywhere from $75,000 to $120,000.

Private loans generally come with higher interest rates than federal loans. They come with either a fixed or variable rate. Choosing between the two interest types can affect how much interest you pay.


Federal Loan vs. Private Loan Interest Rates

Federal student loans offer several key advantages over private student loans regarding interest rates. For subsidized federal loans, repayment plans start after you graduate, so you can focus on your studies without worrying about interest accruing while you are in college

Federal student loans have fixed interest rates so that you won’t experience any unpleasant surprises resulting from a sudden rate hike. Fixed interest rates also allow you to plan a long-term student loan repayment strategy because you know your interest rate. 

Federal loans also offer income-driven repayment plans for many borrowers, allowing you to pay according to the amount you make. However, these plans don’t always come with a change in your interest rate. 

Private student loans give you an interest rate based on your credit report, which can be beneficial if you have good credit. However, if your credit history causes your private lender to loan you money at a higher interest rate, you will likely pay more interest and make a higher monthly payment. 

Interest rates for private loans are set at the lender’s discretion, while the U.S. Congress sets federal student loan interest rates. Typically federal interest rates are lower than private rates, but if you have excellent credit or a co-signer, you may be able to secure a lower rate through a private lender. 


Why Should You Seek a Lower Interest Rate on Your Student Loans?

You agree to a fixed or variable interest rate when you take out a private or federal student loan. Your interest rate is the percentage of the original loan amount that your lending institution charges you for borrowing the money. A higher interest rate means you pay more money to the lender over the life of the loan. 

For example, if you owe $25,000 in student loan debt at a 5.8% interest, you’ll pay an extra $1,450 over the life of the loan. If your rate jumps to 9% for a private loan, you will pay $2,250. If you can only make minimum payments on your student loans, this extra interest can keep you making payments for several additional months or years. It also prevents you from paying down your original balance, which continues to accrue interest. 

How to Lower Your Student Loan Interest Rate

Lowering your student loan interest rates allows you to pay your debt off sooner while removing some of the anxiety that comes with loans.


  • Refinance your loans

Refinancing your student loan involves trading your old loan for a new one with different repayment terms. By refinancing your student loan, you can reduce your interest rate significantly if your credit score and finances are in good order. Specifically, most private lenders will ask for a score in the high 600s or better or a co-signer with good credit to offer you a lower rate. 

Student loan refinancing offers you a choice between a fixed or variable interest rate. Variable rates tend to be lower than fixed rates but choosing a variable rate comes with the risk that economic volatility drives your rate higher than the fixed rate you could have opted for.


  • Consolidate your loans

Student loan consolidation involves taking two or more loans with different interest rates and loan terms into one loan. Consolidation can occur with federal, private, or when combining both student loan types.

Consolidating your loans through the federal government is not always the best option when trying to lower your interest rates because there is no room for negotiation. Congress sets interest rates without allowing room for deviation. 

You should only seek to consolidate your federal student loans if you want to combine them into one monthly payment, lengthen your repayment period, or are looking to qualify for public service loan forgiveness (PSLF). 

The PSLF program provides a way out of debt for professionals with a high federal student loan burden. To qualify for the PSLF program, you must go into federal, state, local, or tribal government. Those serving in the U.S. military or working for nonprofits can also qualify for the loan forgiveness plan.

Consolidating private loans into a personal loan from your lender may offer interest rate reduction opportunities. A jump in your score by 50 points or more will make your case more attractive to the prospective consolidating lender. If you receive a pay increase following a promotion or find a new, better-paying job, your current debt holder may be receptive to discussing a lower rate. 


  • Set up automatic payments

Whether you have a federal or private student loan, lenders may offer a better interest rate for setting up automatic payments. Lenders are willing to provide you with a quarter to a half of a percentage point discount on your interest rate in exchange for the ability to receive payment automatically each month. If you can maintain adequate funds in your bank account, setting up automatic payments is one of the most accessible actions you can take to achieve a lower rate.


  • Look for discounts

Depending on the bank, you may be able to find other discounts that can further lower your student loan rate. Some lenders offer an interest rate discount for making a predetermined number of consecutive payments via autopay. 

The autopay rate discount can be a quarter of a percentage point or more and will be added to the automatic payment discount you’ve secured if you agree to that option.

Some financial institutions offer a loyalty discount for long-time customers with bank accounts or other loans. Inquire with the loan officer to determine if your bank provides loyalty discounts to its clients and determine the criteria for consideration.

Taking advantage of multiple discounts can reduce your interest rate significantly. Talk to your loan officer or inquire with another lender to choose the best option for your student loan.


  • Negotiate a lower rate

Before moving to a different bank, negotiating with your current lender might secure you a lower interest rate. If you’re having trouble meeting your monthly payments, your bank may want a chance to match any offers you receive from other institutions.

Maintaining proactive communication with your loan officer is an excellent practice to follow. The loan officer has the leeway to offer you solutions that can impact your level of debt. 


  • Get a cosigner

Just as with personal loans, getting a co-signer can help you lower your interest rate on your student loan. Getting a cosigner carries a significant responsibility as your actions can affect the cosigner’s finances. Failing to make payments will cause the cosigner’s credit score to suffer while they may be legally responsible for your student loan debt.

Only get a co-signer if you are confident in your ability to make payment and consider using the co-signer release programs that lenders offer. These programs allow you to remove the co-signer from your student loan after you meet a set of criteria. These criteria often include making a certain payment level or improving your credit score to a point where the co-signer is no longer necessary.


  • Improve your credit

Improving your credit is the key that unlocks most other interest rate improvement tactics. 

If you have other debt besides your student loans, try paying it down to reduce your credit utilization rate. Paying down your credit card balances and having negative entries removed from your credit report will let your lender know that you are less of a risk to the bank.


Learn More About Lowering Your Student Loan Rate

Lowering the interest rate on your student loans is an equation with many variables. Solving this equation to make your student loan payments manageable will help you start your post-graduation life on the right foot. 

Student loan borrowers that have graduated and are taking their first steps in the job market should also consider student loan refinance and other rate reduction methods to reduce interest on their debt.

Finance is us helps people make informed choices regarding their finances. Whether you’re looking to open a savings account or are interested in consolidating your student loans, Finance is us provides you with helpful resources to make the best financial decision for your situation.


Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services. 

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