One of the questions we Student LoanDown bloggers get asked frequently (through comments and our Ask the Expert tool) is, “Can I lower my student loan interest rate?”
Some folks are looking to lower their monthly payment because they’re not able to afford it — others are just looking to decrease the total interest paid to their lender. Here’s the information I usually pass on to those readers.
When student loan borrowers sign their promissory note agreeing to pay back the loan, they also agree to the interest rate detailed in the contract. For some loans this will be fixed and for others it will be variable (a margin that is added to a base rate). For federal student loans made after July 1, 2006, the interest rate is fixed. Most private student loans have variable interest rates.
Your promissory note locks in the terms on your loan (including the interest rate or rate margin). You can’t “refinance” a student loan the way you can with other consumer credit products, but there are options to possibly lower your current monthly payment, reduce your interest rate, or reduce the amount you pay over the life of the loan.
Quick tangent: For those of you still in school or just beginning to take out student loans, be proactive. Understand what you’re borrowing at what rate, so you don’t find yourself unable to make payments later. End tangent.
Now, let’s talk about the options.
Consolidate: By consolidating your student loans, you may end up reducing your current monthly payment because you are likely extending your repayment period. However, that means you would end up paying more over the life of the loan if you continue paying just the required amount each month. But if you’re looking for a little payment relief now and are willing to pay more (or make higher payments later to avoid accruing additional interest), consolidation could be the answer. Your best bet for federal student loan consolidation is through the Department of Education’s Direct Loan Program.
An added benefit of private student loan consolidation is a possible interest rate change. If your credit situation has improved since you took out your loan (or if you bring on a cosigner), you may qualify for a better interest rate than you previously had.
Pay off the debt: Some borrowers could consider using a different consumer loan (personal, home equity, etc., depending on assets) to pay off their student loan. This option has a couple big things to consider, though. You would lose several benefits of student loans like deferment and forbearance options, as well as the potential tax deduction.
Pay more: If what you’re looking to do is accrue less interest, then the best solution is to pay more money each month toward your principal balance. Even just a little bit each month could add up to big savings over the life of your loan.
Get the debt forgiven: There are some programs that will forgive a certain amount of a student’s debt. For example, there is a federal loan forgiveness option available to students working in public service.
Use borrower benefits: Ask you lender if they offer any benefits that could reduce your interest rate. For example, some lenders offer a discount if you make your payment automatically.