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Student loans can be a heavy financial burden for borrowers, but there may be ways to get relief. While certain programs can help with repayment assistance or forgiveness, most borrowers don't qualify. Instead, consider looking for opportunities to lower your student loan interest rates. Depending on your situation, there are a few different approaches you can take—and in some cases, you can take advantage of more than one.
Consider Refinancing if Your Credit Has Improved
Refinancing student loans is the process of replacing one or more existing federal or private student loans with a new one through a private lender.
Graduating and establishing yourself financially may have given you the chance to build a solid credit history and a good credit score. If that's the case, you may be able to get a lower interest rate than what you're currently paying by refinancing your loans.
This process involves a credit check, which private lenders will use to help determine whether you qualify and what interest rate you'll get. In most cases, you can get a rate quote before you submit an application, which will give you a good idea of what you qualify for and how much you can save.
Not sure where your credit stands? You can check your credit score for free through Experian and other providers to help understand your chances of scoring a lower rate. Your Experian credit score will show you areas where you can improve so your score can be in the best shape possible before you submit an official application.
How to Decide if Refinancing Is Right for You
To give you an idea of how much you might save, let's say you have $20,000 in student loan debt with a 10-year repayment term and a weighted-average interest rate of 5.5%. If you were to refinance the debt with a 3.5% interest rate and the same repayment term, your monthly payment would drop by $19, and you'd save $2,314 over 10 years.
The more student loan debt you have and the bigger the difference between rates, the more you'll save. Use an online student loan refinancing calculator to find out how much you can save based on your situation.
Keep in mind, though, that if you refinance federal student loans, you may miss out on access to certain benefits, including:
- Student loan forgiveness programs
- Federal student loan repayment assistance programs
- Income-driven repayment plans
- Generous forbearance and deferment options
- A pandemic-related moratorium on student loan payments, interest accrual and collection attempts through September 30, 2021
- Potential student loan forgiveness worth $10,000 or more from the Biden administration
Also, it's important to note that refinancing is different from student loan consolidation, which is a federal loan program that is only available to federal loan borrowers and doesn't offer lower interest rates.
If you're considering refinancing, start by getting prequalified with multiple lenders to understand what you might qualify for and how much you can save. If you have federal loans, make sure you compare those savings with the costs of losing the benefits that come with federal loans.
Most important, it may be best to hold off on refinancing federal loans in 2021 until the CARES Act student loan payment pause ends and President Biden provides more certainty about possibly canceling a portion of student debt for federal borrowers.
Sign Up for Autopay
Many student loan lenders and servicers offer interest rate discounts to borrowers who set up automatic payments. In most cases, the interest rate discount is 0.25%, so if your rate is 5.5%, using autopay would lower it to 5.25%.
Lenders and servicers provide this discount because it's less costly for them than the process of collecting missed payments. Automating your payments also helps you because a missed payment typically results in a penalty, and it can also damage your credit score if you're late by 30 days or more.
Choose a Shorter Repayment Term
When you're refinancing your student loans, a good way to lower your interest rate even more is to opt for a shorter repayment term. Depending on the lender, you can reduce your term to as little as five years—half the 10-year standard repayment term for federal student loans.
Lenders typically offer lower interest rates on shorter repayment terms because it's less risky for them in a couple of ways compared with longer repayment terms:
- Lower default risk: You'll be in debt for less time, which means there's less time for you to default on the loan.
- Lower interest rate risk: If interest rates go up in the future, lenders can't increase existing interest rates on fixed-rate loans. With shorter repayment terms, though, they're leaving less money on the table.
That said, shorter repayment periods come with higher monthly payments. So run the numbers before you apply to make sure you can afford to pay without stretching your budget too thin.
Negotiate With Your Lender
If you have federal student loans, interest rates are set by Congress, and they're non-negotiable. In contrast, private student loan companies set their own interest rates, and there may be some room for negotiation.
It's unlikely that you'll be able to lower your interest rate this way, however, unless you're struggling financially and need a modified repayment plan. Even then, it can be a hard sell. But it can still be worth a try if you don't have any other options.
Additional Ways to Pay Off Your Student Loans Faster
Scoring a lower interest rate can save you a lot of money as you work to pay down your student loan debt. But whether or not that works out, there are steps you can take to pay off your loans sooner and save even more that way.
Pay More Than the Minimum Each Month
If you have room in your budget, consider putting more toward your payments every month. This extra payment will go directly to the principal balance instead of interest, which will accelerate your debt payoff.
Alternatively, you could split your monthly payment in half and make biweekly payments. In most months, the total will equal your regular monthly payment. But there are 52 weeks in the year, which means the equivalent of 13 full monthly payments instead of 12.
Get a Side Hustle
If you don't have enough cash flow to pay extra, consider starting a side business to make extra money. You can then plan to funnel all the money you make toward your student loans as you receive it.
Take your time to research and compare business opportunities to find the best fit for you based on your interest and available time.
Remember Your Student Loan Tax Deduction
Most student loan borrowers can deduct the interest they pay on their student loans when they file their taxes. This deduction reduces your adjusted gross income, which is an important step in calculating your tax bill.
It doesn't directly help you pay off your debt faster unless you're savvy enough to do the calculations to find out how much the deduction saved you and put that toward your loans. But using the deduction will provide some benefit to paying your student loans every month.
Get Your Credit Ready for Refinancing
If you're seriously considering refinancing your student loans, either now or in the future, the better your credit profile looks, the lower your interest rate will be. Building credit can take time, but the additional savings can be worth it.
Start by checking your credit score and reviewing your credit report to get an understanding of your overall credit health and what's impacting your score negatively. Then take steps to address potential issues, such as high credit card balances and past-due accounts.
If you want to refinance sooner but don't have stellar credit, consider asking a loved one who has excellent credit to cosign your loan application. While this arrangement isn't ideal, it can be a good option if your credit has some major issues that will take longer to resolve.