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Interest on student loans can be misleading. When talking about incremental differences, like comparing 5.6% and 6% interest rates, it’s easy to assume that a few tenths of a percent don’t really matter.
But over the life of a loan, these additional differences can add up to hundreds or even thousands of dollars. That’s why getting the lowest possible rate is a great way to save money on student loan repayment.
The best strategies will depend on the type of loans you have. We’ll walk you through the options available to borrowers interested in reducing student loan interest rate.
Determine if you have federal or private student loans
Before determining how to lower your interest rate, determine the type of student loan you have. Most borrowers have federal student loansbut some have a mix of federal and private loans or only private loans.
The first step is to view your official credit report at AnnualCreditReport.com, where you can view your credit report from all three credit bureaus. Free weekly credit reports are available through April 2022. When you check your credit report, it displays a list of all your current and past credit cards, loans, and other credit products. If you have student loans, they will be listed here.
Then visit the Federal Student Aid (FSA) website to see if you have federal student loans. To log in, you will need your FSA ID. Once logged in, you will see all federal loans in your name.
Match the loans on your credit report to the loans on your FSA account. If there are any left, these come from private lenders. You will need to visit their individual websites and create an account to view details such as your interest rate and payment due date.
Determining the type of loan you have is important because your options for reducing interest, as well as the pros and cons of doing so, differ depending on whether your loans are private or federal. Federal loans have more perks and benefits like reimbursement based on incomelonger adjournment periods and more abstention options.
If your parents have Parent PLUS federal loans, they will need to log in to their own account. Parents who have borrowed private student loans can use the steps mentioned above to find their loan details.
Examine student loan refinancing
Refinancing is the process of swapping your current loan for a new loan with a different term, interest rate, or both. More often than not, you refinance with a new lender, not the one you originally borrowed from.
Borrowers typically refinance their student loans to get a lower interest rate so they can pay less interest over the life of the loan. This can result in a lower monthly payment unless the borrower chooses a shorter loan term to speed up the repayment process. Shorter repayment terms often mean a higher monthly payment in exchange for less interest paid over the life of the loan.
Some borrowers refinance to a longer repayment term, which will result in a lower monthly payment. This allows more flexibility in their budget. Be aware that longer-term refinancing may cause you to pay more total interest.
Children and parents can refinance their student loans. A parent may be able to refinance their loans on behalf of the child, if the child is able to qualify. Parents can also keep the loan in their name and refinance at a lower rate or lower monthly payment.
If a parent has co-signed a student loan for their child, the child can refinance to remove the parent from the loan.
How to qualify for a student loan refinance
Generally, qualifying for a student loan refinance requires a credit score at least above 600. To check your credit score, visit a website that offers them for free or check to see if you receive a free monthly score from the financial institutions you do business with. Some banks and lenders provide free credit scores to customers.
Some lenders also have income thresholds. For example, Citizens Bank requires total income of $24,000 to refinance, while CommonBond requires total income of $65,000.
If you don’t qualify for a loan refinance on your own, you can ask someone to co-sign the loan with you, such as a relative. They will need to meet the lender’s credit score and income requirements to co-sign. The loan will remain on their credit report until you repay it, which could affect their ability to qualify for a loan.
Should You Refinance Federal Student Loans?
One of the main reasons to understand what kind of loans you have is to understand what you could lose by refinancing them. When you refinance federal student loans, you waive all associated consumer protections and there is no way to transfer your loans to the government.
For example, if President Joe Biden ends up indulgent a certain amount of individual student loan debt, which will only apply to federal student loans. If you refinance your federal loans, you will not be eligible for loan forgiveness.
Private lenders generally do not offer other types of loan forgiveness or income-based repayment options. Because of these trade-offs, it may be worth not refinancing your federal loans and keeping them federal, even if refinancing them would lead to a much lower interest rate.
Take advantage of interest rate discounts
All federal loan servicers and most private lenders offer a discount on interest rates if you sign up for automatic payments. The rebate is usually 0.25% and payments should be automatically deducted from your bank account.
Here’s how it goes. Let’s say you have a $50,000 loan with a term of 10 years and an interest rate of 6%. If you sign up for automatic payments, the interest rate will drop to 5.75% and you could save $750 in total interest.
Automatic payments also help you avoid paying a late bill, saving you from late fees and damage to your credit score.
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