Your interest rate will make a huge difference in the amount you’ll pay for a loan. You’ll pay $6,892.85 in interest for a total amount of $31,892.85 if you borrow $25,000 at 5.05 percent interest over 10 years.
Lowering that interest rate by one percent reduces that amount to $5,444.81 for a total of $30.444.81. You’ll save $1,4448.04 over the life of the loan. However, that’s just one of the ways you can save money. With that in mind, let’s look at some other ways way to lower the interest on your student loan.
How Rates Are Set
Congress sets the interest rate for Federal Student Loans each year. The lender establishes the percentage — usually based upon the prime-lending rate — if you have a private student loan. Either way, your credit rating must be good, or you’ll be asked to pay more interest.
Refinance Your Loan
With this approach, you’ll apply for a new loan at a lower interest rate, pay off your existing lender(s) and make payments to the new lender. This works best when your loans are still relatively new and your credit score is strong.
You’ll need to be in the high 600s and above or have someone scoring in that range willing to cosign for your loan. You’ll also need to have an income capable of sustaining all of your other credit accounts, while making your payments on a timely basis.
Another approach is to consolidate your student loan with your other obligations. Programs like Freedom Debt Relief can even help qualified enrollees settle unsecured debts and use a consolidation loan to do so faster, leaving them responsible for repaying a single loan instead of juggling multiple high-interest balances.
There are some drawbacks of refinancing to consider, however.
If you have a Federal Student Loan and qualify for a forgiveness program or an income driven repayment plan, you might be better off staying where you are and trying one of the ideas below. You’ll also give up deferment and forbearance options in most cases.
Refinancing requires trading your federal loan for a private one, so the public loan perks will go away. However, you will have a lower payoff amount, so you’ll need to weigh that benefit against those consequences.
Set Up Automatic Payments
Lenders love it when you set them up on auto-pay. So much so, most will offer a .25 percent discount to borrowers who agree to have loan payments automatically deducted from a bank account.
You will see his referred to as an Automated Clearing House (or ACH) discount.
This has an added benefit in that you will be freed of remembering to make your payment each month, as it will be done on your behalf. Be careful though, you do have to make sure the money is there when the computers come calling. Otherwise, you could incur an overdraft fee.
Make Larger Payments Each Month
While this one doesn’t lower your rate per se, it does reduce the overall amount of interest you’ll pay. Student loans are generally free of prepayment penalties. This means the sooner you pay them off, the less you’ll pay to have them as the interest is applied over a shorter duration.
These three strategies will help you lower the interest on your student loan. While each of these — refinancing, setting up automatic payments and making larger payments — will lower the overall amount of interest you’ll pay, they all have considerations you’ll need to make. Before deciding, do some research and give some thought to determine which plan is best for your circumstances.