Hack Your Interest Rate on Student Loans

Smart Money
Student Loan Hacks

How painful is writing that monthly check to pay back student loans? Many people say unpaid student loan debt is a big reason for putting off things like starting a business, buying a home, or even getting married. Is there any way to get around this? You bet there is.

“I’m Listening”

Don’t ignore it

The worst thing you can do is default on your loan payments. Failure to pay can:

  • Damage your credit score
  • Lead to penalties
  • Accumulate more interest

You might think, “I’ll pay it off later,” but resist this temptation. The last thing you want is a collection agency calling you nonstop. There are smarter solutions.

Haggle down your student loan payment

Your student loan has two parts: the principal and interest. The principal is the value of the loan, that is, how much you borrowed. The interest is what’s charged to you over time while you pay back the loan. You usually can’t lower the principal without paying it back, but you can reduce the interest rate. You can also change the repayment term (how long you get to pay back the loan).

This process is called refinancing. It means getting rid of your old loan for a new one with a lower interest rate, different repayment term, or both.

Refinancing can mean big savings

Many student loans come with a high inter-high-interests on federal PLUS loans are currently 7 percent, and not that long ago they were as high as 8.5 percent. When you refinance, your total repayment costs may be reduced by thousands of dollars. Or, you may be more interested in lowering your monthly payment. Here are a few approaches that people take when refinancing student loans.

OPTION 1: Max out overall savings

If you can afford to increase your monthly student loan payment, you can refinance into a loan with a shorter repayment term. This will get you the best interest rate, and pay your loan off faster. It’s a powerful combination that can save thousands of dollars in interest charges.

OPTION 2: Lower monthly payment

If you’re more concerned about reducing your monthly payment, you can refinance into a loan with a more extended repayment term. You won’t get as significant an interest rate reduction, and stretching your payments out over a more extended period can increase your overall repayment costs. But the interest rate reduction you get when refinancing can lessen the impact of taking longer to pay off your loan.

OPTION 3: The best of both worlds

Now you might be wondering, “Can I reduce my monthly payment AND my overall repayment costs?” Yes, you can. That’s another advantage of the refinancing process. It lets you call the shots. If you refinance into a loan with a lower interest rate and about the same repayment term as your existing loan, you’ll often reduce your monthly payment and your overall repayment costs. The change won’t be as dramatic as if you selected one of the other options above, but it’s often a significant improvement over doing nothing.

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What if I have federal student loans?

Even if your loans are from the government, you can still refinance with a private lender. Remember, if you go with a private lender you’ll lose federal benefits such as access income-driven repayment, and the potential to qualify for loan forgiveness. Still, many who refinance with private lenders consider the overall savings even more important than those benefits.

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