If you feel like your monthly student loan payments are barely making a dent in your loan balance, it might be time to see if you qualify for a lower interest rate. In fact, lowering your interest rate by even 1% can save you thousands of dollars over the life of your loan.
So how can you get a lower interest rate? Here's what you need to know.
Depending on when you took your loan out, the rate you were assigned may be much higher than current interest rates (which, as of May 2019, may be as low as 2.48%). If that’s the case, you’re likely paying more than you need to.
Unfortunately, lowering your interest rate is not as easy as calling your lender and asking for a lower rate (although, you can totally do this with your credit cards — and you should!).
The only way to get a lower interest rate on your student loans is through refinancing. If that sounds intimidating, no worries. It's pretty easy to refinance — in fact, it's possible to find a lender and apply in about 15 minutes. We'll walk you through it.
See also: Should I Refinance My Student Loans?
How refinancing works
As we mentioned above, refinancing your student loans can save you thousands of dollars and take years off of the life of the loan.
By swapping out your existing loan for one with a lower interest rate, you’ll automatically direct a bigger portion of your monthly payments towards your loan principal, allowing you to pay down your debt faster. Refinancing your federal student loans to a private loan can be a smart idea for this reason.
However, it's important to know that when you refinance your federal loans, some of your loan terms will change. You’ll have to give up income-based payments and guaranteed payment breaks if you are faced with an economic emergency. Also, you’ll lose the ability to take advantage of loan forgiveness options. But keep in mind that your cost savings may make the tradeoff more than worth it. See our Student Loan Refinancing Calculator to run some comparisons.
Before you talk with a lender about refinancing, there are three things you need to consider: your credit score, the interest type you want for the loan (variable vs. fixed), and the repayment terms. All three play a key role in determining the interest rate you qualify for and how much your monthly payments will be.
How your credit score impacts your interest rate
When a lender reviews your application, one of the first things they look for is your credit score. This score measures how likely you are to repay a loan.
If your credit score is in the 690 to 850 range, you increase your chances of qualifying to refinance for a lower interest rate. But if you're below that number, you might consider applying with a cosigner who does have a good credit score.
Why the type of rate you choose is important
You might be tempted to go with the lowest interest rate possible, but if that number is attached to a variable rate, there are a few things you need to know.
If you opt for a variable rate, you take the chance of the rate fluctuating up and down while you make your payments. This may seem like the best option when the rate is low, but remember, this fluctuation can yield a different loan payment each time the interest rate changes.
Variable interest rates are typically good for short-term loans or loans you can pay off fast. If you don’t have much left to repay on your student loan, or if you have a plan that will allow you to repay quickly, then a variable interest rate may be a good option.
If you go with a fixed rate loan, the rate will remain fixed for the life of the loan. This will give you a predictable and stable loan payment.
For most people, a fixed rate is preferred. It’s easier to budget for predictable payment amounts and there are no surprises. If you intend to pay the debt over a long period of time, it is wise to go with a fixed rate.
How repayment terms impact your interest rate
If you choose a longer repayment term because you want to lower your monthly payments, you may still get a lower interest rate than you currently have — but it won't be the best deal possible. That’s because lenders typically offer a lower interest rate if you choose a shorter repayment period.
To ensure you get the lowest interest rate possible, you will want to look at the shortest repayment period. Most private lenders will offer repayment terms as low as five years. But if your goal is to lower your monthly payments, you may want to go with a longer repayment term. Ultimately, what you choose depends on your goals.
If you’re ready to lower your interest rate, check out our Student Loan Refinancing Calculator to learn more.