Interest is the price you pay for borrowing. It's a fact of life that you'll owe your creditor extra money beyond your principal balance. But that doesn't mean paying interest is fun -- especially when you've taken out student loans and have thousands of dollars in debt you'll be paying back over many years. Interest costs can really add up in this situation.
The good news is, there are ways to reduce the interest rate you're charged on your student loans. Here are three possible solutions for reducing your rate that you can potentially try out, depending on what kind of loans you have and where you are in the borrowing or repayment process.
Image source: Getty Images.
Apply for loans with a cosigner
If you're still in the process of applying for student loans, you have a great opportunity to lower your rate -- if you're going to be using private student loans. You can apply for them with a cosigner.
See, federal student loans offer borrowers the same interest rate regardless of their credit score, with the rate based on the type of loan. But that's not the case for private student loans. Private lenders evaluate your credit, income, and other financial credentials and set a personalized rate based on this criteria.
If you're going to school, chances are good that you don't have a ton of income or perhaps even a great credit score yet. As a result, it may be hard to get a loan at an affordable rate. If you have a qualified cosigner, though, lenders feel more confident they'll be repaid since they could collect from the cosigner if you default. So you will generally be offered a much more competitive interest rate on a cosigned loan.
Parents or family members will often cosign for students taking out private loans, so explore this option if you're in the process of borrowing to fund your degree. Applying with a cosigner could help you to qualify for a refinance loan at a lower rate as well.
Refinance student loans to a new loan with a lower rate
If you have private student loans, refinancing can be another great way to reduce your interest rate -- and it's a technique you can use while still in school or after graduating.
Refinancing involves applying for a new loan with a student loan refinance lender. You'd want to look for a lender offering a better rate than what you're currently paying. If you're approved, the proceeds of the new loan go to repaying your existing student debt in full. You'll then begin paying back your new lender. But, since your rate will be lower, more of your money will go toward principal, so payoff will be easier.
There's a good chance you'll be able to refinance to a loan with a more competitive rate if you've graduated and now have better credit and a higher income than when you were a student. You can also get a cosigner to help you qualify for a refinance loan at a great rate.
You don't want to refinance federal student loans in most circumstances, though. Doing so would mean giving up important benefits exclusive to federal student aid, such as loan forgiveness and income-driven repayment options.
Take advantage of autopay discounts
Finally, taking advantage of autopay discounts is a great way to reduce your student loan interest rate if you're currently in repayment. And, unlike the other two options, this technique typically works well for both federal and private loans.
Many lenders offer a discount of 0.25 percentage points if you sign up to have automatic payments taken out of your bank account. While this isn't a huge savings, every little bit helps -- especially if you have a large loan balance. And since you have to make payments on your loan each month anyway or risk serious consequences for delinquency or default, there's no real reason not to have the payments debited automatically and score this interest savings.
Each of these techniques can help you reduce the interest you pay for the debt you took out to earn your degree. Consider implementing one or more of them if they'll work for your situation.
