Published in: Student Loans | Aug. 27, 2019
3 Ways to Pay Less Student Loan Interest
By: Maurie Backman
The less interest you pay on your student debt, the more money you save. Now that’s a winning formula.
Interest is how lenders make money, and that holds true for issuers of student loans.
But that doesn’t mean you can’t take steps to minimize the interest you pay on your student debt. Here are a few ways to accomplish that goal -- and save yourself what could be a lot of money in the process.
1. Pay off your loans ahead of schedule
Once you take out student loans, you’ll be put on a repayment plan that lets you chip away at that debt over time. For federal loans, the standard repayment schedule is 10 years. For private loans, it can vary, but it frequently tops out at 15 years. If you manage to pay off that debt ahead of schedule, you’ll fork over less interest.
Imagine you borrow $10,000 for college at 6% interest on a 10-year repayment plan. If you stick to that schedule, you'll pay $3,322 in interest. But if you manage to add an extra $100 to your monthly payments, you'll lower your total interest tab to just $1,441, and you'll pay off that debt in about half the time.
2. Stick to federal loans
You have two choices when taking out student loans: You can borrow money from the U.S. Department of Education, otherwise known as federal loans, or you can borrow from private lenders like banks. Sticking to the former could help you keep your interest costs to a minimum.
Federal loans’ interest rates are regulated and capped at a certain level. The interest attached to federal loans is also fixed, so there’s no need to worry about a rate hike over the course of your repayment plan. Private lenders, on the other hand, can charge as much interest as they’d like, and many private loans come with variable interest rates that can fluctuate. Often, that means they become more expensive.
3. Refinance to a lower rate
Refinancing means swapping one loan for another, and it’s an option to pursue if you’re eager to lower the interest rate on your student debt.
If you took out federal loans for college, refinancing typically won’t make sense, because you probably have a pretty low rate already. But if you took out private loans with high interest rates, it pays to see what lower rates you’re eligible for.
It especially makes sense to look into refinancing if your credit score has improved since you borrowed money for college. Though federal loans don’t require a credit check, private loans do, and the lower your score when you apply, the more interest you'll pay. But once your credit improves, it’s easier to qualify for a more favorable rate.
Another reason to consider refinancing: Private student loans often come with variable interest rates. Swapping loans before your rate goes up could result in some pretty big savings.
You may have no choice but to borrow money for college. But once you do, you might as well pay as little interest on your loans as possible and keep more of your money for yourself.
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