If you are a current or former college student, like myself, you are likely to be in debt. I’m sure you’d like to reduce the student loan interest on that debt. Who would not?
With student loan debt data for 2019 indicating that 45 million borrowers owe a staggering $1.52 trillion, it’s no wonder that educational debt is a major economic and political worry. As someone who graduated in 2016 with over $55,000 in student loan debt, I understand this situation firsthand.
Unfortunately, one element contributing to increasing student loan debt is the difficulty and cost of repaying student loans due to interest.
While federal student loan interest rates are lower than those on most other forms of debt, interest begins to accrue as soon as the loan is taken out on unsubsidized and private student loans – yet most students do not begin paying off their debt until after graduation.
As a result, many young people graduate with far more debt than they anticipated. Furthermore, higher amounts require paying more interest after graduation, making debt repayment more expensive and difficult to fit into a budget.
The good news is that there are strategies to reduce the interest you pay on your student loans. Simply follow these four tips to lower your interest costs, allowing more money to go to principle and paying down your debt faster!
And, hey, the more money you save, the more you can invest easily.
Here are some ideas for lowering student loan interest.
1. Pay Interest While Still In School.
If you can make interest payments on your student loan debt while in school, it can make a significant difference in the total amount you owe after graduation.
Making interest-only payments prevents interest from collecting and adding to your loan debt during your schooling. You will also avoid paying interest on the interest, which can occur when unpaid interest is capitalized or added to your loan total.
Assume you borrow $35,000 at an average interest rate of 5.7%. Your loan is on deferral for 36 months, so you make no payments during this period. Your $35,000 debt will increase to $40,985 after deferral. Your monthly payment, assuming you’re on a 10-year normal repayment plan, will increase from $383 to $448.
Obviously, if you can afford it, paying the interest while in school will prevent this from happening to you. Consider working part-time to earn enough money to pay these interest charges; your post-graduation self will be glad for your efforts.
2. Refinance Your Student Loans at a Lower Rate
Another excellent strategy to minimize the amount of student loan interest you pay is to lower the interest rate levied on your loans. You may be able to accomplish this through refinancing.
Refinancing implies obtaining a new loan and using it to pay down previous student debt. If the new loan has a lower interest rate, you will pay less interest and your monthly payments may be reduced. Personally, I’ve refinanced my student loan debt twice since graduation. I was able to reduce the interest rate on my private student loans from over 9% to around 4%.
Assume you owe $35,000 with an average interest rate of 10% and have 10 years remaining on your payback schedule. If you can refinance to a new loan at 7% with a 10-year repayment plan, you might reduce your monthly payment from $463 to $406, saving a total of $6,738 in interest charges.
If you refinance federal student loans, you lose payment flexibility, including generous deferral and forbearance policies, as well as the opportunity to select from a variety of payment plans, including those based on income. You also waive the option of having any portion of your loans forgiven via other federal programs. Before refinancing federal loans, you should thoroughly consider the pros and downsides. You should not refinance federal student loans if you intend to use your federal student loan benefits. These drawbacks do not present with private student loan refinancing, though.
Refinancing a student loan can only save you money if you can get a lower interest rate than you are now paying. According to LendEDU.com, student loan refinancing rates presently vary between 2.49% and 9.99%. To qualify for a low-interest refinancing loan, you must have strong credit and provide proof of adequate income. A cosigner may also be able to help you qualify and obtain a loan at a reduced rate.
3. Make extra payments.
Extra payments on your student loans might also assist to lower your interest rate. That is because more payments allow you to repay your debt more rapidly, resulting in paying interest for a shorter period of time. The higher your additional payments, the more you may save.
Assume you owe $20,000 in student loans, with an average interest rate of 7% and a 10-year payback term. Your monthly payment would be around $232. If you could pay an extra $200 per month on your debts, you’d be able to pay them off in 55 months rather than 120 months, which is almost half the time. You’d save a total of $4,719.30 in interest, cutting your expenditures by nearly 60%.
You just have to examine the opportunity costs of these additional fees and if you would prefer invest in index funds instead.
4. Be Strategic about Loan Repayment.
You can also reduce your student loan interest payments by prioritizing which loans to repay first. If you have loans with substantially higher interest rates, invest as much extra money as you can to paying them off while making only the minimum payments on your other debts.
This is a simple trick that may go a long way!
All of this is to say: you can do it!
If you follow one or more of these four guidelines, you should be able to keep your loan interest rates as low as possible while also making it faster and simpler to pay off student debt. You don’t want your educational debt to limit your ability to accomplish other things with your money, so it’s worth the effort to attempt to reduce the interest you pay.
