How to Decrease the Interest on Your Student Loans

According to the Project on Student Debt, the typical 2009 college graduate had $24,000 in student loans, and many leave school owing $100,000 or more. Federal student loan programs typically offer the lowest interest rates, so students should tap this source first, but private lenders can also offer favorable terms if you shop around. Reducing your interest rate can reduce your monthly payments as well as your total amount due, but it requires dedication and careful attention to details.

Instructions

1

Obtain a student loan from a federal program if you can. Federally subsidized loans have lower interest rates than private loans and also offer more flexible repayment plans. As of July, 2011, dependent students (which includes most students in college) can borrow up to a total of $31,000 for their undergraduate education. Graduate students can borrow up to $138,500 under the federal student loan programs.

2

Shop around for private student loans if the cost of your education exceeds the federal loan maximum. Most major banks offer student loans, but interest rates and fees can vary widely. Before applying for a loan, compare programs. Some banks have low interest rates while you're in school, but the interest rate increases after graduation. While banks may offer a longer repayment period at a lower interest rate, that could increase the total cost of the loan. A higher rate for a shorter period may be the best value.

3

Take advantage of borrower benefit programs. Many student loans offer a discount of about 0.25 percent on interest rates for paying your monthly bill through automatic direct debit. While this may seem insignificant, over the life of a loan, you can save thousands of dollars.

Some banks offer an interest rate discount for making payments on time. Typically, a lender will offer a discount of one percent for making 36 consecutive on-time payments. Be aware, however, that even one late payment, if only by a day, will end your eligibility for this discount. In addition, if you have a forbearance or deferment on your loan, you will lose your eligibility.

While these discounts are available to most borrowers, few will maintain their eligibility for these programs. Tim Fitzpatrick, the former CEO of Fannie Mae, stated that "the bottom line is that less than 10 percent of borrowers will earn all the advertised repayment benefits as they will either consolidate their loans or miss a scheduled payment sometime during the first several years of repayment."

4

Consolidate your loans, which may result in a reduction in your interest rate. Ask several lenders about their options before deciding whether to take this step. In many cases, consolidation, even at a lower interest rate, can mean more money owed over the life of the loan.

5

Get a co-signer. Some banks offer lower rates to students who have a co-signer, usually a parent, on the loan. A co-signer, however, is obligated to repay the loan for you if you do not make payments. Be sure that any co-signers can afford to pay your debt if the need arises.