How to lower the interest rate on your student loan – Forbes Advisor
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Student loan interest can be misleading. When you talk about incremental differences, like comparing 5.6% and 6% interest rates, it’s easy to assume that a few tenths of a percent doesn’t really matter.
But over the life of a loan, these incremental differences can add up to hundreds or even thousands of dollars. This is why getting the lowest rate possible is a great way to save money on student loan repayments.
The best strategies will depend on the type of loans you have. We will explain the options available to borrowers interested in reducing student loan interest rates.
Find out if you have federal or private student loans
Before you figure out how to lower your interest rate, figure out what type of student loan you have. Most borrowers have federal student loans, but some have a mix of federal and private loans or just private loans.
The first step is to view your official credit report on AnnualCreditReport.com, where you can view your credit report from all three credit bureaus. Free weekly credit reports are available until April 2022. When you check your credit report, it shows a list of all your current and past credit cards, loans, and other credit products. If you have student loans, they will be listed here.
Then visit the Federal Student Aid (FSA) website to see if you have any federal student loans. To log in you will need your FSA ID. Once logged in, you will see all federal loans in your name.
Match the loans on your credit report to the loans on your FSA account. If any remain, they are private lenders. You will need to visit their individual websites and create an account to view details like your interest rate and payment due date.
It is important to determine the type of loan you have because your options for reducing interest, as well as the pros and cons of doing so, differ depending on whether your loans are private or federal. Federal loans offer more perks and perks, such as income-tested repayment, longer deferment periods, and more opt-out options.
If your parents have taken out Federal Parent PLUS Loans, they will need to log into their own account. Parents who have borrowed private student loans can use the steps mentioned above to find their loan details.
Find a student loan refinance
Refinancing involves swapping out your current loan for a new loan with a different term, interest rate, or both. More often than not, you refinance with a new lender, not the one you originally borrowed from.
Borrowers typically refinance their student loans for a lower interest rate so that they can pay less interest over the life of the loan. This can result in a lower monthly payment, unless the borrower chooses a shorter loan term to speed up the repayment process. Shorter repayment terms often mean a higher monthly payment in exchange for less interest paid over the life of the loan.
Some borrowers refinance to a longer repayment term, which will result in a lower monthly payment. This allows more flexibility in their budget. Be aware that longer-term refinancing may charge you more total interest.
Children and parents can refinance their student loans. A parent may be able to refinance his loans on behalf of the child if the child is able to qualify. Parents can also keep the loan in their name and refinance at a lower rate or lower monthly payment.
If a parent has co-signed a student loan for their child, the child can refinance to remove the parent from the loan.
How To Qualify For A Student Loan Refinance
Typically, to be eligible for a student loan refinance, you need a credit score of at least 600. To check your credit rating, visit a website that offers them for free or see if you receive a free monthly rating. from the financial institutions you do business with. Some banks and lenders provide free credit scores to customers.
Some lenders also have income thresholds. For example, Citizens Bank requires total income of $ 24,000 to refinance, while CommonBond requires total income of $ 65,000.
If you are not eligible for a loan refinance on your own, you can have someone co-sign the loan with you, such as a parent. They will need to meet the credit score and income requirements of the lender in order to co-sign. The loan will stay on their credit report until you pay it off, which could affect their ability to qualify for a loan.
Should You Refinance Federal Student Loans?
One of the main reasons to understand what type of loans you have is to understand what you could lose by refinancing them. When you refinance federal student loans, you give up all associated consumer protections and there is no way to transfer your loans to the government.
For example, if President Joe Biden ends up forgiving a certain amount of individual student loan debt, that will only apply to federal student loans. If you refinance your federal loans, you will not be eligible for your loan cancellation.
Private lenders also generally do not offer other types of loan cancellations or income-based repayment options. Because of these tradeoffs, it may be worthwhile not to refinance your federal loans and keep them, even if refinancing would result in a much lower interest rate.
Benefit from interest rate reductions
All federal loan managers and most private lenders offer an interest rate reduction if you sign up for automatic payments. The discount is usually 0.25% and the payments should be automatically deducted from your bank account.
Here is how it plays out. Let’s say you have a loan of $ 50,000 with a term of 10 years and an interest rate of 6%. If you sign up for automatic payments, the interest rate will drop to 5.75% and you could save $ 750 in total interest.
Automatic payments also help you avoid paying a late bill, which will save you from late fees and damage to your credit score.
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