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Refinancing can be the best way to make a significant change to your student loan interest rate. It involves taking out a new loan with another lender to pay off your current student loans. This new loan comes with different terms and rates — ideally a few percentage points lower.
This is generally a better option once you’ve established your career and built up a strong credit history. Typically, the best rates go to borrowers with credit scores above 700 and debt payments worth no more than 20% of your monthly income. But refinancing means you lose several federal benefits, including eligibility for some forgiveness programs and flexible repayment options. Consider what you’ll lose first before you apply.
The easiest way to get a lower rate is to sign up for automatic repayments. Most servicers — including those for federal student loans — give you a 0.25% interest rate discount for agreeing to let them automatically deduct your monthly repayment from your bank account. With some private lenders, you might qualify for a discount as high as 0.5%.
Signing up for autopay comes with the added benefit of not having to remember to make your student loan repayments each month. But avoid paying large bills like rent before your repayment is due. If you don’t have enough money in your account, you might have to pay an NSF fee, which is usually around $25 or $35 per returned payment.
Some student loan servicers offer an additional 0.25% interest rate discount just for making repayments on time for a couple of years. If this is available on your loans, take care to not miss any repayments — signing up for autopay can help with this one. Not an option? Consider refinancing with a lender that does offer it.
If none of these options seem right for you, there are other ways to cut down on the amount of interest you pay:
Deferment, forbearance and income-driven repayment plans can increase the amount of interest you pay. That’s because interest capitalizes once you start making repayments again after pausing your loans or switching plans. With interest capitalization, your servicer adds all unpaid interest to your loan balance, meaning you’ll pay interest on interest.
You have quite a few options to lower your interest rate — and many of them require almost no effort on your part. But you might also want to consider shortening your loan term or making extra repayments if you really want to save on the total cost of your loan.
You can learn more about how it all works by reading our guide to student loans.
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