If you have student loans, you're on the hook for more than just what you borrow; you're also responsible for the interest. Student loan interest rates can vary from 3% to over 10%, depending on your lender.
If you're wondering why your rates are high, it's probably because you borrowed at a bad time, your co-signer's credit was only so-so or you applied for multiple loans. Those high rates can have a big impact on your finances over the course of a typical 10-year loan repayment term.
Say, for example, you took out a $10,000 private student loan with a 6% interest rate. Over 10 years you'd pay more than $3,300 in interest alone. But if the rate were 3.76%, the current federal interest rate for undergraduates, you'd pay about $1,300 less over the life of your loan. That's money you could have used to pay off your loan almost a year ahead of schedule.
To help you save money on your loans, we'll walk you through three common causes of high interest rates and give you a game plan for lowering them.
1. You took out a federal loan when rates were high
The interest rate on your loan depends on the year in which you borrowed the money. Except for Perkins loans, federal loan interest rates are set by Congress each spring and are based on the financial markets. They generally change from year to year. If, for example, you took out a direct subsidized loan as an undergraduate in 2007, your interest rate on that loan is 6.8%. If you borrowed money using that same type of loan five years later, though, the rate would be just 3.4%.
Log in to the Federal Student Aid website to see your federal student loan information.
2. Your co-signer had mediocre credit
Your co-signer's credit helped you qualify for a private student loan. The good news is that your student loan is helping you build your credit. The bad news is that if your co-signer's credit score was less than excellent -- anything below 720 -- it may have resulted in you paying a higher interest rate. That's because lenders typically raise interest rate offers as credit scores go down.
"If a person has a high credit score, that shows a level of integrity. They're going to make sure that [the bill] gets paid," says accredited financial counselor Roslyn Lash. On the flip side, she notes, lenders are more likely to see a co-signer with a lower credit score as a liability, and thus issue a higher rate.
3. You applied for too many loans and your credit took a hit
Applying for several loans probably seemed like the best way to compare your private student loan options. But multiple
, which happen when lenders check your credit, drag down your credit scores. In fact, you lose five points from your FICO credit score for every hard inquiry, while your VantageScore goes down by 10 to 20 points.
Having a high credit score is important because lenders use it to help determine your creditworthiness. So the lower your credit score, the higher your loan's interest rate will be.
What you can do to lower your rates
If you're still in school
- Use federal loans first: For most students, it's best to max out federal loans before taking out any private student loans. Federal loans typically have lower interest rates and better borrower protections.
Get a co-signer with excellent credit: If you need a private loan, make sure your co-signer's credit score is at or above 720 so you can qualify for a lower rate. If that's not an option and you have a few months before you need to apply, focus on building your own score by paying your bills on time and keeping your credit card debt below 30% of your available line of credit.
Compare your options: Get prequalified for a private student loan to find out the general interest rate you can expect without racking up hard credit inquiries, which lower your credit score. If prequalification isn't available through a lender's website, Lash suggests getting a copy of your credit report and calling lenders for a rate estimate based on your report.If you're out of school
Sign up for auto-debit: Many loan servicers will knock off 0.25 percentage point from your rate when you sign up. Plus, it'll keep you from accidentally missing payments. Just make sure you have enough in your account each month to avoid getting hit with overdraft fees. Contact your servicer to find out if the discount is available for your loans.Consider refinancing your loans: Student loan refinancing is when a lender buys your existing loan and gives you a new one. If you qualify, you can get a lower interest rate. To qualify, you'll need a steady source of income, a low debt-to-income ratio and a strong credit score, typically over 700. If you don't have strong credit, you can also use a co-signer. If you have both private and federal loans, it's usually best to include only your private loans so you won't lose any federal borrower protections. Use NerdWallet's student loan refinance calculator to see if it's right for you. Devon Delfino is a staff writer at NerdWallet, a personal finance website. Email: ddelfino@nerdwallet.com. Twitter: @devondelfino.
This article was originally published on NerdWallet.
Our 2024 Coverage Needs You
It's Another Trump-Biden Showdown — And We Need Your Help
The Future Of Democracy Is At Stake
Our 2024 Coverage Needs You
Your Loyalty Means The World To Us
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
The 2024 election is heating up, and women's rights, health care, voting rights, and the very future of democracy are all at stake. Donald Trump will face Joe Biden in the most consequential vote of our time. And HuffPost will be there, covering every twist and turn. America's future hangs in the balance. Would you consider contributing to support our journalism and keep it free for all during this critical season?
HuffPost believes news should be accessible to everyone, regardless of their ability to pay for it. We rely on readers like you to help fund our work. Any contribution you can make — even as little as $2 — goes directly toward supporting the impactful journalism that we will continue to produce this year. Thank you for being part of our story.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
It's official: Donald Trump will face Joe Biden this fall in the presidential election. As we face the most consequential presidential election of our time, HuffPost is committed to bringing you up-to-date, accurate news about the 2024 race. While other outlets have retreated behind paywalls, you can trust our news will stay free.
But we can't do it without your help. Reader funding is one of the key ways we support our newsroom. Would you consider making a donation to help fund our news during this critical time? Your contributions are vital to supporting a free press.
Contribute as little as $2 to keep our journalism free and accessible to all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. Would you consider becoming a regular HuffPost contributor?
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. If circumstances have changed since you last contributed, we hope you'll consider contributing to HuffPost once more.
Already contributed? Log in to hide these messages.
