NEW YORK (MainStreet)Increasingly often, the American population leavesan undergraduate or graduate institution with debt from student loans. Most people spend years repaying their student loans, usually taking a decade or two. Of course, the longer you take to pay back a student loan, the more it will cost you. However, there are ways to decrease the interest rate on your student debt for both federal and private loans.
According to student loan expert, Heather Jarvis, attorney and founder of AskHeatherJarvis.com, a growing number of first time college entrants are getting federal unsubsidized loans. Undergraduates are choosing the Stafford Loan option, which carries a fixed rate of 3.4%, while graduate and professional students are taking PLUS Loans that currently offer a fixed rate of 7.9%. Because Congress sets the interest rates for federal loans, there is a concern that interest rates will go up unless a cap is put in place. In fact, the interest rate on new Stafford Loans is set to double starting July 1 from 3.4% to 6.8% if Congress does not act on preventing the increase.
Despite which federal loan is involved, lowering the interest rate can enable the borrower to pay debt on time and at a faster pace. One solution, Jarvis suggests, is to "set up automatic direct debit payments," which will reduce your rate about 0.25%. Another option, according to the website StudentAid.ed.gov, is to go with the "Standard Repayment Plan," which requires fixed payments of $50 every month but allows you to take up to 10 years to pay off your loan. This approach will enable you repay your debt in a timely manner at a lower interest rate. Consolidation, Jarvis reveals, is a third option for those who took out their loans before 2006. Because loans taken out prior to 2006 were at variable rates, Jarvis highly suggests that now is the time to consolidate in order to get a lower fixed rate, which will, in effect, save you money.
Private loans are usually offered at interest rates that are higher than federal loan rates. Variable rates are most likely to be given to those that are new loan applicants, but if you have good credit you can opt for a fixed rate. Both the Discover and Wells Fargo websites suggest going for the variable option that they offer at a low rate. However, that rate can certainly change over time, which can make it difficult to determine how much you will be paying two or three years down the line.
Fixed rates, on the other hand, give you the option to predict how much you will be paying in the long run, but if the bank decreases its interest rate you would not be able to take on that lower amount. The top option offered by both Discover and Sallie Mae is once again the "Automatic Debit" plan, which removes a fixed amount of funds for your bank account and also makes you eligible for a 0.25% reduction to your interest rate.
Another possibility, according to Alltuition.com, is consolidation or refinancing where you can go to a private lender who will then buy all of your old loans and then issue you a new one. Once that occurs, you will be able to dictate the terms of repaying that debt, which can also lead to the lender providing you with a lower interest rate on that loan.
However, Heather Jarvis has an altogether different solution to lowering the rate on a private student loan, which also involves refinancing. The first step is to take out a completely new loan at a lower interest rate than you had with your student loan. Once you have received those funds, you can use it to pay off your previous loan essentially leaving you with a debt that comes with a lower interest rate than the one you had before.
In the end, the key to maintaining a lower interest on your student loans is to pay them on time. If you miss a payment you may be subject to late fees and your private loan will go into default, which can end up being very costly for the borrower in the future.
--Written by Alexandra Carrera for MainStreet