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Home Loan

Interest on Student Loans

How to Pay Less and Save More

December 28, 2022
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Interest on Student Loans
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You’re not alone if you’re wondering how much Interest on Student Loans accrues on your student loans. The average borrower leaves school with over $26,000 in student loan debt, and there are plenty of things they can do to pay less while they’re paying it off. Which could save them thousands of dollars by the time they graduate (and beyond). This guide offers advice on lowering your interest rate and paying off your student loans faster.

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Ways to Reduce Interest

You’ve probably heard that student loans come with many benefits, but you may not have heard about one of their biggest perks: interest. Although it can be confusing, interest-reducing plans are available for many borrowers.

By learning more about these plans, you can save money on your loan costs while building good credit. Here are some great tips for lowering your interest rate, so you don’t pay any more than necessary. For example, if you get a federal loan, four main repayment options (based on income) can help reduce your monthly payments.

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Depending on your option, any remaining balance will be forgiven or discharged after 20 or 25 years of making payments (or 10 years if you work in public service). But note that each plan has different terms regarding when and how much is forgiven.

To learn more about these plans: Visit Federal Student aid

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Consider refinancing your loan at LendKey or SoFi, which could lower your monthly payment by hundreds of dollars each month.
If you want to know more about reducing interest rates on private loans, contact your lender directly; they might also offer similar programs.

Use a Loan Consolidation

In addition to paying off your loans early, consolidating them is one of the best ways to pay less interest. If you have multiple student loans, you can reduce your monthly payments by consolidating your loans into a single loan with a lower interest rate.

However, the longer it takes for you to repay your consolidated loans, the more interest you’ll pay. As with private student loans, federal consolidation requires no credit check or collateral.

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However, suppose you don’t qualify for federal consolidation. In that case, it might be wise to refinance your current loans through another financial institution to get better rates and fees. It’s also important to note that certain benefits are associated with federal loans that aren’t available when you refinance via a private lender.

Consider a Parent Plus Loan

It’s no secret that taking out student loans isn’t ideal, but sometimes it is necessary. If you find yourself in such a situation, consider a Parent Plus loan if you qualify. With a Parent Plus loan, parents can borrow up to their child’s financial aid limit—and they don’t need a good credit score or a record of income to get approved.

With federal PLUS loans, interest doesn’t start accruing until your child is no longer enrolled at least half-time—which means you can pay back without paying any interest for quite some time. And with fixed rates as low as 5% (depending on your credit history), why wouldn’t you want to? Just be sure to keep your repayment plan on track to avoid racking up too much debt.

Interest on Student Loans
Interest on Student Loans

Refinance Your Student Loans

Refinancing private student loans can often save money, especially if your interest rate is over 6%. Find a company that specializes in refinancing private student loans. Typically, they’ll ask for your credit score, debt-to-income ratio, and evidence of good repayment history.

If approved, you can save thousands of dollars in interest payments if your credit score allows it. cut down on loan duration. While many lenders require that you be employed at least part-time (24 hours per week) or have graduated from school within a certain timeframe (12 months). Some will refinance your student loans regardless of whether or not you meet these requirements. So it’s worth applying even if those criteria don’t apply to you.

Get On the Standard Repayment Plan

According to data from Experian, less than 50% of student loan borrowers are enrolled in standard repayment plans. But if you don’t want your loans hanging over your head for years, it’s worth looking into standard repayment. You will have a fixed monthly payment amount that doesn’t change, no matter what interest rate you pay.

The downside is that you’ll pay more interest over time than if you were on an income-driven plan like Income-Based Repayment (IBR) or Pay As You Earn (PAYE). That’s because all debt is bad—but less debt means less bad. For example, under IBR, ten-year payments start at $0, making total payments $0.

Earn Extra Income While in School.

Your credit cards, car loans, and home equity line of credit are all potential sources of cash that may come with lower interest rates than what you’re currently paying. You might also be able to get a personal loan from your family or friends.

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You can pay them back over time with payments based on your budget or offer them a small percentage of whatever interest you save. Even if it costs you a little bit in terms of added responsibility. Getting free money from other sources before you go to Sallie Mae is always smart.

Your overall savings will end up being much higher as a result—and it might feel like less of an obligation when you don’t have one big lender to answer to.

Interest on Student Loans
Interest on Student Loans

Borrow From Other Sources Before You Borrow From Sallie Mae

If you’re concerned about how you’ll be able to afford your education, don’t be. There are several ways to pay for school without taking out student loans. You can get scholarships, grants, part-time jobs, and outside funding from family members and friends.

Even a line of credit through your bank or credit union (though we recommend you avoid that last one). For more ideas about where money can come from to help cover educational expenses, check out Federal Student aid

When Things Get Tough, Take Advantage of Administrative Relief Plans

When you default on your student loans, you might think your interest rate is an unmovable number. But there are a few ways in which you can lower it. Income-Based Repayment (IBR) and Pay As You Earn (PAYE) plans allow borrowers with federal student loans who qualify to have their monthly payments recalculated based on income.

If, for example, your calculated monthly payment through IBR or PAYE is less than what’s currently due. Those government-mandated payments will be applied directly toward interest first until it’s all paid off before continuing with principal repayment.

ALSO READ: The Pros and Cons of Investing vs Saving

These programs also cap your payments at 10% of discretionary income, so they could make paying back loans much more manageable if you’re struggling financially. And if you’re still working on repaying your undergraduate debt after 25 years, any remaining balance will be forgiven.

Ask for a Payment Deferral if Necessary

If you can’t make your monthly payments, contact your loan servicer. The Federal Loan Servicing Center says that a deferment is a form of temporary relief from making payments on time.

Interest will continue to accrue (but not be capitalized) during any period of deferment. That is, interest will continue to add up even if you aren’t paying off your loan each month. If you don’t pay off your accrued interest, it can be added to future balances as part of capitalization at higher rates.

 

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