One of the questions we Student LoanDown bloggers get asked frequently (through comments and our Ask the Expert tool) is, "Can I lower my student loan interest rate?"
Some folks are looking to lower their monthly payment because they're not able to afford it — others are just looking to decrease the total interest paid to their lender. Here's the information I usually pass on to those readers.
When student loan borrowers sign their promissory note 
agreeing to pay back the loan, they also agree to the interest rate detailed in the contract. For some loans this will be fixed and for others it will be variable (a margin that is added to a base rate). For federal student loans made after July 1, 2006, the interest rate is fixed. Most private student loans have variable interest rates.
Your promissory note locks in the terms on your loan (including the interest rate or rate margin). You can't "refinance" a student loan the way you can with other consumer credit products, but there are options to possibly lower your current monthly payment, reduce your interest rate, or reduce the amount you pay over the life of the loan.
Quick tangent: For those of you still in school or just beginning to take out student loans, be proactive. Understand what you're borrowing at what rate, so you don't find yourself unable to make payments later. End tangent.
Now, let's talk about the options.
Consolidate: By consolidating your student loans, you may end up reducing your current monthly payment because you are likely extending your repayment period. However, that means you would end up paying more over the life of the loan if you continue paying just the required amount each month. But if you're looking for a little payment relief now and are willing to pay more (or make higher payments later to avoid accruing additional interest), consolidation could be the answer. Your best bet for federal student loan consolidation is through the Department of Education's Direct Loan Program.
An added benefit of private student loan consolidation is a possible interest rate change. If your credit situation has improved since you took out your loan (or if you bring on a cosigner), you may qualify for a better interest rate than you previously had.
Pay off the debt: Some borrowers could consider using a different consumer loan (personal, home equity, etc., depending on assets) to pay off their student loan. This option has a couple big things to consider, though. You would lose several benefits of student loans like deferment and forbearance options, as well as the potential tax deduction.
Pay more: If what you're looking to do is accrue less interest, then the best solution is to pay more money each month toward your principal balance. Even just a little bit each month could add up to big savings over the life of your loan.
Get the debt forgiven: There are some programs that will forgive a certain amount of a student's debt. For example, there is a federal loan forgiveness option available to students working in public service.
Use borrower benefits: Ask you lender if they offer any benefits that could reduce your interest rate. For example, some lenders offer a discount if you make your payment automatically.
Hi
My son was a in Med School and took several student loans. Among them there was a Signature Student Loan that his father cosign. My son died last year, and when we ask for cancellation of the debt, They are telling us that my husband is reponsible for the loan that he cosign. Is this true?
How does the Obama proposal affect WF?
Alicia -- I'm sorry to hear about the loss of your son. If he had any federal student loan debt, that should've been discharged upon his death. The Signature Student Loan is a private loan from Sallie Mae. For that, you should refer back to the terms of the credit agreement. If your husband agreed to be equally liable for the loan as a cosigner, then any balance that remains on the loan would be his responsibility. Generally, lenders first seek to secure the remaining balance by filing a claim with the borrower's estate, if there is one.
thomsoad, thanks for your question. At this point it's too soon to tell because the Obama Administration's budget recommendations are for 2010. I can tell you that Wells Fargo remains committed to serving the financial needs of students and families through responsible lending of both federal and private loan procuts, and that we're encouraged by the Administration's focus on finding new ways to ensure quality education is available to all.
I was recently granted a $2,500 collegiate student loan from wells fargo. The annual percentage rate of 9.792% before principal repayment begins and 11.746% after principal repayment begins. It says the finance charge is $4,740. The total of payments is then $,7,240. This is almost triple of what the initial loan is. Does Wells Fargo have an abnormally high interest rate or is this pretty common across the board? Also, is there anyway to lower this interest rate? Thanks.
tyler -- Interest rates on Wells Fargo's private student loans (like the Wells Fargo Collegiate Loan) are competitive in the industry. Wells Fargo establishes the price based on the credit of the student applicant and/or creditworthy cosigner, where applicable, at the time of credit approval.
Know that your interest rate is going to fluctuate over time. The interest rate is based on the Prime Rate (which is variable and can change monthly) plus a margin (which is fixed and based on the credit of the student applicant and/or creditworthy cosigner at the time of credit approval). The finance charge and total payments shown on your disclosure statement are calculated as if the interest rate stays the same throughout the life of the loan. However, because the interest rate is variable, you may see the rate change, which could affect the total amount of interest you pay over time. It could be more, or it could be less.
One option for you to reduce the total interest you pay over time is by paying off the interest that accrues while you are in school. Otherwise, that interest is capitalized (added to the principal balance) when you enter repayment and begins to earn interest of its own.
When applying for a student loan for my son, is it required to include my husband's income even though he is not his biological father? My husband insists it isn't. I've been told it is.
Hi Susan -- There is a great resource page about calculating your Expected Family Contribution at FinAid. Check it out at: www.finaid.org/calculators/finaidestimate.phtml
Specifically look under the "Parent Information" section. You'll see that if the custodial parent is remarried the stepparent's financial information is also included.
I currently have a $30,000 sallie mae signature student loan with a 9% interest rate . I can't consolidate this loan with others through direct loans because it is not federal. Once repayment begins it will be $350 a month! Is there anything else I can do?
Matt -- One thing I mentioned in the post that might be helpful for you is private student loan consolidation. Just like consolidating your federal loans , this would be one new loan, with new terms, that's used to pay off the private student loan(s) you want to include. Because these student loans are based on credit you might be able to qualify for a better interest rate if your situation has changed or if you bring on a cosigner with excellent credit. Consolidation may also extend your repayment term, so you could see a lower monthly payment. However, remember that because you're taking longer to repay the loan. It could mean more interest over time if you continue to make just the required payments.
Hi Barbara,
I love your blog, btw. I graduated in December of '08. I only took out Stafford loans throughout college. My grace period ends soon and I am trying to figure out a repayment strategy that will leave me with the most money in my pocket. I am employed (knock on wood), and I have almost 1 year's salary out in student loans. About one half of my loans are a variable 3.6% and the other half are a fixed 6.8%. Some of the 6.8% loans have various incentives that occur at 12, 24, and 36 months of on-time repayment. What I am thinking is that I will consolidate the variable 3.6% loans to lock in that interest rate, and not consolidate the 6.8% loans, as I would actually lose money by forfeiting my incentives. Then, I plan on paying on my 6.8% loans very aggressively until I have them paid off. I feel that 3.6% is a low enough rate that I could pay on those loans as slowly as possible and begin investing my money conservatively in a Roth IRA so that I could save for a down payment on a house. Is this a sound strategy?
Hi James, I'm glad you enjoy the blog! We're certainly not complete financial advisors, and you might want to speak with one of them about your situation and concerning investment choices. Here's what I will tell you about your student loans: When you consolidate your new loan has an interest rate that is the weighted average of the loans you include rounded up to the nearest 1/8 of a percent. So when you consolidate you'll actually see your interest rate rise just a bit. You may want to consider what time you want to consolidate. If you can do so before your grace period ends, you'll be able to use the 3.61% rate, however if your loans are out of grace when you consolidate they'll be at 4.21%. Now, remember that your variable rate loans are going to reset on July 1, based on the results of the last 90-day treasury bill auction in May. You can get a general idea of what the rate will be by looking at the most recent 91-day T-bill auction rates -- check out my post on May 8, 2008 for more info on doing that. Based on those projections you may be able to lock in a lower rate after July 1. But remember that by then you'll be out of your grace period then, so the margin you add will be 2.3%, not 1.7% for loans in a grace period. As far as your fixed interest rate loans are concerned, it's always a good idea to pay down your higher interest rate debt first ... even if that means the loan will be paid off before you hit the borrower benefits later in your repayment period. It's also smart to leave those loans out of a consolidation loan because they are already fixed, so they'd just increase the average interest rate and also would be rounded up, costing you more over the life of the loan. OK, I know that's a lot to take in, so let me know if you have more questions!
Locking in an even lower interest rate would be great. I'd love to see the post you speak of but it appears that your May 8th post is titled "I do (want to save on wedding costs)" and I didn't see anything about T-bills or interest rates. Also, you say that the variable rate will reset on June 1, but I won't be able to lock in the lower interest rate until July 1. If the rate resets on June 1, why can't I consolidate then and lock in the lower interest rate WHILE I'm still in my grace period? Why must I wait until July 1? I think my grace period ends June 20-something (since I graduated December 20-something). My friends and I are anxiously awaiting your reply! Thanks!
Hey James -- Yikes there was a typo in my comment back to you ... thanks for circling back. The rates change July 1, not June 1 (sorry for the confusion - it's now fixed in my earlier comment). Also, check the May 8 post from last year, not this year. Here's the address to make it easier: blog.wellsfargo.com/StudentLoanDown/2008/05/federal_loan_rate_changes
_1.html
Let me know if you have more questions.
Wow! We're still waiting on the last treasury auction for May, but based on the second-to-last auction, my interest rate will be 2.488% (which is pretty significant when dealing with $14,000). At least something good came out of this recession! Thanks for your help!
Hello. I have $100K worth of student loans. I really haven't paid much on them. I consolidated some them about 2 years ago and the interest rate was over 7% at a fixed rate. Last year, I consolidated all of my loans and got a fix rate at 7% even though the interest rate went down. Is there anyway I can get out of a high fix rate and try to get a lower rate?
Hi there, I have about 22k in a self student loan that I would like to refinance (as would my mom since she's a co-signer) but I've tried with both Wells Fargo and BOA and neither is offering locked interest rates at this time on consolidations. Is this the norm across the board right now or are there any places that are offering re-consolidations with a locked interest rate. I was able to refinance my federal loan about 2 years ago and got a 4.625%. My personal is currently at 5% but I'm afraid of it working its way back up. Thanks for any help.
MODERATOR'S NOTE: This comment was originally submitted June 4, 2009 09:22 AM
I need to lower my interest rate; 40% of what I pay each month is just in interest. I try to pay more than minimum payment; it never seems to go down much. My interest rate is at 6%, I didn’t realize it was that high at the time of the loan. I’m in forbearance right now, so I can make smaller payments, but I try to pay more.
Hey Kyle -- are you talking about a SELF loan that's offered through the Minnesota state government? While you can't refinance this student loan in the traditional sense like you can with other types of consumer credit, you can consolidate one or more loans (even a consolidation loan) into a new private consolidation loan (as you can't include SELF loans in a Federal Consolidation Loan). Typically, lenders offer these loans with a variable interest rate. While you might not be able to lock in the rate, you may find you can get better terms on a new loan compared to your current loan (you'll want to compare the terms of two loans very closely and go with the option that would make the most financial sense for you). It may still benefit you to have a cosigner for the new loan --- one may even be required. Adding a cosigner may help qualify for a lower interest rate and improve your chances for getting approved.
Hi Barbara, the SELF loan I currently have is through Wells Fargo and I have consolidated all my loans once when I got out of school. I now have two loans, the federal loan and the SELF loan. I am looking to refinance the SELF loan just to try and get my mother off the loan. Since my last post I called multiple banks and all of them said that no one offers a locked rate for this loan. My current plan is to wait until after July 1st and then refinance the loan (in hopes that the rates will go down again). Do you know what the rates are supposed to go to as of July 1? Another question that you may not know the answer to, but I need to get a new(er) car and would have to take out an auto loan for it. The fear is, if I don't refinance the SELF loan before getting the car loan, down the road I won't be able to refinance the SELF loan because of the additional debt from the auto loan. But I've also heard that those types of loans (car, home, student loan, etc.) don't count against you as much because they are not revolving debt. Is this true? Also, when you refinance (in this case through Wells Fargo) are you able to change your terms (life of the loan repayment) as this could also help in reducing the monthly payments (but obviously extending the life of the loan). Thanks again for your help.
James -- there are some options, depending on what type of loan you have. It sounds like you may have a private student loan with a variable interest rate. While you can't refinance a student loan in the traditional sense, you may be able to consolidate your current loan. Private student loan consolidation allows you to take out a new loan that pays off your old loan. The new loan will have new credit terms, so depending on your situation you may qualify for a better interest rate. Bringing on a cosigner with excellent credit could also help you secure a lower interest rate. Now remember that by consolidating you're usually extending your repayment term as well, so you'll be paying more interest over time. If you want to lower what you're paying in the long run, either on a new consolidation loan or on your current loan, keep doing what you're doing and pay more than what's required each month.
Hi Barbara,
One other question because I think I've confused myself. I have a SELF loan that I need to refinance (planning on it after July 1 with the rate change). Does the rate change apply to both Federal loans and SELF loans? Thank you.
I was told by a direct loans officer that I had to submit and application to find out what my payment would be for a income contingent loan to qualify me for the teacher forgivness. I submitted only to get the summary, I got it but it didnt have the income contingent figured. Then they requested more information which I did not send because one of my loan holders worked with me to stay with them. Giving me a lower rate. So why would I leave? Direct Loans went ahead and went through with the loan without my knowledge. When I have called them they have been very rude and refused to help me saying they are sorry for the misunderstanding but that I have to stay with them. One of their people said I could call my lenders and see if they would take me back. I called my lenders, they both said they would reverse it if Direct Loans contacted them. A different person at Direct Loans states it can be reversed and submits me to the research dept to get me a direct case manager. That person calls me and says that she doesn't feel it necessary and won't submit a request for me or do it. Not that she can't but she won't. I then get a customer service represenative that lies to me and says she can't help then hangs up on me. What am I supposed to do? From the beginning of checking with them for information they have tricked and lied to me, then signed me up without me knowing that is what was happening and now refuse to help me. Saying it is my problem. Please help as to what I should do. Who I should contact, what can be done?
Jennifer -- You can contact the Federal Student Aid Ombudsman of the Department of Education. Their website is http://www.ombudsman.ed.gov/. They may be able to help you sort out what has happened with your loans and how you can proceed.
Kyle – OK, now that you’ve added some details about your loan I’m guessing what you’re dealing with is a private student loan (not a SELF loan, which is through the Minnesota government, not Wells Fargo). You’re right that most lenders offer a variable interest rate on a private student consolidation loan – which is what some borrowers use to get a new loan with new terms (since you can’t refinance a private student loan in the traditional sense). Depending on the lender, the rates on variable interest rate private student loans (including private consolidation) may reset monthly or quarterly. These rates are usually priced at a base rate also called the “Index” (like Prime Rate) plus a margin. The terms you qualify for are based on the credit guidelines of the lender. Again, remember that you might still be required to have a cosigner on the loan and if it’s not required having one may help you qualify for better terms. And you’re right that through consolidation you’re usually extending your repayment term, so you might see a lower monthly payment (but that also means you’d pay more interest over the life of the loan if you just paid the minimum amount due each month). As far as how an auto loan may affect your ability to consolidate, it depends on what the lender considers when making the loan decision, for example credit score and debt-to-income ratio.
I have a questions I'm trying clear up I had a student loan for $1,500.00 over 15 years ago and now its $20,000.00 they had the wrong informaiton on the claim so It never came up when I filed my taxes. I filed bankrup 10 years ago and I'm not sure if it was on there or not. I want to attend school again and repay the loan. But will they dismiss the intrest if I pay the base amount.
Help.. Ms. Orlando
Hi -- I have a WellsFargo Consoldiated Studnet Loan
I owe 30k -- Interest is 16k -- Principal is 14k. Can I simply pay the 14k and become debt free?
Thanks, Mike
How do people get these low interest rate? My son is a full time student and has student loans through Sallie Mae at 13%! Is there any thing we can do to get a lower interest rate?
Ms. Orlando, generally student loans aren't dischargeable when you file bankruptcy. Your loan (not sure whether you're dealing with a federal student loan or private student loan) likely went into default if you weren't making payments on the loan. Your lender should have been in contact with you once your loan went into the repayment period so you could begin making payments. . You'll need to find out where your loan stands now with the lender and work with them to arrange payments. If you're dealing with a federal student loan you may be able to rehabilitate your loan to get it out of a default status. But you'll still be responsible for the total amount you borrowed, plus interest.
Mike, when you took out the loan you agreed to pay the money back, plus interest, so you can't just pay the principal amount. The interest is the cost of borrowing and the promissory note that you signed detailed the full terms of your loan including interest accrual and the variable interest rate. . If you're looking for options to payoff the loan a little faster, you may want to pay a little more than is required each month. That will reduce the total amount of interest you pay over the life of your loan.
Susan, if your son has a private student loan the interest rate is based on the credit guidelines of the lender. Does he have a cosigner on his loan? A cosigner with excellent credit may help him qualify for better terms. Because you can't refinance student loans in the traditional sense, your son may be able to get a new loan with potentially better terms by consolidating his private student loan. Essentially this is taking out a new loan, which pays off the old one.
I currently have a large amount of private student loan debt at a variable rate (3mo Libor + %). Accordingly, my current rate is around 4.5%. I am paying double and triple each month but was wondering if it is possible to refinance the debt at a fixed rate of interest. I would be willing to refinance for a fixed rate somewhere in the neighborhood of 6%. Does anyone provide this service?
do you have cost of living loans
Tim -- When it comes to private student loans, since you can't refinance in the traditional sense, your option to get different terms is to consolidate through a private consolidation loan (essentially paying off the old loans with a new loan with new terms). Most lenders (including Wells Fargo) offer these with a variable interest rate.
Wells Fargo offers federal and private student loans that can be used to cover educational expenses related to attendance at the school. Generally the cost of living is included in your total cost of attendance, which is calculated by your school and used to determine your financial aid package at the school. If the scholarships, grants and federal student loans in your financial aid package aren't enough to cover your living expenses, you could choose a private student loan to cover the gap between your aid and the cost of attendance.
Hello,
I am completing my Master's right now and have a little over $30,000 in federal students loan, one of which is unsubsidized. Can I consolidate these loans so they are not at a 6.8% interest rate?
Hey John – If your loans are already at the 6.8% fixed interest rate, consolidating isn’t going to get you a lower interest rate, which is what I’m guessing you’re looking for. You would actually end up with a higher interest rate as the interest rate on a Federal Consolidation Loan is the weighted average of the loans you include rounded up to the nearest 1/8 of a percent. However, if you have other federal student loans that aren’t already at a fixed interest rate and you decide to consolidate, you may see some benefit. Check out this calculator: www.finaid.org/calculators/loanconsolidation.phtml
You could use another type of consumer credit to pay off the loans, but you’d be losing the benefits of the federal student loan – like deferment options, possible tax benefits, etc. Plus you wouldn’t necessarily be guaranteed a lower interest rate on a different loan.
Hello, I'm in a similar situation as Tim, variable rate private student loan. Though my monthly payments are low now, once libor goes back up, I know my payments will increase with it. Is there anyone that offers private consolidation loan at a fixed rate?
Tom – I’m not aware of a lender that offers a private student consolidation loan at a fixed interest rate right now. The ones I know of (including Wells Fargo’s option) are a variable interest rate loan. Have you considered using another fixed-interest rate consumer loan (for example, a fixed-interest rate home equity loan) to pay off your student loan debt? If that’s not an option, you could consider paying a bit more than required (if you can swing it) while the rate is lower to knock off some extra principal. Then if your rate does rise, you’ll be accruing a little less interest.
I have about a whopping $90,000 in student loans that are Federal loans and a wells fargo loan with interest rates ranging from 2.3% up to 7.5%, and I am looking into consolidating and applying for the new income based payment option and the public service loan forgiveness program (I'm a public school teacher), but I'm having trouble trying to figure out what will be the best option for me as far as consolidating. It sounds like consolidating won't make a difference other than to turn everything into one payment, and potentially lower payments in exchange for extending the term of my repayment. I am also wondering if this has an impact on what my monthly payments will be under the Income Based Payment plan, because it seems like if I don't consolidate all of my loans into one, then each individual loan will be maxed out at 15% of my monthly income, rather than having the total of the loans together be no more than 15% of my income. Any ideas? I am currently paying $1000 a month in loans and I am only getting paid $2300!!!
Hey Kiraney, Here are a couple things to consider:
Consolidation – if you’re dealing with variable interest rate federal Stafford loans (those made before July 1, 2006) consolidation may be of interest to lock in an interest rate. A consolidation loan has and interest rate that is the weighted average of the loans you include, rounded up to the nearest 1/8 of a percent. The variable interest rate Stafford loans change each July 1, and are currently at historic lows, so you may want to consolidate to lock in a low rate. You’re right that it may also give you a lower payment by extending your repayment term.
Public Service Loan Forgiveness – This is available only for people with student loans from the Direct Loan program. You would need to consolidate any federal loans that were made through a private lender into the Direct Loan program for them to qualify for Public Service Loan Forgiveness. If you already have Direct Loans, the payments you’ve been making may count toward this forgiveness.
Income Based Repayment – Under IBR your total payments would be capped at 15% of the difference between your adjusted gross income and 150% of the poverty line for your family size in your state. When you apply for this repayment, you need to tell your lender(s) about any qualifying federal student loan debt you have that’s not with them. So the payment amount is based on your total eligible federal student loan debt, not just the one loan.
Is your Wells Fargo loan a federal loan or a private loan? You can’t include a private student loan in a federal consolidation loan. However, if you’re interested in consolidating a private student loan there is a private student loan consolidation option through Wells Fargo. Unlike federal consolidation, you don’t lock in your interest rate, but you would be extending the repayment term which may lower your monthly payment (keep in mind that that could mean paying more interest over time). Plus if your credit situation has changed or you bring on a cosigner with excellent credit you may be able to qualify for better terms on a new loan.
OK, now that you’ve got a bit more information let me know if you have additional questions.
Thanks for the great information. It has taken me years to get through school and I am facing a huge debt. I think I can handle 10 years of public service to help get those debts down, thank heavens for that. I hope that doesn't go away! It's good to know that there are others in my situation. It doesn't seem right, but you know, the bank can't get back what I learned!
Haven't had time to read through all these comments which I assume are very helpful but... here's my situation.
Student Loans:
Private/Variable: 7000 @ 3.5%
Stafford/Fixed: 10,000 @ 6.8%
Consolidated/Fixed: 6000 @ 4.75%
Can I get any of those interest rates reduced or consolidated. I pay about $600/month on these because I just want to get them out of the way. I have been doing research as far as consolidating goes but I've been going in circles trying to find a good answer.
What are you suggestions as far as reducing interest rates, paying off, etc. Thanks.
Quick Question – It looks like you’ve already consolidated any variable interest rate federal loans, which would be the first recommendation. Since your other Stafford loans are already at a fixed rate it doesn’t make sense to consolidate them if you are able to afford your monthly obligation. By consolidating the existing Stafford and previously consolidated loans your interest rate would actually go up a bit as the interest rate on a Federal Consolidation loan is an average of the loans you include rounded up to the nearest 1/8 of a percent. The only real reason to consolidate those would be if you needed to extend the loan term and possibly reduce your monthly payment, which it sounds like you’re doing OK with right now.
There really aren’t options to consolidate private student loans at a fixed interest rate. However, if you did consolidate you may get better terms than you currently have on your private student loans. It just depends if you credit situation has changed or if you brought on a cosigner with good credit. Your rate doesn’t look too bad right now, but since it’s variable that may change, so you’ll want to watch it closely.
If you’re paying extra toward your loans, which it sounds like you are, have you considered which loan you want to pay off first? Be sure to consider the interest rates (especially that the private one may change) and the repayment options you have on each loan when you’re making a repayment plan. Set a plan that makes the most financial sense for you.
I have about 10,000 in student loan debt through Fed. Direct Loans. I have a fixed rate of 8% which is high compared to current rates. All of my loan were consolidated years ago. What can I do to get a lower rate. What is a good going rate right now from private lenders?
Jennifer – once you’ve consolidated federal student loans, your interest rate is locked in for the life of the loan. So unless you choose to use some other type of consumer loan (personal, home equity, etc., depending on assets) to pay off the student loan, you don’t have options to change your interest rate.
Like I said in the post, though, that option should be considered very carefully since you would lose several benefits of student loans like deferment and forbearance options, plus the potential tax deduction.
Barbara, I graduated last year and have two private loans with variable interest rate:
1. $21,000 @ 3.25% and
2. $14,000 @ 2.25%
I am currently paying down other Stafford loans at 6.8% as fast as I can and my goal is to reduce and lock-in as low an interest rate as possible on the above two loans before the interest rates rise.
1. What would you recommend could be my options? Can I refinance through Wells Fargo? I have excellent credit history and am a long time Wachovia customer.
2. If the Fed key interest rate is 0% why is mine not close to it?
Thanks!! I love your blog!
Hi Mark – You can consolidate your private student loans with a Wells Fargo Private Consolidation loan. However, you’re talking about locking in an interest rate for your private student loans, and most private consolidation loans out there are also variable interest rate loans. Now, you may still be able to get better terms than you have now if your credit situation has changed or if you bring on a cosigner with good credit, but you wouldn’t lock in your interest rate. Given that, you may want to consider which order you’re paying down you debt to make sure it will make the most financial sense in the long run. If the index rate on which your private student loans are based begins to rise you could see a rate above your current 6.8% on your federal Stafford loans. Plus, consider that your federal loans most likely have a few more repayment and deferment/forbearance options than those of most private student loans. As far as your interest rate is concerned, keep in mind that your rate is an index (like Prime Rate or LIBOR) plus a margin, so you’ll want to refer to your promissory note to see what that margin is on your loan.
Hi Barbara,
Thank goodness for you! I love your advice. I have 56k in student loans, all but one fixed at 6.8%. One is 8.2% and is around 3k. I looked at consolidating into a direct federal loan in order to take advantage of the public loan forgiveness option, but at my current salary (45k), my monthly payments will still be pretty high under the IBR program (about $400). If my salary rises over the next few years, I’ll be paying about the same as I will under the traditional plan, which is a monthly payment of $650 for 10 years. I’m starting to think that I should just stay with the traditional plan and pay the loans off as soon as possible to save on interest.
All but $150 or so of my $650 monthly payment goes towards interest. I can afford to pay about $650 - $675 per month towards my loans. If I accept the extended payment option (spreading the payments out over 25 years), my required monthly payment is reduced to $350, all of which goes towards interest. Here’s my question: If I accept the extended payment plan, can I still elect to voluntarily pay another $300 a month and direct that extra money towards paying the principle of the loans? Or, do I have to use that extra $300 towards the interest? I’ve never understood this point. Am I required to pay off the interest first before I can begin paying the principle? Thank you so much for your response!
-Courtney
Hey Courtney – Here’s a quick explanation of how simple interest works. The annual interest rate is divided by 365 to get the daily rate. The daily rate is then multiplied by the current principal balance to get the amount of interest that accrues per day. This interest is kept in a separate account from the principal, and interest does not accrue on the balance of that account, unless it is capitalized. Any additional payment you make would first go to the outstanding interest, and once that’s paid off would start going to your principal balance. So no matter what your monthly payment is, the amount of interest your loan accrues will be the same. Therefore if you are able to stay on the standard repayment schedule, it’s in your best interest to do so.
Let’s look at the numbers (they’re a little different than what you were thinking, so you might want to double check your information). I’m using a loan balance of $53,000.00, interest rate fixed at 6.8% and term of 120 months. This assumes that your payments are received on the payment due date each month; otherwise, there is extra interest to account for. A $53,000.00 loan at 6.8% for 10 years has a monthly payment of about $609.93. Of this payment amount, roughly $296 will go straight to interest.
Here’s the calculation for your first month’s interest:
Monthly interest ($53,000.00 X 6.80% / 365 X 30 = $296.22)
Now, we subtract the interest from your $609.93 payment and $313.71 will go toward principal
So, $53,000.00 (principal balance) - $313.71 (principal payment) = $52686.29 (new principal balance)
During the second month, your interest is accruing off of $52,686.29 rather than the $53,000.00
Monthly interest ($52,686.29 X 6.80% / 365 X 30 = $294.47)
That means a bit more of your payment will go toward principal.
$52,686.29 (principal balance) - $315.46 (principal payment) = $52,370.83 (new principal balance)
And the amount you’ll be putting toward principal will get a bit higher each month you are in repayment. Now that you’re probably on information overload, do you have additional questions?
Hi Barbara, thanks for the info you've provided everyone. I have consolidated school loans of $150,000 @6.7% what can I do to lower my payments? its seems like whatever company I go to will not reduce the interest rate, seems like I have no options - Thanks for any help you can provide
Frustrated, is your loan a Federal Consolidation Loan with a fixed interest rate? If so, when you consolidated, you locked in your interest rate. So you’re right that there aren’t options to have that interest rate reduced with the current loan.
Now, as I mentioned in the post you could consider using a different consumer loan (personal, home equity, etc., depending on assets) to pay off your student loan, however you’d need to consider the options you’d be losing.
Are you looking to pay less interest or do you need payment relief? If you’re having trouble making your payment you could consider a deferment or forbearance if you’re eligible. Or have you looked into Income-Based Repayment? Check out info on IBR here: http://blog.wellsfargo.com/StudentLoanDown/2009/07/the_scoop_on_income_based_repa.html
Hi Barbara,
yes its consolidated with a fixed rate. I'm looking to reduce interest payment. currently paying $1500 a month, was just furloughed at work so.... will check out blog, thanks
Hi Barbara,
Total I owe about $180,000. $68,000 is with American Educational Service, consolidated at 5.6%. The rate is high enough that 75% of my monthly payment is currently going to interest. I have one small federal loan that I still have not consolidated (it's at 4%). Would I be able to re-consolidate the AES loan with my small loan to obtain a lower interest rate? In the alternative, do you know of private consolidators who could give me less than 5.6%? My fear is that no private companies are consolidating for a low rate at the moment. Thanks a lot~
I currently have a private student loan that is consolidated with Sallie Mae. My interest rate is currently 8% and most of my monthly payment is going towards interest. I do pay more than the minimum per month but I will end up paying more than double my actual loan. I want to reduce the interest. Can I consolidate again through another lender or possibly ask for a lower rate since I pay ontime or add a cosigner. Once again my loan is already consolidated but i want a lower rate.
Hi,
I graduated college 2 years ago with private loans from Sallie Mae totaling around 120K. I consolidated them with citibank after I graduated with an interest rate of 10.8%. I have no cosigner at the moment. Is there any option for reducing the interest rate of the loan (I've already used all the benefits such as automatic debit).
Is it possible to transfer this student loan to another lender or reduce my interest rate by adding a cosigner and renegotiating my terms?
Please advise.
Hi Rena – You would be able to consolidate your federal consolidation loan with your federal loan that hasn’t been consolidated. However, this wouldn’t get you a lower rate. In fact, your rate would go up a bit since the Federal Consolidation loan’s interest rate is the weighted average of all the loans included rounded up to the nearest 1/8 of a percent. Consolidating your federal student loans into a private student loan generally is not a good idea. If you switch your student loans from federal to private, you’ll lose the protections you have with your federal student loans. You’ll also almost certainly be swapping a fixed interest rate for a variable interest rate. And in today’s credit environment, it is unlikely you’ll find a private lender who can give you an interest rate lower than 5.6%.
You can check out the interest rates on the Wells Fargo Private Consolidation Loan here: http://wfefs.wellsfargo.com/jump/rates.html#priv_consol. Since the loan is based on credit it’s a good idea to apply with a cosigner who has good credit. That may help you secure a lower interest rate than if you’d applied without a cosigner.
The best way to reduce the amount you pay in interest each month is – if you’re able – to pay more than the monthly payment amount and have the balance applied to principal.
Hi Randi – First off, it’s great that you’re paying more than is required toward your loan; that will really help you in the long run. You can reconsolidate with another lender. Here’s an idea of the rates on the Wells Fargo Private Consolidation Loan: http://wfefs.wellsfargo.com/jump/rates.html#priv_consol. Like I told Rena who commented right before you, it’s a good idea to apply with a cosigner who has good credit if you are hoping to secure a lower interest rate. As for options with your current lender, they’re probably limited, but it won’t hurt to ask!
Sasha – You could consider reconsolidating your private student loan with a different lender. Like I’ve told other recent commenters, applying with a cosigner who has good credit may help you secure a lower interest rate than if you’d applied without a cosigner. You can find out more information about Wells Fargo’s private consolidation option at: https://www.wellsfargo.com/student/repay/private_consolidation. You’d have to check with your current lender about any options for changing your current loan with them.
Hi Barbara, Im going to try to make this long story short. I have student loans at interest rate X, and my lender (I guess it was around june 2006) sent me paperwork to lock it in at rate Y, which was lower than X. I did so, and sent it back. Well "they never recieved them." Im currently living abroad and intend to make this country my permanent residence. Therefore, they have absolutely no way of getting money out of me. I dont want to be a bum and back out of my contract, but want a lower interest rate. Any advice?
Hey Joe – Well, you certainly don’t want to be a bum! There would be some hefty consequences waiting for you if you ever decided to come back to the U.S. Are you talking about federal loans or private loans? If you’re dealing with federal loans, you may be able to lock in an interest rate. It wouldn’t be lower as federal consolidation loans have an interest rate that is the weighted average of those you include rounded up to the nearest 1/8 of a percent. But if you have variable interest rate loans (made before July 1, 2006) it would ensure that those interest rates don’t increase in the future. Federal consolidation loans are offered directly through the Department of Education (http://www.loanconsolidation.ed.gov/).
Private student loans are a different ballgame. You could consider consolidating those. If your credit situation has changed or if you bring on a cosigner with good credit you may be able to secure a lower interest rate than you have now. Of course, you’ll want to consider the terms of the loan carefully to make the decision that’s best financially. Private consolidation loans are offered by private lenders like Wells Fargo (https://www.wellsfargo.com/student/repay/private_consolidation).
If you’re wanting to lower the total amount of interest you pay, whether it’s on a federal loan or a private loan, the best way it to pay more than you’re required to pay each month. You could also check with your lender to see if your lender offers a discount for making automatic payments on your loan.