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How to Negotiate Your Student Loan Interest Rate

Kim Porter

Student loan borrowers know that tuition and fees are major expenses. But borrowers may not grasp how interest can expand a student loan balance and lengthen payoff time. If you have a $30,000 private student loan with an APR of 11%, for instance, about $19,590 in interest accrues over 10 years.

Of course, tuition and fees vary from college to college. The average cost of tuition and fees is inching toward $10,000 per year for state residents at public colleges, according to U.S. News survey data.

Generally, the bigger your loan, the bigger your interest payments will be.

"It does damage to the balance over time," says Stanley Tate, an attorney specializing in student loan debt, about the effect of interest. "I've seen people, over a 15-year period, end up owing double or triple what they actually borrowed."

Luckily, you can save thousands of dollars in some cases by negotiating a lower interest rate. Although you can't change the terms of your federal or private student loans, you may be able to get a lower rate on a new private loan and save on interest in other ways.

[Read: Best Student Loan Consolidation and Refinance Companies.]

How Does Student Loan Interest Work?

Congress sets federal student loan rates each spring, so you can't negotiate them. The interest rate varies by loan type, borrower type and disbursement date. For instance, the rate for Direct unsubsidized loans disbursed to undergraduates between July 1, 2019, and July 1, 2020, is 4.53%. On a $30,000 federal student loan at that rate, a borrower would pay about $7,000 in interest over a 10-year repayment plan.

Private student loan interest rates range from about 4% to 12%, with either variable or fixed terms. Each lender sets its own rate, depending on factors such as your credit score and college.

Consider the earlier example of the $30,000 private student loan with an 11% APR and $19,590 in interest over 10 years. By cutting the rate in half, you would save $10,521. Even just a 1% difference in the interest rate would save you $2,016.

How to Lower Your Student Loan Interest Rate

If you have a private student loan, you won't be able to negotiate a lower interest rate because you've already agreed to the terms. But you can try two methods to negotiate the rate for a new private loan:

Negotiate the rate yourself. Start by researching which banks offer low student loan interest rates. Some big banks won't, but credit unions will, as long as you qualify for credit union membership. Small or community banks could have lower interest rates and special deals promising a discount after you sign up or graduate. Online lenders may offer low rates, if you can qualify.

Your bank could provide a relationship discount of about 0.25% to 0.50% if you or your parents have a checking or savings account there. Ask about an autopay discount as well; it might save you another 0.25% on the interest rate.

[Read: Best Private Student Loans.]

Shop around for interest rates, noting whether they are fixed or variable, as well as any loan discounts, origination fees and loan limits. In case you fall behind on repaying your loan, ask about hardship plans and late-payment policies.

The next step is asking the lender to lower the rate, on top of any advertised discounts. "It can be superintimidating going into a bank and demanding things," Tate says. "But tell them, 'Here's what I found, and I have four other offers. Can you do better?'"

Explain what you're studying and your post-graduation plans. Again, having a banking relationship might help, as a solid history could sway approval for a better rate.

If you think you don't have leverage, keep this in mind: "You're a shopper," Tate says, "so you can take that loan elsewhere."

Use a student loan negotiating company. If you haven't had luck negotiating a better rate, you could look into a new type of company that handles it for you. LeverEdge uses group buying power to negotiate student loan rates with lenders.

Students sign up with the company once they accept an offer to a college. "We use the time in between to gather enough buying power, enough volume of students, to get lenders to start bidding and competing against each other to offer low interest rates," says Nikhil Agarwal, co-founder of LeverEdge.

The company doesn't negotiate one rate but instead ensures that each student who applies for the negotiated loan will get a discount. The final rate will depend on factors such as the student's credit profile, income and college. Students don't pay for the service, and LeverEdge earns money from a lender whenever a student takes out one of the negotiated loans.

LeverEdge is geared toward students who want to refinance their loans and graduate students who want new private loans. Chris Abkarians, co-founder of LeverEdge, says, "For undergraduate students, the federal government rates are actually quite attractive and are more or less lower than anything the private loan market will offer you."

Tate adds that LeverEdge could be a smart option for some students, but he emphasizes that "you're not in control of the negotiation, so you give up some freedom in exchange. That said, you're not locked in."

Alternatives to Negotiating a Lower Student Loan Interest Rate

If you can't negotiate a lower interest rate, you can still find ways to save money. Other options include:

Refinancing your student loan. This process involves taking out a new loan at a new interest rate. Consider this route "if you can get a better deal and the math works out," Tate says.

[Read: Best Student Loans Without a Co-Signer.]

If your credit score has improved since you took out your loan and you have a reliable source of income, getting a new loan with a lower interest rate should be easier. Generally, if you have a private loan, refinancing it into a new private loan with a lower rate and no origination fees could help you save money in the long run.

For the most part, refinancing a federal student loan into a private loan is not a good idea. You'll lose access to federal income-driven repayment plans, which limit your monthly payments to a percentage of your income and offer loan forgiveness. You'll also lose the ability to temporarily reduce or stop payments through the federal deferment or forbearance programs. They help you avoid defaulting on your loan.

Getting a co-signer. A co-signer is a person, often a close friend or relative, who agrees to take responsibility for your loan and repay it if you don't. A private borrower may qualify for a lower interest rate if his or her co-signer has good credit. But the co-signer is equally responsible for repaying the loan, so any missed payments can lead to damaged credit scores for the borrower and the co-signer.

Both people must consider the risks before taking out the loan. If the borrower falls behind on payments, the co-signer will be asked to repay the loan. Private lenders may hire collection agencies, and co-signers may be sued for failing to repay.

If you get a lower interest rate with a co-signer, seek loan terms that release your co-signer from liability after a certain number of payments.

Modifying your loan. If you're paying your student loan bill on time every month, the lender won't be motivated to lower your interest rate. But borrowers who are in financial distress and miss loan payments might be able to reduce their interest rate through a loan modification. This may include a lower monthly payment or interest rate for a few years.

You might need to provide supporting financial documents, such as pay stubs, other types of income documents and additional proof of financial hardship. Of course, falling behind on student loan payments will affect your credit score, so don't try this method just to lower your interest rate.

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