There are many ways to save money on your student loans, including student loan discounts, paying interest during the in-school period, using a cash back rewards card, claiming income tax breaks, accelerating repayment, qualifying for a lower interest rate, and getting someone else to help pay down your debt.
When borrowers talk about saving money on their student loans, sometimes they mean reducing the loan payment and sometimes they mean reducing the cost of the loan. The two types of saving are different and may conflict with one another. For example, a lower monthly loan payment will cost more over the life of the loan, while a higher monthly loan payment will reduce the total interest paid.
Student Loan Discounts
Student loan discounts save money by providing an interest rate reduction or cash back to reward borrower behaviors.
The most common type of student loan discount is an AutoPay discount, where the lender reduces the interest rate by 0.25% or 0.50% percentage points if the borrower agrees to have their monthly loan payments automatically transferred from their bank account to the lender. AutoPay is also known as Auto-Debit.
Some lenders provide a cash reward for referrals. The cash reward is applied to your loan balance when your friend gets a loan from the lender.
Less common discounts include rewards for good grades and graduating, as well as a current customer discount.
Pay Interest During the In-School Period
Several lenders offer interest rate reductions to borrowers who agree to make payments during the in-school and grace periods. The amount of the rate reduction may differ depending on whether the borrower agrees to make fixed ($25/loan per month), interest-only or fully-amortized payments.
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An added benefit is making payments during the in-school and grace periods can reduce or eliminate interest capitalization, where accrued but unpaid interest is added to the loan balance. This causes interest to be charged on interest. Although interest on federal student loans is capitalized once, at the end of the deferment or forbearance period, the interest on private student loans can be capitalized as frequently as monthly.
Earn Cash Back with Student Loan Rewards Credit Cards
Cash back credit cards can earn a rebate based on your purchases to help you repay your student loans.
Sallie Mae’s Accelerate credit card pays 1.25% cash back on purchases plus a 25% bonus if the cash back rewards are used to pay down student loan debt.
Other cash back rewards cards aren’t specifically designed for repaying student loans, but may pay a higher rebate. For example, the Citi Double Cash Card offers a 2% standard rebate.
But, don’t carry a balance on the credit cards, or it defeats the purpose.
Claim Income Tax Breaks
The student loan interest deduction lets you deduct up to $2,500 in interest paid on federal and private student loans. Since it is an above-the-line exclusion from income, you can claim it even if you don’t itemize.
The income phaseouts begin in the middle of the 22% tax brackets, so the student loan interest deduction is worth up to $550. But, since the average deduction is about $1,080, the typical tax savings will be about $240.
Generally, you should choose the repayment plan with the highest monthly payment you can afford. Using the standard 10-year repayment plan is better than extended repayment, graduated repayment or income-driven repayment.
If you still have more money available each month, consider making extra payments on your student loans. There are no prepayment penalties on student loans, so nothing should stop you from doing this.
Making extra payments will cause your student loans to be paid off quicker and will reduce the total payments over the life of the loans, saving money on interest.
There are many ways to choose which loan will get the extra payments. The avalanche method, which applies the extra payment to the loan with the highest interest rate, will save you the most money. Sometimes, the loan with the highest interest rate might not be a student loan, but rather credit cards or other debt.
Be sure to provide the lender with instructions to apply the extra payment as an extra payment. Otherwise, the lender might treat the extra payment as an early payment of the next installment and skip the next AutoPay payment.
It is also a good idea to tell the lender to apply the extra payment to the loan with the highest interest rate. Even better, specify the loan ID number of the loan that should be prepaid. If you don’t, the lender gets to choose which loan gets the extra payment. Some will spread the extra payment evenly among all the loans. Some will apply the extra payment to the loan with the earliest due date. Some will apply the extra payment to the loan with the lowest interest rate.
To get the money to make extra payments, use windfalls like bonuses, income-tax refunds, inheritances and lottery winnings. If you get a raise, increase the amount you pay toward your student loans. Some borrowers take a second job in the evenings and weekends to earn extra money to pay down debt.
There are also apps like ChangEd that can help you pay down debt quicker by rounding up your purchases and applying the spare change to your student loans.
Qualify for a Lower Interest Rate
To qualify for a lower interest rate, start by improving your credit scores. You can do so by paying all your bills on time every month. Duration of employment with your current employer and your debt-to-income ratio also matter. Get a free copy of your credit reports from annualcreditreport.com and correct any errors by disputing the inaccurate information.
Shop around for the best interest rate. The lowest “as low as” interest rate is not necessarily the interest rate you’ll get. Some lenders will tell you your interest rate with a soft credit pull. Otherwise, don’t worry about hard credit pulls if you apply for several loans in a short period of time, since the credit bureaus now recognize shopping-around behavior.
Apply for a private student loan with a creditworthy cosigner. Most lenders will give you a better interest rate just for having a cosigner. They will also use the higher of the two credit scores, so if your cosigner has better credit, you’ll get a lower interest rate.
Choosing a shorter repayment term might help you qualify for a lower fixed interest rate on your private student loans.
Be careful about choosing a variable interest rate, even if the variable interest rates are lower. Interest rates are at or near record lows, so a variable interest rate has nowhere to go but up. However, if you can and will pay off the loan in full within just a few years, before the interest rates rise too much, you might save money with a variable interest rate.
Before refinancing your student loans, compare the refi rate with the current interest rates on your student loans. If it is in the middle of the pack, selectively refinancing just the loans with higher interest rates will save you more money. Alternately, you could make extra payments on the highest-rate loans to save money without refinancing.
Some lenders will allow you to refinance federal student loans into a private refinance. However, this means that the new loan will lose the better benefits of federal loans, such as longer deferments and forbearances, income-driven repayment plans and loan forgiveness. Even so, refinancing a federal loan into a private student loan might be worthwhile if you can qualify for a much lower interest rate.
Get Someone Else to Repay Your Student Loans
Ask friends and family to help you repay your student loans instead of giving birthday, holiday and graduation presents.
If you have leftover money in your 529 plan (or a sibling’s 529 plan), 529 plans can now be used to repay up to $10,000 of the beneficiary’s student loans and $10,000 in student loans for each of the beneficiary’s siblings. The $10,000 limit is a lifetime limit per borrower from all 529 plans.
About 8% of employers offer student loan repayment assistance programs, or LRAPs, according to the Society for Human Resource Management (SHRM). Typically, the employer will contribute $100 a month toward your student loans.
There are also many loan forgiveness programs for federal student loans based on the borrower’s occupation. Examples include Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF). Members of the U.S. Armed Forces may qualify for military student loan forgiveness if it is part of their enlistment contract.
Source: Forbes – Money