As college tuition continues to climb, students who entered school in the 2020-2021 year paid the most ever for tuition, according to CollegeBoard. The average public four-year tuition cost $10,560 in ’20-’21.
Compared to 2011-2012 which was only $8,244, that’s a $2,316 increase. And according to its most recent debt stats, the average student loan debt for bachelor’s degree recipients was $28,800. Anyone entering school in the last decade will be saddled with thousands of dollars in student loans by the time they graduate.
While the hard facts paint a bleak picture, there are ways to save money on your student loans. Obviously, paying extra towards principal will help you save on interest charges. But what if you don’t have room in the budget to allocate more money towards student loan payments each month?
It turns out that you may still be able to save interest on your student loans even if you aren’t able to make extra principal payments right now. Below, we break down two simple ways to save interest on your student loans whether they happen to be federal or private.
How To Save Interest On Your Federal Student Loans
Federal student loans offer a special discount if your payment is deducted through auto debit. This means the loan servicer will draft the monthly payment directly from your bank account.
How much will you save for allowing access to your bank account? Generally, 0.25% will get shaved off your interest rate. If you have a rate of 5.05%, it will go down to 4.80%.
You’re probably thinking 0.25% isn’t much and is it even worth it. Before we explore that question, remember that with auto payments you don’t have to worry about missing a payment and incurring fees. Making your payment on-time every time is already saving you money in fees on top of your rate reduction.
Which Loans Are Eligible For The Rate Reduction?
The Department of Education says that all Direct Loans are automatically eligible for a 0.25% autopay discount. But some of the federal student loan servicers may offer discount for auto payments. To determine if your loan is eligible for the discount, check with your servicer.
Now back to our question of how much does 0.25% save you. Here are some numbers for a bachelor’s degree in repayment status calculated using the federal student loan calculator:
With the 0.25% discount applied, the rate drops to 4.80%.
Over the term of this loan, the savings in interest amount to $684.85. On a monthly basis, you’re only saving $3.80, which is equal to $45.66 per year.
While that doesn’t seem like much, it’s money that isn’t evaporating into thin air anymore. Considering its money you wouldn’t have had without the discount, think of it as a free coffee or ice cream sundae every month.
How To Save Interest On Your Private Student Loans
Private student loans are different from federal student loans. Whereas federal loans have restrictions set by law and come with fixed interest rates. Private loan terms are set by the lender.
While private loans can have a higher interest rate than federal loans, you can still save on your private loan by refinancing. Refinancing allows you to set up new terms with a lower interest rate. Most private lenders also apply a 0.25% discount for auto payments just like federal loan servicers.
Here are a few companies that can refinance a private student loan:
How Much Can Refinancing Save You?
Using student loan calculator provided by SoFi, we can get an estimate of monthly and total savings. A $29,000 loan at 5.05% with 110 months remaining refinanced at 3.69% – 5.87% will decrease the monthly payment by $10 – $41 per month and save $1,565 over the life of the loan. Of course, you’ll want to make sure the rate you’re quoted is below 5.05%.
Whether they’re federal or private, there are simple ways to save interest on your student loans without raising your monthly payment. One of the most common is to set up auto payments. This can land you a 0.25% discount.
And if you have private loans, you should see if you’re able to refinance to a lower rate. Consider getting quotes from each of the companies listed above. Or if you want even more options, check out our top 10 student loan refinancing companies.