Brought to You by our Partners at College Ave Student Loans
It’s no secret going to college can be expensive, and students are often faced with finding alternative ways to pay for it. As a result, it’s common for students to end up with federal or private student loans – or some combination of both. When talking about student loans, the conversation usually centers on interest rates and the total amount of debt…but very rarely focuses on the ways a borrower can reduce the total cost of that debt.
The reality is that at a specific point in time (like when shopping for a student loan) a borrower can’t do much to change the interest rate they are offered by the lender. But there are things a borrower can control to reduce the total cost of their debt.
Here are a few tips on how to reduce the cost of your student loan from our partners at College Ave Student Loans.
Example Loan Scenario
In order to see the impact that each tip below has on reducing the cost of your student loan, let’s start with an example loan scenario:
Let’s assume you need a $10,000 loan for your freshman year of college.* On this loan, you get a 6% interest rate, and you elect to defer payments while in school and pay it back over 10 years.
Under this scenario, the total cost of your loan would be $16,920 (which consists of the original $10,000 loan – also called the principal – plus $6,920 in interest charges). We will use this as the baseline in all of the comparisons below.
1. Sign up for Auto-Pay
Most lenders give you the option to sign up for automatic payments and, in return, you receive an interest rate reduction (typically 0.25%). This is a very easy way to reduce the cost of your loan, and it makes your life easier as you don’t need to take the time to make a payment every month – or worry about missing one.
For example, by signing up for auto-pay as soon as you get the loan and receiving a 0.25% interest rate reduction, you reduce the total cost of your student loan to $16,581, which saves you a total of $339.
Note: Be sure to check with your lender to see if there are restrictions on the auto-pay discount!
2. Choose a Shorter Repayment Term
When taking out your student loan, some private lenders give you the option to select how long you want to repay the loan while others assign a loan term. Having the option is a benefit for you as you can customize the loan to fit your needs. Choosing a shorter repayment term will result in a higher monthly payment, but you will save money in the long run.
For example, by choosing an 8-year repayment term instead of 10 years, you reduce the total cost of your student loan to $16,022, which saves you a total of $897.
3. Make Additional Payments.
Making additional principal payments while in repayment is a great way to reduce the total cost of your student loan even further. By doing so, you reduce the principal amount owed faster than scheduled in your repayment plan, thus reducing interest charges. You could make recurring additional payments every month or elect to do lump sum payments – like after receiving graduation gifts or tax refunds.
For example, if you elect to pay an additional $20 per month once you begin repayment, you reduce the total cost of your student loan to $16,191, which saves you a total of $729.
Note: Be sure to confirm that your lender does not have a prepayment penalty or fee before making additional payments.
Find additional tips for reducing the cost of your student loan on the College Ave Student Loans blog. Read more here.