A student loan isn’t limited to the principal amount—a.k.a. the initial loan amount you’re given by a lender. Interest and various fees, like origination fees and late fees, tack on extra costs, causing the balance you owe to grow and grow until it’s fully paid off. (Here are four factors that can increase your debt.) The big question is: How can you reduce your total loan cost?
You'll find answers here. Get expert tips for saving on your student loans by reducing your total loan cost—including refinancing, making extra payments, changing your payment terms, and applying for forgiveness programs.
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How student loan interest works
Before we get into how to reduce your total loan cost, it's important to understand how student loan interest works.
Most borrowers don’t realize this, but student loan interest starts to accrue the day your loan is disbursed to your school. That means whatever percentage you were quoted for your loan—typically 5.50% to 8.05% for federal loans and 4.5% and 17% for private loans, as of May 2024—will start accruing within a month of classes starting.
“Interest on student loans is like a fee you pay for borrowing money, and it keeps adding up until you pay back the loan,” says Ian Group, a lawyer and money coach. “Every month, on your bill from your lender, you’ll see your payment covers two items: the principal—the original amount you borrowed—and your interest.”
While you won’t have to start paying back your debt until six months after you graduate, interest will accrue while you’re in school. Most undergraduate programs are four years long, so your interest will keep compounding in that time. The way Group puts it: “Loan money isn’t free—and what you borrow is far less than what you will actually owe.”
How to reduce total loan cost: 4 strategies to consider
So, how can you reduce your total student loan cost? Fortunately, reasonable strategies do exist—and depending on your situation, they can make repaying your loan much less difficult.
1. Make extra payments
Six months after graduating, you’ll start to receive bills for your student loans, and on each of those bills, there will be a minimum payment. For a student who takes out a $40,000 federal loan at the current 5.50% fixed interest rate, with a 10 year repayment term, that minimum monthly payment will be around $434.11.
Now, that is a significant chunk of change and it may be hard enough for you to make that payment. If, however, you can make that payment plus a bit extra, it could save you thousands of dollars down the line.
“You can always pay more than the minimum amount, and typically it will reduce the principal balance of the loan,” Group says. “This is a fantastic way to accelerate debt payoff.”
Let’s do the math: A borrower who makes the minimum payment of $434.11 per month will end up paying just over $12,000 in interest. But paying an extra $150 per month, if you can, will save you nearly $4,000 in interest by the end of the loan. Even an extra $50 per month saves you $1700. If you can pay early and extra, do it.
2. Refinance your debt
When Group was paying off $230k of his own student loan debt, refinancing was a helpful option for him.
“I had 12 loans when I graduated from law school, each with varying interest rates, which averaged around 7-8%,” Group says. “I refinanced my loans several times and ultimately consolidated them into one loan at just 2.3%. This saved me a substantial amount of money because I was paying less interest on my debt.”
While this worked out for Group, he does caution about the tradeoffs. He acknowledges that 2.3% is a very low rate that isn’t always available.
“Refinancing my loan reduced my overall costs, but I took a risk because I needed to simplify, and because the federal government offers various protections and programs to borrowers,” he says of his federal loan. Refinancing with a private lender is also an option, he says, but “when you refinance your debt with a private lender, you lose all of those protections.”
So even if there are some downsides to refinancing, in the case of extreme financial hardship, it could be a major help, Group says. The federal government also offers programs like income contingent repayment plans, which allow borrowers to make smaller monthly payments based on income and family size.
“These are all options to look into and consider,” Group says. “If you’re able to get a good deal with a refinance, just make sure you’re cautious and fully understand what you’re getting yourself into.”
Read this next: 4 Types of Loans You Can Refinance
3. Consider your repayment terms
Most loans come with a 10-year repayment term, but sometimes you’ll be given the option to choose how long the term is (e.g. 10 years vs. 15 years). There are pros and cons to both—it depends on what works best for you.
“Shorter terms tend to have lower interest rates but higher monthly payments. On the flip side, longer terms have higher rates and lower payments,” Group says. “Lower payments might sound good, but you have to consider how much more interest you’ll pay over the term of the loan.”
In other words, if you can opt for a shorter repayment term and afford the payments, you’ll save more money in the long-term. If you need the longer term, try to make payments that are higher than the minimum so you can still cut down on your overall interest.
4. Look into loan forgiveness programs
Aside from President Biden’s 2024 student loan forgiveness program, the future of which is uncertain , the government offers other forms of debt relief, like the Public Service Loan Forgiveness.
“There are specific requirements for these programs, but if you’re able to take advantage of them, it can save you a ton of money on your debt,” Group says.
In the event that you don’t qualify for loan forgiveness, the government offers four income-driven repayment plans: Saving on a Valuable Education (SAVE) Plan, Pay As You Earn (PAYE) Repayment Plan, Income-Based Repayment (IBR) Plan, and Income-Contingent Repayment (ICR) Plan. These plans are based on your monthly income and family size, so they’re more tailored to what you’re able to pay.
How to tackle your loan repayment—and make a plan
Whether you’re taking out a loan for undergraduate or graduate level studies, Group’s advice is the same: you need a solid plan. The first step of that plan, he says, is finding employment. (You can look for open jobs with solid companies right here on The Muse!)
“Paying off debt is a numbers game, and a surefire way to win is to make consistent payments until the loan is paid off,” Group says. “You can accelerate it by paying more than the monthly minimum, or if you get a bonus at work, you can throw that whole amount into your loan and knock it down quickly. But without being gainfully employed, none of this will be possible. So your first focus should be making money.”
From there, it’s all about paying as much as you can as quickly as you can without completely compromising your quality of life. This will look different for everybody.
Paying off multiple loans
For someone with multiple loans, Group recommends the “debt snowball” or “debt avalanche” methods.
“The ‘debt snowball’ method just means you’re making minimum payments on all debts and using any extra money to pay off your smallest balance debts first,” he explains. “Once that debt is paid in full, that extra money goes to the next highest balance debt. You continue until the debts are all paid.”
“The ‘debt avalanche’ method is the same as the snowball method except you’re focused on paying off the debts with the highest interest rate first,” Group says. “While the snowball method can provide quick wins and great momentum, the avalanche method tends to show the greatest overall cost savings over time.”
Using grants to reduce your loan need
One early strategy Group says is lesser known and underutilized: applying for scholarships and grants. These are offered by numerous organizations all over the world, including nonprofits, states, and funds.
“If I could go back and do it all over again, I would seek out and apply for as many scholarships and grants as possible to reduce my initial bill for school,” Group says. “This can lower the amount of debt you need to take on, and ultimately make repayment easier.”
Mistakes to avoid when taking out a loan
The worst mistake you can make is ignoring your debt; the interest will keep accruing and fees will get assessed, Group says.
“If you go into default on a federal loan, it can impact your credit score, your wages can be garnished (with a court order), and you can lose any tax refunds coming your way,” he says.
Private loans also have penalties. “If you have a private loan, depending on the loan terms, failure to pay can result in your lender accelerating repayment (i.e. your entire unpaid balance and interest becomes due immediately), there could be lawsuits, legal fees, and judgements involving failure to pay,” he says.
To avoid all of this, Group emphasizes understanding your loan terms. Know what you are going to owe each month and how you plan to pay it. If you make the payments consistently, the debt will diminish and one day you’ll have none. In the meantime, try these strategies and remember you aren’t alone.