How to Save Money on Student Loans
By Mark Kantrowitz
Here are the top twelve tips for saving money on student loans.
- Minimize debt. Go on a debt diet by focusing on free
money first, such as grants and scholarships, and by cutting college
Education debt may be good debt, because it is an investment in
your future, but too much of a good thing can hurt you.
- File the Free Application for Federal Student Aid (FAFSA) to
qualify for federal, state and institutional aid. Search for
scholarships on free scholarship matching web sites like
- Budget before you borrow. Live like a student while you are in
school, so you don't have to live like a student after you
graduate. Only borrow what you need, not what you can. Don't treat
loan limits as targets. Every dollar you borrow will cost about two
dollars by the time you repay the debt, so ask yourself if you'd still
buy it at twice the price before you spend money on anything.
- Work part-time during the school year (up to 12 hours a week) and
full-time during the summer. You can earn up to about $6,000 a year
without affecting eligibility for need-based financial aid.
- Enroll at an in-state public college or at a college with a
generous, "no loans" financial aid policy. Take an extra class each
term to try to graduate on-time or even early to cut college
costs. Don't switch majors or transfer to a different college, as this
adds a term or two to your college career.
- Economize on living expenses. Buy used textbooks and/or sell
the textbooks back to the bookstore at the end of the academic
term. Use tuition installment
plans as an alternative to long-term debt. Aim to
have total debt at graduation that
is less than your expected annual starting salary, and, ideally, a lot
- Borrow federal
first. Generally, federal
student loans are cheaper, more available and have better
repayment terms than private student loans. About a quarter of private
student loan borrowers in 2011-2012 did not borrow from the Federal
Stafford loan program. Even among the students who do borrow Federal
Stafford loans in addition to private student loans, about a quarter
borrow less than the Federal Stafford loan limits.
- Prefer lower-cost loans. The Federal Stafford loan has a
lower interest rate than the Federal PLUS loan. The subsidized Federal
Stafford loan is less expensive than the unsubsidized Federal Stafford
loan, because the federal government pays the interest during the
in-school and grace periods. Assuming a 10-year repayment term,
subsidized interest is the equivalent of cutting the interest rate
roughly in half. Shop around
for private student loans
and private parent loans with
lower interest rates and fees.
- Apply for a private student loan with a creditworthy
cosigner. When a borrower applies for a private student loan with
a cosigner, lenders base the interest rates and fees on the higher of
the two credit scores. If the cosigner has a better credit score, this
can reduce the interest rate on the private student loan.
- Get a head start on repayment while you're still in
school. Reduce debt at graduation by paying at least the interest
that accrues during the in-school and grace periods. This avoids the
capitalization of interest, which adds unpaid interest to the loan
- Refinance to get a lower interest rate. If you have been
managing your credit responsibly for a few years after graduating,
paying every bill in full and on time, your credit score may have
improved, making it possible for you to refinance all or some of your
student loans at a lower interest rate.
- Sign up for student
loan discounts. Auto-debit discounts and graduation rewards
provide interest-rate and principal reductions.
- Claim the student loan interest deduction.
The student loan
interest deduction lets you deduct up to $2,500 in interest paid
on federal and private student loans.
- Minimize total interest paid by minimizing the repayment
term and maximizing the monthly payment. Choose the shortest
repayment term with the highest monthly payment you can afford to
reduce the total interest paid over the life of the loan. Keep the
repayment term to 10 years or less. Avoid temporary suspensions of the
obligation to repay the debt, such as deferments and forbearances,
because interest continues to accrue, increasing the amount of debt.
- Prepay high interest debt. Make more than the minimum
payment. Extra payments will reduce the principal balance of the loan,
which will reduce the portion of subsequent payments that is applied
to new interest. Target the extra payments to accelerate repayment of
the loan with the highest interest rate. This will save the most money
over the life of the loans and reduce the average interest rate. Be
sure to tell the
lender to apply the extra payment as a payment to principal on the
loan with the highest interest rate, and not as an early payment of
the next installment due.
- Devote windfalls to paying down debt. If you get a big
income tax refund or inheritance, use at least half of the money to
prepaying your student loans. Ask friends and family to help you pay
down your student loans instead of traditional birthday and holiday
- Seek student loan forgiveness. Look for jobs that
provide loan forgiveness. In addition to public service loan
forgiveness, some employers provide loan repayment assistance as an
employee benefit. If an employer does not offer loan repayment
assistance, ask the employer to pay off all or some of your student
loan debt as a signing bonus. If you are unemployed, volunteer with
AmeriCorps to earn education awards that can be applied to your
federal student loans.