As if student debt wasn't already crippling enough, interest rates on federal loans are set to jump higher. In fact, "federal student loan interest rates will reach record heights for the 2024-25 school year," said NerdWallet, citing a recent announcement from the Department of Education.
Effective July 1 for the 2024-25 school year, "undergraduate direct loans will have a 6.53% interest rate, up from 5.50%," said NerdWallet. Meanwhile, "graduate and professional direct loans will have an 8.08% interest rate, up from 7.05%."
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Tap out federal student loans first
Even though interest rates on federal loans are poised to reach record heights, it's still generally more favorable to maximize any federal student aid available to you first, before turning to private student loans.
This is because, compared to private student loans, federal loans "offer more repayment options and borrower protections," said Forbes. Plus, "because federal undergraduate loans don't require credit checks or minimum income requirements, you're likely to get a better rate with a federal loan than a private one."
Improve your credit score
If you are applying for private student loans as opposed to federal, a big determiner of your rate is your credit — "lenders assign the best rates on student loans to borrowers with the strongest credit scores," said The Wall Street Journal.
So, if you are able to hold off for a little while on applying and take some time to boost your credit score, that can make a big difference in how much you pay in interest over time. "One of the fastest ways to improve your credit is to lower your credit utilization ratio, or the amount of credit you're using compared with what's available to you," said the Journal; you can do that by working to pay down existing balances.
Other ways to improve your credit include reviewing your credit report for any errors, ensuring you are making on-time debt payments, or getting added as an authorized user on the account of someone with excellent credit. Just keep in mind that "the amount of time it takes to improve your score will vary by individual" as well as depending on what lowered your score in the first place, said the Journal.
Apply with a co-signer
Especially if you have not yet had a chance to establish and build up your own credit history, applying with a co-signer can be a big help in getting approved and securing a more competitive rate.
A cosigner "is typically a relative or trusted friend with good or exceptional credit as well as reliable income who will share responsibility for the loan," said Credible. By adding them to your loan, that "reduces the risk to the lender, which could improve your chances of qualifying for a lower interest rate."
Just keep in mind that "if a parent or partner co-signs your loan application, the loan will show up on the co-signer's credit report and could potentially hurt his or her chances of getting credit when needed," said U.S. News & World Report. Plus, "if you miss a payment, your co-signer is legally responsible for paying what you owe."
Look into any offered discounts
A sure-fire way to save interest on student loans is to take advantage of any discounts.
One of the most common ways to get a discount on both federal and private student loans is by signing up for autopay, which means that your payments are automatically deducted from an attached bank account. "Most of the discounts lower your rate by 0.25 of a percentage point, but some go as high as 0.5," said U.S. News & World Report.
Other discounts you may be able to secure, depending on your lender, include a loyalty discount if you are an existing customer (say, you already have a bank account with the institution) or a percentage off as a reward for graduating or staying on top of loan payments.
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