Senate Cents: A Financial Wellness Blog

If you have student loans, you're on the hook for more than just what you borrow; you're also responsible for the interest. Student loan interest rates can vary from 3% to over 10%, depending on your lender.

If you're wondering why your rates are high, it's probably because you borrowed at a bad time, your co-signer's credit was only so-so or you applied for multiple loans. Those high rates can have a big impact on your finances over the course of a typical 10-year loan repayment term.

Say, for example, you took out a $10,000 private student loan with a 6% interest rate. Over 10 years you'd pay more than $3,300 in interest alone. But if the rate were 3.76%, the current federal interest rate for undergraduates, you'd pay about $1,300 less over the life of your loan. That's money you could have used to pay off your loan almost a year ahead of schedule.

To help you save money on your loans, we'll walk you through three common causes of high interest rates and give you a game plan for lowering the,.

1. You Took Out A Federal Loan When Rates Were High

The interest rate on your loan depends on the year in which you borrowed the money. Except for Perkins loans, federal loan interest rates are set by Congress each spring and are based on the financial markets. They generally change from year to year. If, for example, you took out a direct subsidized loan as an undergraduate in 2007, your interest rate on that loan is 6.8%. If you borrowed money using that same type of loan five years later, though, the rate would be just 3.4%.

Log in to the Federal Student Aid website to see your federal student loan information.

2. Your Co-Signer Had Mediocre Credit

Your co-signer's credit helped you qualify for a private student loan. The good news is that your student loan is helping you build your credit. The bad news is that if your co-signer's credit score was less than excellent — anything below 720 — it may have resulted in you paying a higher interest rate. That's because lenders typically raise interest rate offers as credit scores go down.

“If a person has a high credit score, that shows a level of integrity. They're going to make sure that [the bill] gets paid,” says accredited financial counselor Roslyn Lash. On the flip side, she notes, lenders are more likely to see a co-signer with a lower credit score as a liability, and thus issue a higher rate.

3. You Applied For Too Many Loans And Your Credit Took A Hit

Applying for several loans probably seemed like the best way to compare your private student loan options. But multiple hard credit inquiries, which happen when lenders check your credit, drag down your credit scores. In fact, you lose five points from your FICO credit score for every hard inquiry, while your VantageScore goes down by 10 to 20 points.

Having a high credit score is important because lenders use it to help determine your creditworthiness. So the lower your credit score, the higher your loan's interest rate will be.

What You Can Do To Lower Your Rates

IF YOU'RE STILL IN SCHOOL

• Use federal loans first: For most students, it's best to max out federal loans before taking out any private student loans. Federal loans typically have lower interest rates and better borrower protections.
• Get a co-signer with excellent credit: If you need a private loan, make sure your co-signer's credit score is at or above 720 so you can qualify for a lower rate. If that's not an option and you have a few months before you need to apply, focus on building your own score by paying your bills on time and keeping your credit card debt below 30% of your available line of credit.
• Compare your options: Get prequalified for a private student loan to find out the general interest rate you can expect without racking up hard credit inquiries, which lower your credit score. If prequalification isn't available through a lender's website, Lash suggests getting a copy of your credit report and calling lenders for a rate estimate based on your report.

IF YOU'RE OUT OF SCHOOL

• Sign up for auto-debit: Many loan servicers will knock off 0.25 percentage point from your rate when you sign up. Plus, it'll keep you from accidentally missing payments. Just make sure you have enough in your account each month to avoid getting hit with overdraft fees. Contact your servicer to find out if the discount is available for your loans.
• Consider refinancing your loans: Student loan refinancing is when a lender buys your existing loan and gives you a new one. If you qualify, you can get a lower interest rate. To qualify, you'll need a steady source of income, a low debt-to-income ratio and a strong credit score, typically over 700. If you don't have strong credit, you can also use a co-signer. If you have both private and federal loans, it's usually best to include only your private loans so you won't lose any federal borrower protections. Use NerdWallet's student loan refinance calculator to see if it's right for you.

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