How to Save Money on Student Loans

By Mark Kantrowitz

Here are the top twelve tips for saving money on student loans.

1. Minimize debt. Go on a debt diet by focusing on free money first, such as grants and scholarships, and by cutting college costs.
   • 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 Fastweb.com.
   • 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 less.
   Education debt may be good debt, because it is an investment in your future, but too much of a good thing can hurt you.
2. 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.
3. 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.
4. 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.
5. 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 balance.
6. 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.
7. Sign up for student loan discounts. Auto-debit discounts and graduation rewards provide interest-rate and principal reductions.
8. 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.
9. 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.
10. 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.
11. 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 gifts.
12. 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.