10 ways to reduce the cost of student loans and other debt

  • If you look at many different lenders and compare the terms, you can find the best interest rate.
  • Make more than the minimum payment each month and try to make additional payments whenever possible.
  • When looking for a student loan, prioritize government options before getting a personal loan.

When you need to borrow money to pay for things like your car or school, you want to make sure that debt is as affordable as possible.

Whether you’re looking to lower the cost of your student, personal, auto, or any other type of loan, we have 10 key pieces of advice to make sure you’re paying the lowest amount possible.

1. Shop around and compare offers

You can check the interest rates that many different lenders are offering you by filling out simple online applications that should only take a few minutes and will not affect your credit score


. You can also use a credit marketplace to compare many offers at once with a single application.

It’s worth taking the time to review a number of options. A study by SuperMoney.com analyzed 160,000 loan offers to over 15,000 borrowers and found that the average difference between the highest and lowest APR offer for the same borrower was 7.1 percentage points.

“Just accepting the first loan offer you qualify for can be a costly mistake,” says Andrew Latham, a CFP® expert and editor-in-chief of SuperMoney.com. “The data suggests that comparing multiple lenders can save you more money than upgrading your credit score by 100 points when it comes to finding the best APR.”

2. Pay early and often

If you have the financial flexibility to make special payments or early repayments on your loan, you should do so. The more additional payments you make on your loan, the faster the balance goes down and the less interest you pay overall.

Most lenders don’t charge a penalty for prepaying your loan, and you could shave months or even years off your term by consistently making extra payments.

3. Make more than the minimum payment every month

The minimum monthly payment probably won’t do much to reduce your overall debt, since most of the money goes toward paying off interest first, especially on high-yield loans. Higher monthly payments will reduce your debt more aggressively and leave less room for interest rates to rise.

However, if you are given the choice of making the minimum payment or not making any payment at all, you will pay the minimum amount. This way you keep your credit in good shape.

4. Consider a variable rate loan

Variable interest rates change periodically throughout the life of your loan and typically start out lower than fixed rate loans. While you run the risk of your lending rates increasing over the term, you can also benefit from a fall in interest rates.

Paying off your loan quickly enough can negate the fixed-rate aspect of a fixed-rate loan because you benefit from a lower interest rate.

5. Refinance your loan

If your credit rating, income, or financial situation in general has improved since you first borrowed, you may consider refinancing to take advantage of more favorable terms. This could include a better tariff, more accessible customer service, and a different transit time.

However, be very careful before refinancing federal student loans as you lose important protections in the process. For example, you would not be eligible for the COVID-19-related student loan payment pause.

6. Put bonuses, tax refunds or gift money towards your debt

While investing extra money to pay off your debt might not be the most exciting idea (and you should definitely save some of it to treat yourself), an unexpected windfall can boost your ability to pay off your debt quickly.

You can’t always budget for how much money you’ll get, but if you have an idea (let’s say your company pays $1,000 in annual vacation pay), you can budget for a specific portion of your debt. The exact percentage you allocate doesn’t matter as every little bit helps.

7. Sign up for automatic payments

Many lenders offer discounts to borrowers who sign up for automatic payments. While a 0.25% or 0.50% discount may not seem like much, the discounted rate does add up in the long run.

Also, by signing up for automatic payments, you make sure you don’t miss any payments that could hurt your credit score and disqualify you for future credit.

8. Choose a shorter term

When setting your loan terms, you usually have the choice between a shorter and a longer term. This varies by loan type and we have outlined the general timeframes below:

  • Student loans – five to 20 years
  • Car loans – one to seven years
  • Personal loans – one to 12 years

If you choose a shorter term, your monthly payments will be higher, but you’ll pay less interest overall, saving you on the overall cost of the loan.

9. Prioritize federal student loan options

Government student loans often have lower interest rates and better protection than private loans, so they’re a good option for reducing overall loan costs. Government student loan assistance programs like Public Service Loan Forgiveness can help you forgive all of your loan debt if you work in the public sector and make qualifying monthly payments for 120 months.

To avoid student loans altogether, check out what federal aid you qualify for in the form of grants, scholarships, and work-study programs, all of which do not have to be repaid.

10. Don’t allow interest to be capitalized on your loan

Capitalized interest is unpaid interest that is added to your loan balance after periods of non-payment, including forbearance, deferral, and the expiration of your grace period. This increases your total loan balance, and you later pay interest on that higher amount, increasing the overall cost of your loan.

While loan deferral can help you get back on your feet if you’re facing financial difficulties, remember that interest typically continues to accrue. So, the longer you wait before you start paying back the loan, the more it will end up costing you.

Virginia C. Taylor