If you haven’t already consolidated your federal student loans, then you’re currently out of luck. Due to Congressional budget cuts, most student loan issuers have decided it’s not economical to consolidate federal loans. You can consolidate private loans, but it’s more difficult. Nevertheless, you can find ways to save money on student debt. Here are my tips for saving money on your student loans, and my thoughts on a popular method you should avoid.

Set Up Automatic Student Loan Payments
Many lenders offer interest rate reductions when you set up automatic debits through their website. My lender reduces my interest rate by a quarter point. I did have to call them to sign up for the service, but once it was active, I started saving instantly. I also never have to worry about missing a payment because the money is automatically zapped from my checking account.

Always Pay On Time
In addition to avoiding late fees, paying on time could also result in an interest rate reduction. My lender offers a half point reduction after 36 on-time payments. Since my payments are automatic, they’re never late. I expect to see the reduction in October 2009, which will bring my rate down to 3.12%.

Overpay If You Can
One of my husband’s student loans has a variable interest rate, and the payment amounts change with it. Interest rates have fallen significantly recently, so the payment due has also fallen. He keeps paying the same amount, though. He’s now overpaying by $40-50 a month without impacting our budget at all. The lender is currently applying the overpayments to future interest, but soon they will start buying down the principal.

Pay Down Principal with Financial Windfalls
If you receive a windfall, use it to pay down the principal on your student loan. You might have to mail a check with a note indicating that the payment be applied to the principal. By paying down principal, you reduce the total interest over the life of the loan, which amounts to a substantial savings. Of course, you should only do this if your credit cards and other higher rate debts are paid off.

Don’t Pay Student Debt with a Home Equity Loan
If you do have federal loans, then you should keep them as student loans. Not only are they discharged if you die before they’re repaid, but they offer forbearances and deferrals if you experience a hardship. Private loans don’t offer these same advantages, but you shouldn’t use the equity in your home to consolidate student loans. If you fall behind on your payments, you could lose your house. That’s too big a risk.

Even though my husband and I plan to pay off a few of our loans this year, we still have a huge chunk of student debt. Saving just a little on them every month makes us feel a little better about the burden.

Edited to add: apparently you can consolidate federal loans through the government’s Direct Loan program if certain conditions apply.  Go to the Direct Loan to see if you qualify.


9 Responses to “Save Money on Student Loans without Consolidating”

  1. Mrs. Micah on June 7th, 2008 7:21 pm

    We may consolidate our loans to make things easier, but we’ll also look into automatic payments. I’ve done some overviews, but what’ll really matter is the rate they actually offer us.

  2. The 156th Carnival of Personal Finance: Songs of Summer | Prime Time Money on June 9th, 2008 4:38 am

    [...] from Sound Money Matters presents Save Money on Student Loans without Consolidating, and says, “Federal student loans can’t be consolidated anymore, but you can still find [...]

  3. Beyond Paycheck to Paycheck on June 9th, 2008 6:10 am

    Apparently, you can still consolidate your federal student loans directly with the government. (It’s how the government is trying to help given their taking away of the private market earlier this year through Congressional tinkering.)

    You can learn more here:


  4. Aryn on June 9th, 2008 9:23 am

    Thanks, Beyond Paycheck, I never had any Direct Loans, so I forgot they weren’t the same as Sallie Mae!

    Mrs. Micah, the rate is an average of your current rates, so you don’t see any real savings beyond the ability to condense payments so overpayments go further. Also, you can’t consolidate both of your loans together (which is good.) You would need one consolidation for you and one for Micah.

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