Which Loan Term Is Right for Me?

Refinancing student loans has a bunch of potential benefits: Not only could it hook you up with a lower interest rate, but it also gives you the chance to select a new student loan term. After you pick a lender, you can choose a new length for your loan and adjust your monthly payment accordingly. Altering your payment plan can be a huge help, whether you’re looking to pay your loans off more quickly or, on the flip side, lower your monthly bills by repaying at a slower pace.

So which repayment term should you choose after refinancing your student debt? Here are some questions to answer as you try to find the best term for your financial situation:

What student loan terms are available?

Your student loan term refers to how long the lender expects it will take you to repay your debt. Student loan terms range from relatively short to almost as long as a traditional mortgage.

Most refinancing lenders typically offer student loan terms of five, seven, 10, 15 or 20 years. That’s a lot of terms to choose from, and it can be tough to know which one is right for you among so many options. But making the right selection is important, since your student loan term has a big impact on how much you pay each month, as well as the total cost over the life of your loan.

What’s more, once you choose, you typically can’t change your repayment term unless you decide to refinance again. You can prepay your loan ahead of schedule without penalty, but you probably can’t pay less than your monthly payment or add extra years to your plan.

You should also note that if you refinance federal student loans — essentially turning them into private student loans — you’ll lose access to federal repayment plans, such as income-driven repayment and extended repayment. Most private lenders don’t offer these options, though some will postpone your payments through forbearance if you run into financial hardship.

In most cases, the term you choose at the beginning is the one you’ll have for the rest of your loan, so make sure to think through your decision before finalizing the deal.

How does a short loan term impact my financial situation?

Are you leaning toward a relatively shorter loan term of five or seven years? Selecting a short term could impact your debt in a few important ways.

First, you might snag the lowest rates, as refinancing providers typically pair the lowest rates with the shortest terms. That’s not a guarantee, of course, and you’ll still need to have a great credit score to secure your best rate available. But it’s worth asking your lender about, because a lower interest rate means a cheaper loan.

Not only will a low rate save you money on your loan, but paying it off quickly will, too. The faster you repay debt, the less time the loan has to accumulate interest.

Let’s say, for example, you owe $30,000 at a 5.0% rate. If you pay it off over 15 years, you’d pay $12,703 in interest — but if you pay it off over just five years, you’d only pay $3,968 in interest.

The faster you pay back your loan, the less you’ll pay in interest. But, naturally, paying back a loan fast typically means higher monthly payments.

Going back to that last example, your monthly bill on a 15-year term would be $237, but on a five-year term it would be $566. That could be a problem if the higher payment isn’t affordable within your current budget.

If you make enough money to swing this bill, however, selecting a short term could be a wise move. You’ll be out of debt faster and pay less interest.

But if you can’t afford it, you won’t have as many options to restructure your debt as you would through the federal government. So even if a shorter term is tempting, make sure you can really make the monthly payments — now and for the foreseeable future — before committing to a five- or seven-year payoff.

What about long student loan terms?

Now let’s consider the pros and cons of going with a longer repayment term of 10, 15 or 20 years.

With a relatively long term, you won’t have to pay as much toward your student loans each month. Lowering your monthly payment could be a big help if you’re struggling to keep up with bills or are worried about going into default.

And as mentioned above, you can always make extra payments to speed up repayment without penalty if you start making more money or get a windfall of cash. Then again, you might not be as motivated to pay more than you need to each month, even if you have the extra income.

A long term could also come with a slightly higher interest rate — but even if it doesn’t, the longer timeframe alone would cost you more in interest over the years.

Even with the extra costs, though, a long term could be the right option if you’re feeling financially stressed. Choosing a 10-, 15-, or 20-year payoff could provide you with breathing room as you establish yourself, work to increase your income and manage your cash flow wisely.

What’s more, freeing up more of your monthly income could mean you’re able to use that money toward other goals, whether that’s building up an emergency fund or investing. If you have low-interest student loans, you might not care about paying them off as quickly as possible and instead choose to prioritize other financial goals.

Which refinancing lenders have flexible repayment terms?

If you’ve decided you’re ready to refinance and want to look at changing your loan term while you’re at it, these lenders are a good place to start. They all provide various loan terms with both fixed and variable interest rates, refinance both federal and private loans and accept undergraduate and graduate student debt.

Final thoughts: Choose your student loan terms carefully

Choosing a student loan loan term requires you to understand how different repayment periods impact your financial situation.

Longer loan terms mean lower monthly payments, which could benefit you today if your budget is already tight. But you’ll pay more out of pocket over the life of the loan, since you’re stretching out how long you make payments and pay interest.

A shorter student loan term means saving money in the long run, since you’ll pay less in interest and may even get to refinance to a lower-interest rate loan. But the tight time frame could put a heavy burden on your cash flow right now, so make sure you can handle the higher monthly payments.

The right term will depend on your unique circumstances — there is no one-size-fits-all solution. So take a close look at your finances, and remember to consider both short- and long-term goals as you determine which loan term is right for you.