Choosing a Repayment Term when Refinancing 

Is refinancing your student loan looking like a good option for you? If you have started to think about refinancing your student loans, you are on the right track to saving thousands of dollars over the course of your loan term. There are a number of reasons why students will refinance from a lower interest rate, to a term extension, and even lower monthly payments.

Refinancing looks great on paper and is even better when you do not have to make those hefty monthly payments anymore, but what do you do when it comes time to choose the loan term? You will be offered a few scenarios and those include shortening your loan’s term, lengthening the loan’s term, or keeping your same term you have now.

Decision, decisions, decisions. But, one must be made. Below, we will go over what your options are and the benefits of each one.

What Is Available to You?

If you have done minimal research about refinancing, you may not know what your options are when it comes to student loan repayment terms. The standard term is often 10 years, but you may have signed up to extend yours over a 20-year term.

When you refinance your student loan, you can shorten, lengthen, or keep the same terms you have now. For example, if your repayment term is 10 years, you can keep it that way or you can shorten it to 5 years, or lengthen it to 15 years.

While the difference to you may seem like just a few short years, there is actually a bigger difference hiding between the lines and that is the amount of interest you pay. No matter what option you choose, you will find that your choice impacts your financial future in more ways than one.

Before you do make a choice, think long and hard about the decision you are about to make and choose the option that is best for you both in the short term and in the long run.

Steps to Take First

Before you grapple with the choice of your repayment term, sit down and think about your budget and how much money you want to spend each month towards your student loans.

If you are on a tight budget, you may want to extend your loan to provide you with a minimal monthly payment. If you have extra money to spare each month, then you may want to send more money to your loan servicer to pay down your loan earlier.

Sit down and think about your ideal monthly payment and write this number down. Whether it is $50, $250, or $575, you need to know where you stand and what you can afford.

Choosing a Longer Loan Repayment Term

If you want to choose a longer loan repayment term, you may be enticed by the options available to you. Who wouldn’t want a lower monthly payment and more time to pay?

When it comes time to extend the length of your loan, you may find that you can choose from 10 years, 15 years, 20 years, or even 25 years. While these options look good now, think about the amount of interest you will end up paying over the course of the loan period.

While you may think you are doing yourself a favor, you may actually be hurting yourself in the long run and paying more money than you have to. If this is your only option and the monthly payment fits within your budget, then you may not have an option, but know that your interest payments are also spread out over this time and you will spend more in interest than if you chose a shorter term.

Choosing a Shorter Loan Repayment Term

If you want to get your debt paid off quickly, you may want to shorten the term repayment period of your student loans. You can often choose somewhere between 5 and 7 years to do it. One thing that you need to know about shortening your loan term is that you will pay a lot more per month to get your loans paid down.

Now, you will save a ton of interest in the process and when we say ton, we mean thousands of dollars. If you can afford the larger monthly payments, then this would be the option for you, especially if your goal is to have your student loan debt paid off quickly.

How It Breaks Down

Let’s take a look at how both of these scenarios would play out for you.

1. Scenario A

In this scenario, you have a loan balance of $20,000 with a 3% interest rate on a loan term of 20 years. Your monthly payment would be $110.92, but you would spend a total of $6,620.68 in interest.

2. Scenario B

In this scenario, you have a loan balance of $20,000 at 3% interest with a loan term of 5 years. Your monthly payment would be $359.37, but you would only spend a total of $1,562.43 in interest.

As you can see, you will save a ton of money in interest payments simply by choosing to shorten the length of your loan. In fact, you would save a total of $5,058.25 in interest payments. Also, you would only have to pay your loans for 5 years instead of 20 years.

Final Thoughts on How to Choose Your Repayment Plan

When it comes down to it, you are the only one who can determine how much money you can pay towards your student loans. You want to make sure that you do not overextend yourself when you refinance, as this can lead to default.

If you think you can only afford $250, then choose a term that works with that budget. If you have extra money to send to your student loan provider each month, then do so, as this will help you pay down your debt quickly.

As a final note, make sure that whatever repayment plan you choose, you never stop making the payments because default is no fun.