The potential benefits of student loan refinancing are well-known: lower monthly payments, a better interest rate, and a new loan term. However, you typically can’t enjoy all of these benefits at once. That’s why it’s important to understand how the student loan refinance term you choose will affect the monthly payment and interest rate you receive, so you can pick the option that best aligns with your financial goals. For instance, a shorter term will allow you to repay the loan faster and save money, while a longer term will come with a lower monthly payment. A student loan refinancing calculator is a helpful tool for seeing how much student loan refinancing can save you. We’ll go into further detail below, so you can better understand how student loan refinance terms work.
Student Loan Term Options
When you take out a loan, the amount of time you have to repay the balance is known as the loan term. The most common loan terms are five, seven, 10, 12, 15, and 20 years. The term will usually influence the monthly payment and interest rate. In general, lenders assign lower interest rates to shorter terms and higher interest rates to longer terms. For instance, if you choose a 15-year loan, your interest rate will likely be higher than if you choose a seven-year loan. Shorter-term loans have higher monthly payments than longer-term loans, but you’ll pay less total interest over the life of the loan than if you have a longer-term loan. When choosing a student loan, it’s crucial to understand how the term can impact your monthly payment. Once you finalize the loan, you can’t change the term until you refinance. Let’s use an example to illustrate how this can play out. Carrie owes $100,000 in student loans with a 10% interest rate and a 10-year term. Carrie pays $1,321.51 a month. If she refinances and changes her loan term, her payments could be impacted drastically. Keep reading to see how Carrie’s monthly payment, total loan costs and total interest will change if she refinances to a new term. Learn More: How Often Can You Refinance Student Loans?
Short-Term Student Loan Refinancing
Short-term student loan refinancing includes loans with five or seven-year terms. These terms will have the lowest possible interest rates and highest possible monthly payments. Here are the pros of short-term refinancing:
- You’ll pay off your student loans faster.
- You’ll have a lower student loan interest rate.
- You’ll pay less interest over the life of the loan.
Here are the cons of short-term refinancing:
- You’ll have higher monthly payments.
- You may struggle to keep up with payments if you lose your job or have surprise expenses come up.
- Your debt-to-income (DTI) ratio will be higher, which could make it harder to qualify for other types of loans.
5-Year Student Loan Repayment Term
Let’s say Carrie qualifies for a five-year term at a 5% interest rate. Here’s how that will affect her student loans:
- New Monthly Payment: $1,887.12
- Total Cost: $113,227
- Savings: $45,354
7-Year Student Loan Repayment Term
Let’s say Carrie qualifies for a seven-year term at a 5% interest rate. Here’s how that will affect her student loans:
- New Monthly Payment: $1,413.39
- Total Cost: $118,725
- Savings: $39,856
Long-Term Student Loan Refinancing
When you refinance student loans, you may choose a longer loan term 10, 15, or 20 years. Long-term loans generally have higher interest rates than short-term loans. Here are the pros of long-term refinancing:
- You’ll have lower monthly payments.
- You’ll have more flexibility in your budget.
- Your debt-to-income ratio will be lower, which could make it easier to qualify for other types of loans.
- You could invest extra money and earn a higher return.
Here are the cons of long-term refinancing:
- You’ll pay more total interest overall.
- You could be paying off your student loans for a long time.
- It’s easier to spend any extra money instead of putting it toward your loans.
10-Year Student Loan Repayment Term
Carrie also qualified for a 10-year term with a 5% interest rate. Here’s how that will affect her student loans:
- New Monthly Payment: $1,060.66
- Total Cost: $127,279
- Savings: $31,302
15-Year Student Loan Repayment Term
Carrie also qualified for a 15-year term with a 5% interest rate. Here’s how that will affect her student loans:
- New Monthly Payment: $790.79
- Total Cost: $142,342
- Savings: $16,239
20-Year Student Loan Repayment Term
Carrie also qualified for a 20-year term with a 5% interest rate. Here’s how that will affect her student loans:
- New Monthly Payment: $659.96
- Total Cost: $158,390
- Savings: $191
Can You Refinance Student Loans to a 25 or 30-Year Term?
If you have a high student loan balance, you may be interested in refinancing to the longest student loan term to decrease your monthly payments. So, what is the longest student loan term? Most private lenders offer a maximum of 20-year student loan refinance terms, with very few offering 25-year terms. There are no private lenders that offer 30-year student loan refinance terms. Most lenders that offer 25-year terms only offer them with a variable interest rate. This means the interest rate and monthly payments will fluctuate over time. Choosing a 25-year loan will result in the most interest paid overall. And if the lender you pick only offers variable interest rates, then your payments could increase significantly over time. In general, the longer term a variable-rate loan has, the greater chance that interest rates will increase.
Options to Extend Your Federal Student Loan Repayment Term
Borrowers with federal student loans have access to 10, 20, 25, or 30-year terms, depending on the repayment plan. The standard repayment plan has a 10-year term for most Direct loans or up to a 30-year term for Direct Consolidation Loans. Borrowers who want to extend their federal loans can do the following:
- Choose an Income-Driven Repayment (IDR) plan: Income-driven repayment plans have 20 or 25-year terms and may also result in lower monthly payments. After the term is over, any remaining balance will be forgiven.
- Choose an Extended Repayment plan: The term for the extended repayment plan is 25 years. Unlike IDR plans, there is no loan forgiveness component.
Borrowers can also choose to refinance federal student loans to get a different term and possibly a lower interest rate. If you refinance federal loans with a private lender, you’ll lose access to IDR plans, student loan forgiveness programs, and longer deferment and forbearance options. Some private lenders also offer loan forbearance, but these programs are often shorter than what federal loans offer.
Things to Consider When Choosing Your Student Loan Refinancing Term
Before choosing a term, make sure to compare student loan refinancing lenders. You might see a wide variety of rates and terms. Also, clarify if the rates you’re seeing are for a fixed or variable interest rate. Variable rates have lower starting interest rates than fixed, but you’re also taking a risk that interest rates won’t increase significantly over the life of your loan. Whichever type of rate you choose, make sure you can comfortably afford the monthly payment. Don’t get the highest possible payment you can afford. Leave some wiggle room in your budget. Remember, you can always pay extra every month if you can afford it, but you can’t pay less than the minimum if you lose your job or have some other type of financial emergency.
Refinance Your Student Loans With ELFI on Your Terms
ELFI offers student loan refinancing for both undergraduate and graduate students, as well as parents who took out loans for their children.* ELFI offers flexible repayment terms, competitive interest rates, and the ability to choose between a fixed or variable-rate loan. You can use this student loan refinancing calculator to see how much you could potentially save.* If you prequalify for refinancing, you can receive a custom quote. Don’t worry – this won’t affect your credit score.
