Choosing the Right Student Loan Repayment Term

Choosing the right student loan repayment term will make a huge difference in how much and how long it takes to pay back your student debt. To make this choice, here are a few key questions to consider:

• How much student debt do you have?
• How much can you afford to pay each month?
• What are your long-term financial goals?

It’s important to choose a student loan repayment term that fits your lifestyle and allows room for you to continue saving toward major financial goals. Once you’ve answered those questions, you’ll be ready to dive into the details and choose the perfect repayment term!

Key terms: Principal and Interest

In the next sections, we’ll talk a lot about principal and interest. Understanding these terms is vital to choosing the right student loan repayment term.

Principal is the original value of the loan. For example, if you take out a loan for $15,000, then your principal amount is exactly $15,000. As you know, however, the total loan amount you’ll repay includes more than the principal amount.

Lenders also charge interest as a convenience fee for providing you money when you need it. Your interest is calculated as a percentage of the principal, then added to your payment total.

As a rule of thumb, long repayment terms offer lower monthly payments, however, they also generate more total interest. On the reverse side, short repayment terms incur less interest but tend to have higher monthly payments.

You can use the ELFI Student Loan Refinance Calculator¹ to estimate different term lengths to see how they will impact the interest on your student loans.

First, decide whether a fixed or variable rate loan is right for you.

Now that you’ve determined your total amount of student debt and your monthly budget for making payments, you can determine whether a fixed or variable rate is right for you.

This choice will go together with selecting your student loan repayment term to be sure you’re getting the most value out of your repayment plan. If you have an ELFI Personal Loan Advisor, you can also discuss these options with him or her for expert feedback on your specific financial situation.

Fixed-Rate Loans

A fixed-rate loan means your interest rate will not change for the duration of your student loan repayment term. The rate will remain the same across every payment until your loan is paid back in full.

These types of loans are best for borrowers who:

1. Have smaller loans to pay back
2. Are planning to opt for a short-term student loan repayment period

The benefit of fixed-rate loans is your interest rate will never rise, and you won’t have any unpleasant surprises when calculating the monthly total for your loans. On the downside, fixed-rate loans often have higher initial interest rates than variable-rate loans. There’s no risk of your interest rate jumping, but also no chance of the rate lowering over time.

Variable-Rate Loans

Variable-rate loans, on the other hand, have interest rates that change over time. Rates are currently based on the London Interbank Offered Rate, or LIBOR. Lenders update their variable interest rates at regular intervals, so while the interest totals themselves will change, the dates they change won’t come as a surprise to borrowers.

Variable-rate loans are best for borrowers who:

1. Have larger loan totals to pay back
2. Are planning to opt for a long-term student loan repayment period

The benefit of variable-rate loans is that interest rates may decrease over time. If you’re planning to pay back your student loans over a long-term period, like 15 or 20 years, opting for a variable-rate loan may decrease the total interest you pay over the life of the loan.

Then, choose your student loan repayment term.

Short-Term Repayment

Short student loan repayment terms are a fantastic option for borrowers with small student loans who can afford to make higher monthly payments. The benefit of short-term student loans is that they can significantly decrease the total amount of interest paid over time.

For example, a $15,000 loan with a 5-year term will have higher monthly payments than the same loan spread out over 10 or 15 years, but it will incur less total interest because you’ll pay down the principal amount more quickly.

Long-Term Repayment

Long-term repayment plans, on the other hand, are perfect for students with large loans who need to decrease their monthly payments. While long-term plans incur more interest over time, they make monthly payments more affordable and easier to handle.

For example, if your $15,000 loan is spread out over 20 years, you’ll have much more time to pay down the principal amount. While each payment will incur additional interest, opting for a long student loan repayment term will allow you to repay the loan in a way that fits your monthly budget.

It’s important to choose your student loan repayment term based on your budget and total loan amount. Selecting the right term will allow you to repay your loans as quickly and efficiently as possible.

ELFI Student Loan Repayment Options

Refinancing your student loans can be a great way to earn a better interest rate, as well as to change your repayment term. ELFI offers a variety of student loan repayment options, offering both fixed- and variable-rate loans, as well as terms spanning 5 – 20 years.*

For more information on how to efficiently repay your student loans, check out ELFI’s blog, “What’s the Best Way to Repay Student Loans.”

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* To qualify for refinancing or student loan consolidation through Education Loan Finance, you must have at least $15,000 in qualified student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary Education Loan Finance institution. Education Loan Finance Parent Loans are limited to a maximum of the 10-year term.

¹Subject to credit approval. Terms and conditions apply.